Reinsurance in Brazil - new guidance regarding the 40 percent cession requirement

The National Council of Private Insurance (CNSP) is due to issue a new Resolution intended to provide further guidance as to the working details of Resolution 225. 

Recap of recent events – liberalisation of the Brazilian reinsurance market

In April of 2008, the Brazilian reinsurance market was opened up after seven decades of control by the state sponsored monopoly, IRB Brazil Resseguros SA (“IRB”). As part of the restructuring and liberalisation of the market, supervisory and regulatory powers were transferred from the IRB to the CNSP and to the SUSEP, in their respective capacities.

A new set of resolutions culminating in Resolution 168 of 2007 established the framework for reinsurers to operate within the local market and allowed reinsurers to register in Brazil as either (a) “local”, (b) “admitted”, or (c) “occasional” reinsurers depending on their degree of participation and financial commitment. The IRB is registered as a local reinsurer.

Restrictions remained in the new framework, notably:

1. Local insurance companies were prevented from ceding more than 50 percent of risks to admitted or occasional reinsurers.
2. Local reinsurers retained the right to first refusal to 60 percent of every reinsurance (the 60 percent tariff applied for the first three years and from January 2010 this became 40 percent).

These restrictions were intended in all probability to ensure that a significant portion of underwritten risks and premiums remained in the local market and to protect IRB, still partly owned by the Brazilian government, from losing market dominance. However, a large number of international reinsurance companies entered the Brazilian market, resulting in substantial growth in capacity and expertise. In spite of restrictions still in place the IRB saw its market share plummet from 100 percent prior to liberalisation, to reportedly less than 50 percent.

Attempting to reverse the IRB’s rapid loss of market share - and arguably acting unconstitutionally - the CNSP introduced new regulations which rolled back radically the liberalisation process and restricted the ability of international reinsurers to operate in Brazil. Note that the IRB, CSNP and SUSEP strongly deny that these resolutions are meant to shield the IRB from losing market share and contend that they are still in line with the general principles of market liberalisation initiated in 2008. The current situation has been described by some international reinsurers as “ordering a meal from a menu and having the prices change when you get the bill”.

Restrictions - Resolution 232 and Resolution 225 effective 31 March 2011

• Resolution 232 restricts insurance/reinsurance companies operating in Brazil from ceding business to companies in the same group or under the same ownership based outside of the country to 20 percent of premium. The limitation does not apply to rural and nuclear risk insurance, guarantees and domestic or export credits. Note that Resolution 232 replaced Resolution 224's total ban on intergroup reinsurance and retrocession transfers.
• Resolution 225 amends Resolution 168 of 2007 which provided the right to first refusal of every reinsurance risk to local reinsurers. The resolution establishes a positive requirement that at least 40 percent of every cession be placed with local reinsurers in Brazil. No guidance is provided as to what happens if insurers cannot place 40 percent of the risks with local reinsurers. Article 15 of Resolution states (free translation):
  
  “The insurance company will contract with Local Reinsurers at least forty per cent of each reinsurance cession in automatic treaties or facultative.”
  

These measures have been criticised heavily by international reinsurers. It is believed they will distort the local market, they are ambiguous and guidance has not been provided as to how to interpret and apply the measures in practice.

There is also concern in Brazil at ministerial and other governmental levels about the potential negative consequences of these regulations at a time of increasing demand for insurance and reinsurance.

SUSEP letter of clarification regarding Resolution 225

On 11 July 2011, Luciano Portal Santanna, Superintendent of SUSEP, replied to an official letter from the Ministry of Finance requesting clarification of Resolution 225. SUSEP defends Resolution 225 stating that it is not a protectionist measure because international reinsurers are still allowed to register as “local” reinsurers and in this way continue to participate fully in the local market and benefit from the 40 percent cession requirement. It states that SUSEP has been approached by a number of international reinsurers wishing to register as local reinsurers and that this influx will strengthen the local market.

It is yet to be seen whether more international reinsurers will in fact register as local reinsurers. Some reinsurers who reportedly intend to do so have stressed that these plans were made prior to the new rules being announced.

However, in its letter the SUSEP does make the important clarification (or concession) that if an insurer cannot place 40 percent of a risk with local reinsurers, the cession may be placed with international reinsurers registered in Brazil as admitted or occasional reinsurers.

There are currently eight registered local reinsurers, 29 admitted and 56 occasional reinsurers. This significantly broadens the choice of local insurance companies, however, notably, the SUSEP emphasised that:

1. All local reinsurers must be offered 40 percent of any cession by a process of “formal consultation” [not defined].
2. The risk must be refused by all local reinsurers prior to being placed with admitted and/or occasional reinsurers.

Questions remain, including whether any bid from a local reinsurer must be accepted prior to being offered to the rest of the market, regardless of whether it is on the same terms as that for the remainder of the risk.

SUSEP has said that the CNSP will issue in the near future a further resolution dealing with the practicalities of Resolution 225.

The market must now wait to see whether the CNSP and the SUSEP will succumb to international pressure to relax Regulation 225 (and 232 for that matter) or whether they will continue to pursue what appears to most observers to be a protectionist strategy in an attempt to bolster the IRB. Choosing the latter route may have negative consequences for the Brazilian market and the economy as a whole especially as most of the large infrastructure and energy projects in Brazil depend on the international reinsurance market for capacity.