New rules in Brazil have placed limits on transfers and cession to international (re)insurers and, despite some concessions by the regulators following industry lobbying, critics warn that these limitations may impede the growth of the market
Things are hotting up in Brazil. Following months of fierce industry lobbying, the Brazilian insurance regulator has agreed to relax new rules governing intra-group risk transfer and compulsory cession restrictions in the Brazilian reinsurance market.
But stirrings in the market suggest that the rules have not been relaxed enough, and create an unhelpful protectionist environment in one of the world’s fastest-growing markets.
The rules (known as Resolution 224 (later replaced by 232) and 225) were formulated to effectively stop a portion of premium earned by local reinsurers from leaving the country, as well as forcing local reinsurers that are a division of a multinational group to invest more capital in the country.
In December 2010, through Resolution 224, Brazilian regulator Susep (Superintendence of Private Insurance) had planned to prohibit liabilities arising from insurance, reinsurance and retrocession contracts carried out in Brazil to be ceded internationally.
But following strong criticism from the international reinsurance community, Resolution 224 was revoked and replaced with Resolution 232. Effective from 31 March 2011, intra-group transfers from
(re)insurers holding a local licence to groups based abroad is now capped at 20% of premium corresponding to each contracted coverage. (Resolution 224 would have prohibited such transfers entirely.)
Back and forth
The revocation of 224 in favour of 232 wasn’t driven solely by market backlash, according to law firm Davies Arnold Cooper partner Hermes Marangos. “The government thought there wouldn’t be enough capacity. They tried to meet the industry halfway by allowing the industry to take some capital abroad, but also forcing reinsurers to think about keeping more capital in Brazil.
“Much like what happened in Argentina, the government is hoping that more (re)insurers will bring more capacity into the country.”
Clyde & Co partner Stirling Leech believes that Resolution 232 will impact heavily on subsidiaries and units that pass risks back to a foreign parent company, for example those writing Brazilian risks from the London market. He says: “It is also being criticised as prohibiting free trade and placing a restriction on business that previously didn’t exist.”
After making some concessions on Resolution 224, the Brazilian regulators have not backed down as far on Resolution 225, also effective from 31 March 2011. This resolution states that insurance companies working in Brazil must cede at least 40% of each facultative or treaty contract to local reinsurers (it was originally set at 60%).
Leech says: “There has been a lot of discussion and debate about Resolution 225, which is fairly extreme in its nature. The largely international non-local reinsurers, of which there are many, don’t like it because it means they can only get 60% of the business.”
One troubling grey area in Resolution 225 is that no plan has been made for circumstances where local reinsurers are unwilling or unable to write the 40% cession.
Marangos says this will place even more power in the hands of the state. “One assumes that if coverage is unable to be found, owing to lack of capacity or lack of willingness, (re)insurers will be forced to go back to the regulator,” he says.
Marangos is also concerned that some reinsurers will be punished twice by the resolutions. “Companies like Munich Re and ACE, which have paid a huge amount of money to register to become local reinsurers, are now finding that they also have to keep their international capital in Brazil. Arguably those reinsurers are being discriminated against even though the resolutions are in support of local reinsurers.”
Brazilian regulators may yet bow to mounting pressure to further relax the two resolutions. “If I was a betting man, I would say it is likely there will be further changes down the line,” Leech says. “There is definitely a wish and a trend among local Brazilian (re)insurance entities to try to keep it local, but they are facing a lot of backlash from the international community – both privately and publicly.”
Stifling new business opportunities through regulation might traditionally signal en masse market exodus. Marangos believes the cost of doing business under such regulation could prove prohibitive for some. “To use your international capital, you have to front the business via another reinsurer, which increases the complexity and the cost,” he says.
But, despite the difficulties they bring, Leech isn’t convinced that the resolutions will be enough to drive key players from the Brazilian market long term.
“They have already set up their stall there,” he says. “I think some might just pause momentarily to observe but most will stay, and keeping looking for new business.” GR