Transitional Rules for Reinsurance Contracts

Resolution No. 164 of July 20, 2007 (“Resolution No. 164/07”), issued by the National Council of Private Insurance (“CNSP”), sets forth the terms by which insurers doing business in Brazil may contract for reinsurance.  The Resolution sets forth temporary rules to provide guidance until such time as the definitive regulations governing the opening of the reinsurance market are issued (Complementary Law No. 126 of January 15, 2007).

According to Resolution No. 164/07, reinsurance must be obtained through local reinsurers, which, practically speaking, means that IRB-Brasil Resseguros S.A. (“IRB”) will be the reinsurer, it being the only reinsurer currently licensed in Brazil.  In the event the local reinsurer refuses to provide coverage, reinsurance may be procured through a foreign reinsurer. 

Reinsurance procured through IRB is governed by procedures and criteria set forth by IRB, except in circumstances where said procedures and criteria conflict with the aforementioned Complementary Law No. 126.  Reinsurance through foreign reinsurers would, in contrast, be obtained on terms determined by the parties.

Insurers may not contract with reinsurers domiciled in countries that do not levy an income tax, that tax at a rate less than 20% or that permit the issuance of bearer shares.

Only transactions with reinsurers meeting the following requirements will be considered for purposes of determining reserve and minimum capital requirements: (i) cash reserves of no less than US$100 million; (ii) a solvency rating at least two levels above the minimum required for a classification of investment grade or the equivalent by a ratings agency recognized by the Superintendent of Private Insurance (“Susep”); and (iii) the delivery by the reinsurer to the insurer of financial statements for the last three fiscal years, including accompanying auditors’ reports.

Negotiations between insurers and reinsurers may be assisted by reinsurance brokers themselves having errors and omissions liability policies or certificates of insurance of no less than 10 million Brazilian Reais and deductibles of no more than 10%.

Resolution No. 164/07 also provides that reinsurance and coinsurance may be purchased with foreign currency in Brazil, provided that National Monetary Council regulations are complied with and (i) the insurance is purchased in foreign currency, (ii) foreign reinsurance or coinsurance is obtained, and (iii) in the event that reinsurance is provided by both domestic and foreign reinsurers, the majority of reinsurance is provided by foreign reinsurers.

The CNSP’s issuance of Resolution No. 164/07 is laudable because the absence of regulations governing cases where the IRB refuses to issue coverage had, from the first trimester of 2007, come to handicap reinsurance agreements.  It is likewise laudable that the CNSP has opted for a simple solution, pursuant to which the insurer is not obliged to request permission from Susep before going to foreign markets where the ISP fails to issue coverage.  This solution facilitates reinsurance transactions and constitutes the beginning of real competition in the Brazilian market such as has been foreseen by Complementary Law No. 126.

Amadeu Carvalhaes Ribeiro
aribeiro@levysalomao.com.br

Marcio Dias Soares
msoares@levysalomao.com.br