Brazil’s reinsurance market was a shining beacon of hope during the financial crisis. But David Banks finds growth rates have failed to impress and, with more legal changes on the way, foreign reinsurers are preparing for a slow and difficult journey.

After the reinsurance ‘gold rush’ of the last 18 months, business in newly opened Brazil is not quite as glittering as everyone expected. The main problem for new reinsurers in the market is that the local state-owned reinsurer, IRB Brasil Resseguros, is still extremely strong.

IRB and the five other ‘locally registered’ reinsurers – Munich Re, Mapfre Re, XL Re, J Malucelli and ACE – are said to enjoy a market share in excess of 80%, helped by a compulsory ceding rule that hinders other reinsurers from taking a lead role.

Reinsurance broker Cooper Gay’s managing director for Latin America, Steve Jackson, says it has been difficult for those outside of the local six to compete: “When everybody piles in, it means the competition is extremely fierce.

“IRB has significant advantages in that it has a huge capacity and, for cedants, change is difficult. Under the current circumstances cedants in Brazil prefer to stay with the people they know. IRB knows its stuff and is fighting hard. It has a great network and great contacts.”

But a drop in the compulsory ceding to local companies from 60% to 40% at the beginning of 2010 could make life a little easier for newcomers and promote choice for Brazilian cedants.

Leap of faith

Aon Benfield’s Latin America chief executive, Mike Hughes, says that foreign companies are being competitive and that most cedants know the benefits of requesting a range of quotes to obtain the best price, terms and conditions.

“IRB is becoming more selective on facultative risks, and more disciplined on treaty risks. If it is pushed to reduce price, it will normally reduce participation,” Hughes says.

“Some companies are still not happy with having to offer the

40% to local companies, due to concerns over confidentiality of terms on placement on risks. There is significant capacity in the market and reinsurers are competing for premium volume, which has meant that certain reinsurance technical underwriting is not as strong as it was previously.”

Meanwhile, treaty conditions are expanding to give a broader coverage, which is allowing more risks to be ceded to the treaties and for the insurance companies to be competitive on price.

Despite the challenges, new reinsurers that have spotted opportunities and learnt from the mistakes of their rivals are still willing to take the jump.

US-based OdysseyRe is the latest, announcing the opening of its Brazil office in March. It had already been one of 21 ‘admitted reinsurers’. Its chief operating officer, Bryan Young, said that although he was excited about growth prospects, it was “probably fair to say” that new companies have to be patient.

Despite being only an admitted reinsurer, OdysseyRe, along with Max Re, SCOR and Transatlantic Re, has played an important role in the new market. Munich Re and Everest, another admitted reinsurer, exerted lead roles in 2009, according to United Insurance Brokers.

Lloyd’s companies, on the other hand, were showing great caution. Catlin and Kiln were the most active, but remained conservative.

Young believes any newcomer will benefit from showing commitment and working hard to build a strong network. “Brazil’s economic growth and the 2016 Olympics in Rio de Janeiro can’t be ignored,” he said.

Future still looks bright

Just a glance at the economic growth figures in the country would suggest there are good times ahead. Reinsurance premiums in 2010 stand in excess of $3bn and are growing rapidly in a market of around $40bn in life and non-life gross premium. Despite being the ninth-largest economy in the world, insurance penetration is growing gradually from a low 3%.

Further change could be on the cards as the Brazilian government plans to sell 70% of its 50% stake in IRB to Banco do Brasil.

Meanwhile, there could be a new approach to regulation on the horizon following the resignation in March of Armando Vergílio dos Santos Júnior, the man who opened the market to foreign competition in his role as head of Brazilian insurance regulator Susep.

His interim successor, Paulo dos Santos, an economist with Brazil’s Central Bank for 32 years, will hold the post for at least a year until the winner of Brazil’s presidential elections in October makes a permanent choice in 2011.

Future developments include a proposed reinsurance underwriting market in Rio de Janeiro to assemble the key players and assert the city’s traditional role as a lead centre for reinsurance. Such a move, though still years away, would be helped by a Brazilian congress proposal to cut service tax for business in Rio from 5% to 2%, in line with that of São Paulo.

Such plans offer some hope that there is a genuine desire in Brazil to bring still much-needed structure and certainty to the market. GR