Over the past few months, the National Council for Private Insurance (CNSP) – the Brazilian entity in charge of drawing up the country's reinsurance industry policies – has introduced a series of changes to the regulatory landscape.
These changes aim to enforce the wider liberal agenda set out by the Ministry of the Economy and underline the federal government's commitment to a more liberalised economy, as promised in the 2018 presidential campaign and provided for under the Charter of Economic Freedom, enacted under Federal Law 13,847/2019. The charter sets out a statutory principle whereby state intervention on economic activities should be subsidiary and exceptional, with a view to reducing the bureaucratic burden imposed on businesses.
Status of admitted reinsurers, including Lloyd's of London syndicates
Under Brazil's tri-licence system of 'local', 'admitted' and 'occasional reinsurers', occasional reinsurers must meet less stringent administrative requirements than those required under the former two licences. For instance, occasional reinsurers need not maintain a local representative office and bank account in Brazil, whereas admitted reinsurers must.
Previously, occasional reinsurers could receive only 10% of the premium ceded by local insurers and 50% of the premium ceded by local reinsurers per year. However, since December 2019, local carriers can cede up to 95% of the premium to occasional reinsurers. The cession rule, by which 40% of risks must be offered preferentially to local reinsurers, affects admitted and occasional reinsurers in the same way.
As such, an occasional licence now provides similar access to local risks as an admitted licence, without the need for an overseas reinsurer to come on-shore and incur the substantial expenses of doing so.
New rules enacted in June 2020 by the insurance authorities facilitate the conversion of an admitted reinsurer licence to an occasional reinsurer licence. This applies to Lloyd's of London, which currently operates in Brazil under a single admitted licence. This development is consistent with a wider understanding that admitted reinsurance licences are being phased out. Under the new rules,(1) Lloyd's central fund is considered sufficient evidence of the capital requirements that foreign reinsurers must meet in order to operate in Brazil.
Although the new rules may attract interest from overseas players to Brazilian risks while operating from abroad, statistics indicate that, since the opening of the reinsurance market in 2007, companies with a physical presence in Brazil have experienced more and better-quality risk when compared with those which are not on the ground. Reinsurers should consider this point when planning to enter or continue their operations in Brazil. In particular, the abovementioned cession rule keeps the best risks written in Brazil by local reinsurers which are offered the risks first.
Contracting in foreign currency
On 6 March 2020 CNSP Resolution 379/2020 was issued, altering CNSP Resolution 197/2008, to facilitate the contracting of insurance in foreign currencies in Brazil, should the insurer and insured so wish. According to the new rule, this currency choice will be available to all lines of business, as opposed to being limited to the lines of business already permitted under Superintendence of Private Insurance (SUSEP) Circular 392/2009.
When local policies are written in one currency and reinsurance policies provide cover or are reserved in another, issues regarding the quantum of claims often arise. Discussions over applicable rates of exchange and how to apply the accrual of interest and monetary correction (Brazilian law inflation-linked interest) in the context of the currency conversion are common when adjusting claims. There is less scope for dispute if the local policy and reinsurance policy are in the same currency.
In another relevant development, as of 1 July 2020, SUSEP Circular 605/2020 reduced the timeframe for regulated entities – including insurers and local and admitted reinsurers – to maintain documents relating to their operations to five years. Previous regulations, dating back to 1999, provided for different periods for different lines of business, up to a 20-year deadline for liability contracts.
The new rules provide clarity by specifying what documents to keep, how to keep them and for how long they should be kept, in particular by regulating the electronic storage of documents, which was not adequately addressed in previous rules. Notwithstanding these clarifications, caution is needed when considering the retention of documents relating to long-tail liability business.
Endnotes
(1) CNSP Resolution 387/2020, issued on 9 June 2020 and valid as of 1 July 2020, revoked the article of CNSP Resolution 330/2015 which determined that Lloyd's of London syndicates had to register as admitted reinsurers, while SUSEP Circular 606, issued on 22 June 2020, authorised Lloyd's of London's syndicates registration as either an admitted or an occasional reinsurer.
