It's been a long wait for the state reinsurance monopoly to end in Brazil, Maria Kielmas discovers
Ten years after Brazil's National Congress approved a law that was supposed to end the state reinsurance monopoly, Brazilian legislators have taken the first step in achieving this in practice. In January, the Economic Development, Industry and Commerce Commission of the Chamber of Deputies, the lower house of Congress, approved amendments to a 2005 bill to open up Brazil's reinsurance market. The bill now has to be approved by the lower house's Justice Commission and then by an absolute majority of legislators in the chamber. If this succeeds without any changes at all to the bill, the draft law will pass to the upper house, the Senate, for a similar approval. If this process is successful then President Luiz Inacio Lula da Silva (Lula) will be able to sign the bill into law.
However, it is election year in Brazil. In October there will be elections for the president as well as federal and state legislatures. The absolute majority which the reinsurance bill requires to pass through both legislative houses means the majority in favour of it has to be 50% of each chamber's elected members, rather than members present at the vote, plus one. If there are amendments to the bill then the whole approval process must begin again. This makes the timetable to the reinsurance market opening very difficult to predict, says Rafael Guedes, managing director of rating agency Fitch Ratings in Rio de Janeiro. The legislators may be more interested in their re-election campaigns than attending votes in the Congress. So the opening could be delayed until 2007 at least, he thinks.
Reinsurance costs in Brazil are some 32% higher than they should be because of the state reinsurance monopoly through Instituto de Resseguros do Brasil (IRB), thinks Nelson Marquezelli, a Sao Paolo federal deputy who is the rapporteur for the bill in the lower house.
Spokesmen for Odebrecht, one of Brazil's largest engineering companies, say that the monopoly adds 40% to their total insurance costs. Marquezelli believes that the IRB monopoly has stifled the development of new products in the Brazilian reinsurance market as well as pricing out cover for many potential reinsureds. With the opening, Brazil's reinsurance market could grow from its present $1.3bn to some $5bn, he said.
But Rafael Guedes is not so sure. "Brazil is a low-income country where insurance is a luxury," he says. Written premiums for the period January - November last year totalled R$42bn ($19.1bn) in the primary market (see table 1). This is more than premiums from all of the other 18 Latin American countries combined but is still very low by industrialised world standards.
Furthermore, Brazil's insurance companies can report high profits despite their high loss ratios because they are large holders of federal government debt in their technical reserves. "They do very well because interest rates are high at 18% to 20% last year while inflation was only around 5%," Guedes says.
There is also a lot of uncertainty in the draft reinsurance bill (see box 1). According to Paulo Piza, first vice president of the Instituto Brasileiro de Direito do Seguro (IBDS) and partner in Sao Paulo law firm Ernesto Tzirulnik Advocacia, the bill has been poorly drafted by economists and politicians rather than by lawyers. So even basic words such as the Portuguese for coinsurance (cosseguro) has been spelt wrongly as co-seguro, while all Brazilian laws use the former spelling. And regulation has also opened a can of worms.
The reinsurance market will only open up gradually. Local reinsurers will have the right of first refusal for 60% of all cessions for the first two years after the law comes into force, and then 40% for the following two years. "Occasional" reinsurers will be restricted to 10% of the market.
Four years after the law comes into effect the executive, ie the head of state, will decide on further market opening.
What kind of regulation?
According to Paulo Piza, there is a real worry in the market about future regulation. The draft law allows for the creation of a regulatory authority different from the present insurance regulator, Superintendencia de Seguros Privados (Susep). There is also the possibility that a new regulatory agency for the entire financial sector will be created. And whatever the structure of this agency, it will not be independent but a political agency as its senior executives will be appointed by the head of state. Under the present Lula administration, previously independent regulatory agencies in the energy and utilities sectors have been brought firmly under political control.
The draft law gives arbitrary powers to the regulator on both regulatory matters and also in the way that contracts are drawn up. "This is dangerous because the agency may do whatever it wants," says Piza. "The insurance superintendent may establish restrictions to ceding of risks and restrict the realisation of reinsurance contracts. Why?" he asks. Brazil's long-awaited reinsurance market opening may still be some time ahead.
- Maria Kielmas is a freelance journalist and consultant.
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BRAZIL BOX 2 - HISTORY OF IRB
The Instituto de Resseguros do Brasil was created in 1939 under the presidency of Getulio Vargas. In 1937, Vargas created a corporatist dictatorship known as the Estado Novo (New State) loosely modelled on Iberian and Italian fascism, after he overthrew his own government with the help of the military.
This suspended all political parties, ended the autonomy of the states and established itself as the central authority. The flagship of Vargas' economic policy was the creation of state monopolies such as IRB in reinsurance, as well as its counterparts in the oil, electricity, mining, steel and motor manufacturing sectors.
In the 1940s, IRB's initial business was restricted to fire but the company moved into other lines in the 1950s and expanding significantly in the 1970s, during that decade's rapid growth of reinsurance capacity worldwide.
In 1996, the National Congress approved a law to end the reinsurance monopoly and one year later the company was renamed IRB-Brasil Re. The company's planned privatisation was stalled by Brazil's 1999 devaluation crisis and subsequent political uncertainty.
BRAZIL - BOX 1 - Reinsurance supplementary law (Bill no. 249 of 2005)
The Reinsurance supplementary law establishes the policy for reinsurance, insurance syndication and retrocession activities, including the operations of intermediaries, insurance placed with foreign insurers, and insurance transactions in foreign currencies and other related matters.
The following types of companies may conduct reinsurance and retrocession operations in Brazil:
- Local reinsurer - a reinsurer domiciled in Brazil, organised as a stock company exclusively to conduct reinsurance and retrocession business;
- Admitted reinsurer - a reinsurer domiciled in a foreign country with representative offices in Brazil and registered with the insurance supervisory body. Admitted reinsurers must also maintain an escrow account with the supervisory authority as a guarantee for their operations in Brazil. The conditions of this account and the amount of funds required will be defined by the regulator. The company must also file periodic financial reports with the regulator; and
- Occasional reinsurer - a reinsurer domiciled in a foreign country, which may have a representative office in Brazil and is registered as such with the insurance supervisory body.
The company should have a solvency margin rated by a rating agency recognised by the Brazilian insurance regulation authority with a classification similar to or higher than the minimum classification required by the Brazilian regulator. The company must appoint a representative in Brazil who will have the authority to receive service or writ of summons on behalf of the reinsurer. It should also comply with any other requirements that may be established by the regulator.
Local and admitted reinsurers will pay supervisory fees that will be established by the regulator.
BASIC CRITERIA FOR CESSIONS
- Reinsurance or retrocession written in Brazil or abroad should be conducted by direct negotiation between cedant and reinsurer or through a legally recognised intermediary. The intermediary should be covered for professional liability the terms of which will be defined by the insurance regulator;
- The maximum limit to be ceded annually to occasional reinsurers will be established by the executive and will be the subject of international agreements. The insurance regulator will establish the limits and conditions for retrocession;
- Risk transfer in retrocession and reinsurance contracts will only be effected to local, admitted or occasional reinsurers; and
- The insurance regulator will have access to any reinsurance or retrocession contract entered into by a Brazilian insurer or reinsurer.
Subject to requirements established by the insurance regulator, the cedant shall give preference to local reinsures for at least:
- 60% of its reinsurance cession during the first two years from the date the supplementary law comes into effect;
- 40% of its reinsurance cession after the first two years of this law coming into effect; and
- Four years after the law comes into effect the cession percentage may be altered by the executive, subject to a maximum limit of 40%.
The insurance regulator may require or establish:
- The inclusion of mandatory clauses in reinsurance and retrocession contracts;
- Time limits for the completion of contracts;
- Restrictions to the cessions of certain risks;
- Limit restriction, follow-up and monitoring of inter-group operations; and
- Any further requirements.
All reinsurance contracts should include a clause stating that in the case of a cedant's insolvency, the reinsurer remains liable before a liquidator, irrespective of payments by the cedants to the insureds, policyholders or beneficiaries.
The following insurance can only be contracted with Brazilian insurers:
- Mandatory insurance;
- Non-mandatory insurance contracted by persons or organisations to cover their loss exposure within Brazil.
Cover with foreign insurers is restricted to:
- When there is no cover available in Brazil for a particular op-operation; and
- When the insured is a Brazilian resident and requires insurance for visits abroad.
- IRB - Brasil Re is authorised to continue its reinsurance and retrocession operations in Brazil and will not require any formal request or further government authorisation. The company shall provide the insurance supervisory body with technical information and copies of its database and any other documents deemed necessary.
- The insurance supervisory body, Central Bank, Securities Regulator (CVM), the Economy Ministry's Internal and External Revenue Secretariat, and the federal pension regulator will exchange all information deemed pertinent to cedents.