Complementary Law 126 of 15 January 2007 was published in the official Gazette on 16 January 2007, finally extinguishing the Brazilian monopoly on reinsurance after more than ten years since the initial steps were taken for opening of the market. The new legislation is of a paramount importance in view of the fact that the Brazilian domestic capacity is far inferior to the huge domestic insurance demands. This is even aggravated by the fact that surety bonds, and other products which are indispensable for project financings, are classified as insurance in Brazil and thus so far subject to the limitations caused by the reinsurance monopoly.

Therefore, foreign reinsurance is vital for the Brazilian sustainable growth, but it is also necessary to ensure that foreign reinsurers, who are not subject to Brazilian legislation, comply with their obligations to Brazilian insurance companies. Now it is possible to address all these matters in an efficient manner and some market players estimate that the Brazilian reinsurance market will increase to US$ 5 billion per year, when the present turnover of the IRB is approximately US$ 1,2 Billion.

Historical Background

The reinsurance monopoly was granted in 1939 to the Brazilian Reinsurance Institute ("IRB"), a company jointly owned by the government and private shareholders. In August 1996 a Constitutional amendment paved the way for the reinsurance monopoly to be lifted. Still, private companies could not legally perform direct reinsurance operations in Brazil until complementary legislation was passed to "rule on the whole Brazilian financial system, including authorisation and operation of entities of insurance, reinsurance, social security and capitalisation, as well as of the official body monitoring those activities"(1).

In May 2003 another Constitutional amendment simplified the requirement, by authorizing the approval of complementary law limited to govern insurance and reinsurance market, independently of other sectors of the financial system. Nonetheless, IRB participation was yet required for reinsurance in Brazil. The IRB then decided whether reinsurance, in whole or in part, could be placed with a foreign company. Payments in foreign currency to the reinsurer abroad were also dependent on the approval of the IRB. The IRB also had legal attributions to regulate the coinsurance, the reinsurance and the retrocession.

The Government of Fernando Henrique Cardoso attempted to open the Brazilian reinsurance market and privatise the government participation in IRB, taking the initiative for the enactment of Ordinary Law 9,932 of December 20, 1999 (as opposed to the complementary law required by the Federal Constitution). As a result, under the terms of the short lived Ordinary Law 9,932/99, the regulatory attributions of IRB were transferred to the National Council of Private Insurance ("CNSP") and the Superintendence of Private Insurance ("SUSEP"), who then issued a whole new set of rules aiming to adequate the Brazilian insurance and reinsurance market to international standards. However, shortly afterwards, Ordinary Law 9,932/99 was declared unconstitutional, was rendered void and only now properly replaced by Complementary Law 126/07, which was originally proposed by the government of President Lula on May 2005.

Main Provisions of Complementary Law 126/07

All of the original regulatory and monitoring attributions initially vested to the IRB are now transferred to the CNSP and SUSEP.

Reinsurance (defined as the assignment of risks from one assignor to a reinsurer) and retrocession (defined as the assignment of reinsurance risks from reinsurers to other reinsurers or insurance companies established in Brazil) may take place with the following kinds of reinsurers:

(i)a "local reinsurer", defined as being a reinsurance company constituted and organised in Brazil as a company by shares, with the sole purpose of operating with reinsurance and retrocession;

(ii)an "admitted reinsurer", defined as being a company headquartered overseas; with a representative office in Brazil; complying with the applicable rules and registered with SUSEP for operating with reinsurance and retrocession as an "admitted reinsurer"; or

(iii)an "occasional reinsurer", defined as being a company headquartered overseas (provided that they are not located in jurisdictions with income tax at a rate lower than 20% or in jurisdictions imposing secrecy as to the identity of their shareholders); with a representative office in Brazil; complying with the applicable rules and registered with SUSEP for operating with reinsurance and retrocession as an "occasional reinsurer". The maximum limit possible to be assigned to occasional reinsurers is to be determined by the executive branch of the government.

The IRB is a local reinsurer. The Brazilian government may offer to acquire the participation of preferential shareholders of the IRB (holding approximately forty percent of the capital of IRB) provided that such shareholders use the totality of the resulting proceeds to acquire shares of other reinsurers located in Brazil.

Local reinsurers are subject, "mutatis mutandi", to the rules applicable to local insurance companies.

For reinsurers to be authorized as "admitted reinsurers" or "occasional reinsurer", requirements to be met include:

(i)they must be duly authorised, in accordance with the rules applicable within their home jurisdiction, to underwrite domestic and international reinsurance in the sectors they intend to operate in Brazil and they should have commenced those operations more than five years prior to their application in Brazil;

(ii)their financial and economic capacity must not be lower than the minimum requirement to be established by CNSP/SUSEP;

(iii)they shall maintain, at least, the minimum rating to be established by CNSP/SUSEP relative to their capacity to pay risk on claims, such rating to be granted by rating agencies; and

(iv)they shall maintain an attorney-in-fact resident in Brazil with powers to receive service of process and notifications in Brazil.

Additionally, "admitted reinsurers" must, amongst other things, comply with the following requirements:

(v)maintain, as collaterals to their operations in Brazil, a minimum deposit in an amount to be yet specified, in a bank account in foreign currency (linked to SUSEP) with a bank authorised to deal with exchanges in Brazil; and

(vi)provide SUSEP with copies of their balance sheets and financial statements periodically.

Reinsurance relating to life and private pension shall be exclusively carried through by local reinsurers.

For a transitional period of three years, from 16 January 2007, "local (authorised) reinsurers" will have preference over foreign reinsurers offering the same conditions in relation to sixty percent of the total reinsurance being offered by an insurance company in relation to risks in Brazil. After the initial period of three years, the preferential treatment will be lowered to forty percent of reinsurance amounts transacted in Brazil.

Insurance, reinsurance and/ or retrocession may be contracted in foreign currency in Brazil, subject to the rules enacted by the National Monetary Council ("NMC") and by the CNSP.

The NMC shall regulate bank accounts maintained in foreign currency to be kept by local insurance and reinsurance companies, by foreign reinsurers registered with SUSEP and by insurance brokers.

Mandatory insurance, as well as non-mandatory insurance contracted by individuals resident in Brazil, or by legal entities located in Brazil, insuring risks located in Brazil, must be contracted in Brazil.

Contracting insurance abroad by Brazilian residents or legal entities headquartered in Brazil are only authorized in the following situations:

(i)when the insurance in question is not available in Brazil and not contrary to the Brazilian legislation;

(ii)when the insurance in question covers risks located abroad for individuals, provided that the insurance is valid only during the period of their stay abroad;

(iii)when the insurance in question is the object of an international agreement ratified by the Brazilian Congress;

(iv)when the was legally contracted prior to 16 January 2007; and

(v)when the insurance covers the risk located overseas of legal entities located in Brazil.


As stated above, while the Brazilian authorities decided to opt for a phase-out opening, by retaining a percentage of the reinsurance business carried in Brazil, the potential for growth of the Brazilian market is endless. In addition, the global companies now operating in Brazil will be able to buy reinsurance locally without the restrictions and limited option which was offered by the IRB. In its very own terms, the new law attempts to ensure the export of the risk located in Brazil, adequacy to international insurance standards, and enhancement of coverage terms. Good news at last!

(1) In accordance with wording of 1996 of article 192, II of the Brazilian Federal Constitution.