After 20 years of waiting, the industry was finally rewarded with the news that the Brazilian government was relaxing its grip on the local reinsurance market. Liz Booth reports.

Earlier this year, the Brazilian government finally did what it had been promising to do for decades - it decided it would, at last, allow foreign reinsurers to operate in the country, ending the monopoly of the state-owned IRB-Brazil Re. The "will they, won't they" debate had been taxing reinsurers for years. As one broker observed, "The foreign companies came, opened up offices, went away again and came back again." But even though the market is to be liberalised, the future is far from clear, although it is evident nobody is expecting overnight changes.

The government has passed a new law, which paves the way for the ending of IRB's monopoly, but the detail of how this will happen has still to be decided. The issue has been passed into the hands of the regulator (Superintendencia de Seguros Privados) which has yet to announce its decisions. So far, reinsurers know they will face a staggered entry into the market. For the first three years after enactment, 60% of any reinsurance programme must be placed with IRB and foreign reinsurers with local subsidiaries in Brazil, after that the percentage drops to 40% for a further three years.

And after that, the government reserves the right to either maintain that 40% or decrease or increase it for a further three-year period depending on the success of the market at that stage.

Why reinsurers have stuck with the country for so long is explained by the potential size of the market (138 million people live in Brazil) and its relative stability from a natural catastrophe perspective. Brazil is one of just two Latin American countries to have kept foreign reinsurers at bay for so long - the other being Costa Rica - but it dominates the region. Along with Mexico, Brazil accounts for two-thirds of all premiums written in Latin America.

Small share; big potential

According to a report from Benfield published in February, direct gross premiums written in Latin America totalled $53.4bn in 2005 and represented only 2% of the global market. But the report says, "The Latin American insurance market displays many of the characteristics of emerging markets - most notably that of low insurance penetration. Rates are typically under 4% relative to established markets, which run at levels of around 8% to 10%. In Brazil, the penetration rate of 2.3% of GDP is lower than China and the per capita spend of around $100 gives scope for substantial growth when compared with $3,875 of the developed market of the US."

Benfield believes the potential growth is dependent on greater freedom for reinsurers. It says, "Privatisation is seen as crucial to the market for a number of reasons. Firstly, Brazil is not considered to have the capital necessary to meet all domestic insurance requirements from a reinsurance perspective. Secondly, the opening of the market would encourage competition for business and would therefore result in the end of "blanket" rates and the beginning of differentiated pricing on an appropriate risk basis. Thirdly, the associated flow of foreign skills and capital would ultimately serve to strengthen the market and provide product innovation and development."

Stefan Mosel, executive manager for Southern Latin America at Munich Re, adds, "Brazil is the 20th largest reinsurance market in the world accounting for just under 1% of the world's reinsurance market in terms of premium. It consists of more than (Brazilian Real) BRL3bn ($1.4bn) reinsurance premium. IRB collected some BRL2.6bn in risk premiums as of 30 November 2006, according to the company. Most of it comes from life, auto and property insurance. Compared to other Latin American countries the insurance penetration is high. Comparing it to Europe or Asia, it is still on a very low level. We expect the insurance market to continue growing in a significant way for the next few years."

Jean-Michel Lewis, director of reinsurance at Heath Lambert, London, agrees. "I think the potential is enormous in a country of that size with that number of people." He believes that allowing reinsurers in will dramatically increase competition, which will ultimately reduce prices for insurers, as well as increase the range of products available. But he says there will be a learning curve for the local market as it adjusts to the requirements of the international market. "International reinsurers will require far more detailed information - much more transparency. The upside should be reduced prices and a greater choice of products." Lewis says Lloyd's, London, Bermuda and the US, among others, will all be jockeying for position in Brazil. "Companies have opened offices, staffed them and then closed them." Most of those that have remained in the business are thinly staffed and he believes they will rely quite heavily on brokers with good local knowledge to help them develop those first crucial links with insurers.

A mixed market

The Benfield report says there are approximately 150 insurance companies operating in Brazil, writing business in four broad segments: P&C, life, retirement savings/pensions (known as previdencia) and capitalisation products (known as capitalizacao which combines savings with a lottery-type element, and is unique to the Brazilian market). "The insurance market in Brazil is dominated, as at December 2005, by the Bradesco group which has a 22.1% market share," the report says. "The group leverages its considerable geographic spread as a bancassurer in order to assume this position. Two foreign affiliated/owned entities Unibanco AIG and AGF Brasil are also notable players in the top ten." Munich Re's Mosel adds: "We also expect a higher presence of brokers in the reinsurance market (by law in the direct insurance segment, brokers are required as part of the distribution chain). Brazil is a service intensive market in reinsurance since the know-how was bundled at the IRB, so we also expect a higher demand for reinsurance services and consulting."

A middle class is slowly developing in Brazil, helped by a changing political climate which is narrowing the divide between the haves and the have-nots. This should develop demand for a much wider range of products. Lewis says there are already signs of increased demand for directors and officers (D&O) policies as well as surety products. But the biggest surge in demand is expected to come from the health and life side of the business. And Mosel agrees: "The fastest growing area in the insurance industry is life assurance. Especially the VGBL - a life product with a savings component. On the non-life side D&O and E&O (errors & omissions) covers are a small but fast growing segment. We will continue to uphold our highly selective underwriting approach to generate profitable and sustainable growth for the company. Our goal is to build a sustainable basis for future growth; being the number one reinsurer in the market is not a target per se. Based on this strategy we foresee a double digit growth potential for Munich Re."

Enter Lloyd's

The brokers are expecting a Lloyd's presence in the market, not least because of the perceived benign natural catastrophe experience and hence the opportunity to diversify. But so far Lloyd's press office has limited its comments to, "Lloyd's welcomes Brazil's decision to liberalise its reinsurance market. We are interested in being able to provide more reinsurance support to Brazilian insurers and hope there will be a formal consultation process with the international reinsurance community while the regulations are being drafted." Lewis is certain that Lloyd's will want to be in the market. "In terms of cat exposure, it is not deemed to be a cat area which is very attractive to reinsurers," he says. "To date, any catastrophes have had a negligible effect on insureds so costs have been low. The fact that it is considered a non-cat area is a huge advantage and a huge interest to the reinsurers who will not have to worry about those cat exposures."

But Beat Strebel, head of Latin America at Swiss Re, strikes a note of caution. "There is not enough awareness of the exposure to natural catastrophe risks. I agree the exposure to earthquakes is very small but on the other side are the changing weather patterns. For the first time we have seen tornadoes in Brazil. So far there has not been a lot of insured damage but the potential is increasing. We foresee losses for the insurance industry from wind and flood." He stresses that Brazil is not "another Caribbean" but he believes that reinsurers will have a role to play in educating the local market about the potential catastrophe risks.

Like the others, Strebel expects fierce competition as the market opens up, "at least in the first few years", because Brazil has some of the largest growth potential of any of the emerging markets. "Everybody wants to position themselves at the beginning of the process. I believe there will be an excess of capacity available in Brazil and competition will be fierce until the market finds equilibrium." He says the key to success will be in finding the right company to partner with. "There are still a huge number of insurance companies with the top ten having a significant part of the total business. There will be consolidation in the market because there are too many smaller operators which will struggle to survive." The skill will lie, he says, in picking the right company to give capacity. Improving distribution channels will form a crucial part of the process as reinsurers will be looking for partners who will broaden their customer reach - information technology playing an important role in this.

But it will not just be about developing personal lines - Brazilian agriculture offers significant opportunities too. Strebel predicts the economy is set to boom thanks to a prosperous agricultural sector. As the US and Europe open their markets, he says the highly industrialised Brazilian market will be in the perfect position to take advantage - and with that will come greater opportunities for insurance and reinsurance products.

So, everyone seems to agree that while 20 years may have been a long time to wait for liberalisation, the rewards will make it worthwhile.


- Opening doors in Latin American insurance market

- QBE snaps up Mexican insurer

- Converium completes agricultural programme in Brazil

Brazil Types of reinsurers in Brazil

In order to carry out reinsurance and retrocession business in the liberalised Brazilian market, a reinsurer will need to be classified as a "local", "admitted", or "occasional" reinsurer.

- Local reinsurers are established in Brazil as a limited liability company. Local reinsurers will have a preferential offer (with the opportunity to decline the cover) to at least 60% of the total annual reinsurance cession of ceding companies within the first three years and to at least 40% in subsequent years. Reinsurance of endowment insurances and supplementary pension plans can only be ceded to local reinsurers;

- Admitted reinsurers are reinsurers with a representative office in Brazil. Additional key requirements for this class of reinsurers are: registration with SUSEP (the local regulator), nomination of an attorney-in-fact in Brazil, a local deposit and financial returns; and

- Occasional reinsurers are reinsurance enterprises established overseas with no representative office in Brazil. The maximum annual cession limit for occasional reinsurers is still being evaluated. In order to place reinsurance and retrocession businesses from Brazilian cedants, occasional reinsurers would also need to be registered with SUSEP and to appoint an attorney-in-fact in Brazil.

Source: Global Reinsurance.