The Brazilian Reinsurance Institute (“IRB“) was created in 1939 as a monopoly over the reinsurance market. In August 1996, a Constitutional amendment paved the way for the reinsurance monopoly to be ended. As yet, however, no specific legislation has been adopted that regulates the activities of private companies in direct reinsurance operations. Private companies are not permitted to perform direct reinsurance operations in Brazil until complementary legislation is passed to “rule on authorisation and operation of entities of insurance, reinsurance, social security and capitalisation, as well as of the official body monitoring those activities“
IRB participation is always required. IRB then decides whether reinsurance in whole or in part can be placed with a foreign company. Payments in foreign currency to the reinsurer abroad are also dependent on approval by the IRBBoth the end to the monopoly and the privatisation of 50 percent of IRB´s capital (now held by the Federal Government), can only take place after the new regulation to the sector is issued. Initially, the government hoped to be able to issue the new regulation in the form of a Provisional Measure (Medida Provisória) by the Federal Government. This would allowed IRB´s privatisation to take place on October 14, 1999 for the minimum price of R$ 437 million. The draft regulation was considered and debated for nearly one year. The Government then decided that Congressional legislation was necessary. The submission of such legislation inevitably delayed matters and the R$ 437 million minimum price may need to be adjusted accordingly.
As to possible future regulation of the sector, a report dated April 17, 1998, prepared by a study group of the National Federation of Insurance (“FENASEG“) recommends that:
* future regulation take into consideration that Brazilian domestic market funds are not sufficient to meet all domestic insurance demands; that there is a large demand for foreign reinsurance; and that it is necessary to ensure that foreign reinsurers, who are not subject to the Brazilian legislation, comply with their obligations to Brazilian insurance companies;
* the method most commonly used to ensure compliance with local rules is the acceptance or refusal of the credit of the reinsurance;
* consequences of the reinsurance may be controlled through the recognition, or non-recognition, of the risk assignment (reinsurance) for purposes of reserves or other solvency controls applicable to the insurance company (assignor); and
* the reinsurance will not be recognised for purposes of transfer of responsibility, unless the reinsurer is authorised or admitted by the monitoring authority.
Based on the last available project of law and draft regulation, it is clear that the Government has taken into consideration all of FENASEG´s recommendations.Project of Law 1699, submitted by the Government in September 1999, has already been approved by the Lower House of Congress and is now being reviewed by the Senate. Approval by the Senate is expected by January, 2000, after an apposite opinion by the commission of economic matters is issued. Under this project:
* all of the present functions of IRB will be transferred to the Superintendence of Private Insurance – SUSEP;
* Brazilian reinsurers will be subject to the rules that apply to local insurance companies;
* insurance of local risk by companies outside Brazil will require prior approval by SUSEP;
* reinsurance of local risk by companies outside Brazil, transitional preference granted to local reinsurers, as well as Brazilian representative offices of foreign reinsurers, are subject to the rules to be enacted by the National Council of Private Insurance (CNSP)
* insurance, reinsurance and/or the retrocession may be made in foreign currency in Brazil, subject to the rules to be enacted by the National Monetary Council (CMN), and by the CNSP
* the CMN shall rule on bank accounts in foreign currency to be kept by local insurance and reinsurance companies, by foreign reinsurers registered with SUSEP and by insurance brokers;
* IRB´s present monopoly on insurance and reinsurance outside of Brazil will be terminated;
* certain existing legal obligations of IRB will be automatically terminated upon IRB´s privatisation.
Regulation by CNSP can only be issued after a Law is enacted. Main provisions of the last draft Regulation by CNSP (Draft 13, dated August 12, 1999) include:Brazilian insurance companies would be allowed to freely choose their reinsurers, either in Brazil or abroad, provided that the assignment is made to a “domestic authorised reinsurer”, an “admitted reinsurer”, or an “occasional reinsurer” (defined below).
* A “domestic authorised reinsurer” is a reinsurer organised in Brazil or a Brazilian subsidiary of an international group, and is subject to the local monitoring authority. Any reinsurance assigned to local reinsurers would be recognised for retention, reserves and solvency ratios. Any assignment by the local reinsurer to other reinsurers would be subject to the rules mentioned below.
* An “admitted reinsurer” is a company with its headquarters outside Brazil that complies with certain requirements and is enrolled with SUSEP.
* An “occasional reinsurer” is a company with headquarters outside Brazil that complies with certain requirements but is not registered with SUSEP. The maximum assignment amount allowed to “occasional reinsurers” would be the equivalent of 10 percent of the net income of premiums collected by Brazilian company each calendar year. In any case, assignments of responsibility to occasional reinsurers are not recognised in the Brazilian insurance companies.
Two provisions are designed to avoid “fronting practices” (by which domestic insurers or reinsurers channel nearly all collected premium to other companies):
* with the exception of surety bonds (“seguro-garantia”) and export credit insurance (two areas in which the domestic supply far exceeds domestic demand), domestic insurers or reinsurers are not allowed to assign, in reinsurance, more than 50 percent of the net income of premiums relative to their global operations in each calendar year;
* for calculation of the solvency ratio of the Brazilian insurance company, the credit for the assignment of the reinsurance to “admitted reinsurer” or “occasional reinsurer” is limited to 60 percent of the net income from the relevant premiums.
Brazilian companies assigning reinsurance must make full disclosure to SUSEP. “Domestic authorised reinsurers” must maintain capital and net assets of at least R$ 50 million; and their activities must be confined to reinsurance.
In order to be considered “admitted reinsurers”, companies must:
* maintain a minimum deposit of $ 10 million in a bank account (linked to SUSEP) with a bank authorised to deal with exchanges in Brazil;
* be duly authorised (under the rules that apply in their home jurisdiction), to underwrite domestic and international reinsurance in the sectors they intend to operate in within Brazil and they should have begun those operations at least six years prior to their application in Brazil;
* maintain net assets of at least US$ 100 million (as determined by an independent certified accountant);
* provide SUSEP, before commencement of their activities in Brazil and annually thereafter, with copies of audited balance sheets and financial statements dating back three years prior to registering with SUSEP;
* maintain, at least, the minimum rating to be established by SUSEP, relative to their capacity to pay on risk claims, such minimum rating to be granted by SUSEP-recognised rating agencies; and
* maintain an attorney-in-fact resident in Brazil with powers to receive service of process in Brazil and notification from SUSEP.
Additionally, their home jurisdiction should not impose any exchange control regulations that could impair performance of the obligations under their international reinsurance.
In order to be considered “occasional reinsurers”, companies must:
* be authorised, in accordance with the rules applicable in their home jurisdiction, to underwrite domestic and international reinsurance in the sectors they intend to operate in within Brazil and they should have begun those operations more at least five years before beginning activities in Brazil;
* maintain net assets must be at least $ 150 million, as attested by an independent certified accountant; and
* maintain, at least, the minimum rating to be established by SUSEP (possibly BBB+), relative to their capacity to pay risk on claims, such minimum rating to be granted by SUSEP-recognised rating agencies.
Additionally, their home jurisdiction should not impose any exchange control regulations that could impair performance of the obligations under their international reinsurance.Insurance brokers must be admitted by the local regulating authority, according to the requirements of the local authority.
End of the Monopoly – Preferential treatment to local players for a transitional period
For a transitional period of two years, beginning on the date IRB is privatised, “domestic (authorised) reinsurers” will have preference over other reinsurers offering the same conditions in relation to 60 percent of every reinsurance being offered by a insurance company in relation to risks in Brazil. Some international groups have already established their presence in Brazil to benefit from this preferential treatment.