Market Report – Brazil: Regulatory changes and greater flexibility point the way

The Brazilian economy has taken a hit in recent years, but the country emerged from recession in 2017 and economists have suggested that the recovery, albeit moderate, may continue in 2018 and beyond. While the economic crisis appears to be over, the political crisis in the country continues, at least until the elections in October. In terms of insurance, Brazil is a huge market, and accounts for about half of the entire Latin American insurance market in terms of premium volume.

Regulatory changes
It has been suggested that Brazil is one of the most difficult jurisdictions in the world when it comes to integration of local policies to global programmes, though the process of incorporating Brazilian risks has become easier since the removal of the monopoly of the former state-owned reinsurer, Instituto de Resseguros do Brasil, and the relaxation of local reinsurer retentions.

“Ever since the opening of the local reinsurance market in 2008, we have been able to deliver innovative solutions for our clients,” said José Otávio, head of Willis Towers Watson Brasil. “Most recently, two major changes propelled by CNSP Resolution 353 directly impacted the Brazilian reinsurance market: the change from mandatory to ‘preferential’ retention of 40% of the risk by the local reinsurer, and the end of the 20% intra-group cession restriction. Both changes will continue to help the primary side as it will unlock more alternative capacities, especially for those requiring placements for large and complex risks into the markets.”

In a recent market bulletin, Lloyd’s explains: “CNSP Resolution 353/2017, effective from 22 December 2017, eliminates the mandatory placement requirement which mandated cedants to place a minimum percentage of reinsurance with local reinsurers. Under Resolution 322/2015, Brazilian insurers were mandated to place a minimum percentage of each risk with local reinsurers (25% during 2018, progressively decreasing to 15% by 2020). Brazilian (re)insurers are now free to cede risks directly and in their entirety to admitted and occasional reinsurers.”

It goes on: “Underwriters should note that Resolution 353/2017 does not amend the preferential offer requirement established in Complementary Law no. 126, dated 15 January 2007, which gives local reinsurers a right of first refusal on at least 40% of all reinsurance cessions. CNSP Resolution 353/2017 did, however, reiterate the principle that preferential offers to local reinsurers should provide identical conditions to those offered to the international market. The resolution also stated that employing unfair practices to fulfil the preferential offer requirement may be punished and, in such circumstances, the reinsurance contract may be considered void.”

More reforms needed
Insurance Europe recently said that while positive steps have been taken in Brazil in 2017 to roll back restrictions on affiliates’ transactions and other barriers, key restrictions such as required minimum retentions by local cedants and a system of order of preference remain in place.

“Insurance Europe supports the progress made over recent years in addressing trade barriers in Brazil. However, it would suggest that more ambition is needed to support the ability of European (re)insurers to place business in Brazil on a competitive, non-discriminatory basis. Given that the EU Free Trade Agreement with Mercosur countries, including Brazil, is expected to be concluded soon, these concerns should be addressed now by the European authorities,” said the association.

Flexibility from regulator
Non-admitted insurance is generally not allowed in Brazil and the local regulator Superintendência de Seguros Privados (SUSEP) has tight controls to monitor any breaches on non-admitted insurance. Exceptions to prohibition on non-admitted placements include insurance coverage not available in the Brazilian market and insurance subject to international treaties approved by the Brazilian Congress.

The Brazilian Insurance Authority (SUSEP) has in recent years taken a tougher stance in respect of non-admitted insurance, and a number of investigations have taken place throughout Brazil, with SUSEP reported to have imposed substantial penalties on companies providing insurance in breach of the regulations.

“In the last few years there have been no big changes in legal policies or regulation that affect global insurance programmes,” said Mr Otávio. “However, the regulatory bodies have started to be more flexible. Nowadays, it is possible to change some aspects of the contract that wasn’t possible before. We can see a clear trend to greater flexibility, but we have nothing tangible as yet.”

Back in 2016, the European Commission granted provisional Solvency II equivalence for ten years to Brazil. In its 2017 Latin American insurance outlook, EY said that SUSEP was expected to regulate the Own Risk and Solvency Assessment fully in 2017, making it effective by 2019. “This represents a major transformation of how insurance companies will operate, including a requirement for forward-looking solvency assessments and business decisions tailored to risk-taking choices,” states the EY report.

EY says this equivalence is likely to facilitate European insurers investing in the Brazilian market, and Brazilians investing in the European insurance market. It also notes that in 2015, SUSEP was accepted as a member of the International Association of Insurance Supervisors, in recognition of the steps the country is taking in relation to the regulatory standards set by the association.

The insurance market
In a report from last year, Mapfre notes that Brazilian insurance companies posted a net result of BRL17.84bn in 2016, down 10% on the previous year. The report states that the Brazilian insurance industry comprised 116 insurance companies in 2016, adding that levels of market concentration have grown steadily during the past ten years.

The leading insurance group in the Brazilian market is Brasilprev with a 21.7% share of premiums in 2016, followed by Bradesco, Itaú, Mapfre, Zurich, Porto Itaú, Caixa, SulAmérica, Tokio, and HDI. For non-life insurance, the leading group is Porto Itaú with 15.2% of all premiums, followed by Mapfre with a share of 14%, Bradesco with 8.9%, and then Zurich, SulAmérica, Tokio, HDI, Caixa, Allianz, Marítima.

Global programmes
So what does this all mean for global programmes incorporating Brazilian risks? “We still face problems in operation of global programmes in Brazil and on how to make them work properly here, as in other countries,” said Mr Otávio. “But we have also noticed, since the beginning of this year, an increase in demands. The main challenge is when we receive from another country a demand which needs to be the same negotiation and correctly discriminated in Brazil. The client must have the same insurance coverage and the best standards as possible, because there are differences between what is offered here compared to other countries, and besides that, it is necessary to adapt the programme to local policies.”

He added: “We can say that in the last few years there was no big step toward regulatory process, but we also feel a trend in SUSEP’s greater flexibility, and this probably will continue in the next few years. We have progressed, but undoubtedly, the market can grow more.”