The Opening of the Brazilian Reinsurance Market

02/05/2007

THE OPENING OF THE BRAZILIAN REINSURANCE MARKET

After many years of congressional debate, the law that provides for the opening of the Brazilian reinsurance market to competition has been finally enacted.  Supplementary Law No. 126 was published on January 15, 2007, and is now in effect.  The specific regulation for the entry of new players into the market will likely be issued by the National Private Insurance Council (Conselho Nacional de Seguros Privados – CNSP) in the weeks to come.1  The opening of the reinsurance market, which for more than sixty years has been under the monopoly of IRB-Brasil Resseguros S.A., the Brazilian state-owned reinsurer, is a landmark in the history of the Brazilian insurance industry.

The new legal framework foresees three types of reinsurers:  the local reinsurer, the admitted reinsurer and the occasional reinsurer.

The local reinsurer must be a corporation headquartered in Brazil incorporated with the sole purpose of conducting reinsurance and retrocession business.  Local reinsurers must comply with the regulation applied to Brazilian insurance companies and the specific requirements to be established by the CNSP.

Under the supplementary law, IRB-Brasil Resseguros S.A. is qualified as a local reinsurer.  At present, the federal government holds the 50% voting part of IRB’s capital, private domestic insurance companies holding the 50% non-voting part.  The new law allows the government to offer to IRB’s private shareholders the right to withdraw from IRB, provided that these shareholders use the funds resulting from such withdrawal to invest in another local reinsurer.

Aiming to stimulate the incorporation of other reinsurance companies in Brazil, the new law grants local reinsurers the right of first refusal relative to 60% of all reinsurance business in the country within the first three years of the Brazilian reinsurance open market and relative to 40% after said time period.  The implementation of this right of first refusal is dependent upon regulations yet to be enacted by the CNSP.

Reinsurers headquartered abroad will be able to conduct business in Brazil as admitted reinsurers or occasional reinsurers, provided that they comply with certain requirements. 

According to the supplementary law, the admitted reinsurer is a foreign reinsurer with representative offices in Brazil duly registered with the Brazilian insurance authorities to conduct reinsurance and retrocession business.  The admitted reinsurer must maintain a foreign currency account with the Brazilian insurance authorities to guarantee its operations in Brazil, which balance is to be determined by the CNSP.  It must also periodically present its financial statements to the insurance authorities.

The occasional reinsurer is defined as a foreign reinsurer with no representative offices in Brazil which complies with the specific requirements to be set forth by the insurance authorities.  The supplementary law establishes that the Brazilian government shall determine a maximum annual limit for the underwriting by occasional reinsurers of business transferred by Brazilian insurers.  Reinsurers headquartered in tax havens – defined by the new law as jurisdictions providing for income tax rates inferior to 20% or for confidentiality of corporate structures or identification of shareholders – cannot be registered as occasional reinsurers.  Companies that fall within this legal definition can only conduct reinsurance business in the Brazilian reinsurance market if registered as an admitted reinsurer or via a local reinsurer.

Further under the new law, both the admitted reinsurer and the occasional reinsurer must satisfy a 5-year seasoning requirement in their domiciliary country for the specific lines of business in which they intend to engage in Brazil.  They must also comply with minimum financial capacity and solvency requirements to be determined by the Brazilian insurance authorities.  Lastly, they must appoint a legal representative resident and domiciled in Brazil with powers to receive summons on behalf of the company.

It remains to be seen whether foreign reinsurers will consider the right of first refusal referred to above sufficiently advantageous to justify undertaking the onus of the minimum capital requirements, to be established by the CNSP, and other compliance costs. 

With regard to foreign reinsurers preferring not to incorporate local subsidiaries, the legal framework benefits admitted reinsurers, as they are not subject to a maximum annual underwriting limit in relation to business transferred by Brazilian insurers.  Assuming that this limit (yet to be determined by the Brazilian government) will significantly reduce the ability of occasional reinsurers to do business in Brazil, one can expect that many reinsurers will decide to participate in the Brazilian market as admitted reinsurers, thus establishing representative offices in the country and complying with other applicable regulatory requirements, as described above.

The supplementary law grants considerable regulatory power to the CNSP to determine the new framework of the market.  The CNSP may choose to establish rules of a general nature, leaving it to the Federal Agency of Private Insurance (Superintendência de Seguros Privados – SUSEP) to regulate the new reinsurance market in greater detail.  In addition, some specific regulatory issues fall under the responsibility of the National Monetary Council (Conselho Monetário Nacional – CMN).  These include, inter alia, rules on the execution of reinsurance agreements in foreign currency, rules on the use of bank accounts in foreign currency in Brazil, and, more importantly, the establishment of restrictions on investments by reinsurers of their technical reserves, guarantees and other funds. 

The end of IRB’s monopoly is a very important step towards the development of a competitive reinsurance market in Brazil, which is expected to benefit Brazilian insurers and insureds.  The market will follow the issuance of the new regulations by the CNSP, SUSEP and CMN closely.

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1 The CNSP is headed by the Ministry of Finance.  Its other members are the president director of the Federal Agency of Private Insurance (Superintendência de Seguros Privados – SUSEP) and representatives of the Ministry of Justice, the Ministry of Social Security, the Central Bank of Brazil and the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM).

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