Brazil market report – Going for gold

But Brazil has also featured in the insurance press with stories about the market opening and the future role of state-owned reinsurer, Instituto de Resseguros do Brasil (IRB). For years, IRB had a monopoly, and though this has now finally been removed, the market is not completely open: 40% of a facultative risk must be placed with local reinsurers.

As for its economy, it is showing signs of a rebound in the second half of 2012 and this should gain strength in 2013, according to the latest report from Atradius. After 2.7 % growth in 2011, GDP is expected to increase only 1.5 % in 2012. In 2013, growth is expected to rebound to 4.2 % as private consumption, business investment and external demand – especially from Asia – picks up. Anticipation of increased domestic expenditure in the run up to the FIFA World Cup in 2014 and Olympic Games in 2016 is expected to result in a 4% to 5% rise in GDP.

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As for insurance, Moody’s explained that the Brazilian insurance market is by the far the largest in Latin America, accounting for approximately 53% of the region’s premium volume, and has been sustaining significant growth over recent years. The Brazilian market had 109 active insurance companies as of year-end 2011, of which 73 are P&C insurers and 36 are life and pension companies.

According to Moody’s, “Although still relatively concentrated, the P&C segment is the most fragmented sector in the Brazilian insurance market – the ten largest insurers account for approximately 60% of the P&C industry’s total gross premium. P&C insurance products are distributed primarily through independent brokers, although the use of alternative channels is expanding. Commercial, specialty lines and international-based risk coverages are sold largely through international brokers (most notably Marsh, Aon and Willis).”

Non-Admitted Restrictions

The general rule is that insurance bought by individuals or entities domiciled in Brazil, for risks located in Brazil, must be compulsorily written in Brazil, says Hermes Marangos, Partner and Head of International, DAC Beachcroft LLP. He added that non-admitted insurance is permissible only in limited circumstances, such as where there is no insurance cover available in Brazil, provided that the insurance operation does not breach any law in force; insurances that are the subject of international treaties ratified by the Brazilian Congress; and insurances that, at the time of the publication of Complementary Law 126 of 2007 and according to the laws in force, were placed with foreign insurers.

“For many years there has not been many efforts from the government investigating non-admitted insurance,” said Anthony Harvey, Network Country Manager, Willis Brazil. “However, this year the government has issued record fines against life insurers which have been selling life insurances in Brazil through local agents, despite not having local licences. It has been the first sign that the government will start keeping a closer eye in non-admitted insurance, which is generally not permitted in Brazil.”

He said that non-admitted insurance is permitted for very few lines, and this includes risks that no insurance company in Brazil is prepared to write, and a specific process should be followed in order to turn the offshore placement into a policy allowable under the legislation.

The Brazilian Insurance Authority (SUSEP) has recently taken a tougher stance in respect of non-authorised insurance, and a number of investigations have taken place throughout Brazil. It has been reported that SUSEP has imposed substantial penalties on companies providing insurance in breach of the regulations – a recent example was a penalty of BRL11 billion imposed on a US based insurer for selling life insurance without being legally authorised in Brazil.

Assuming none of the non-admitted insurance exceptions are applicable, a local policy is required, as local subsidiaries must buy insurance locally for risks located in Brazil. According to Mr Marangos, “Although arrangements via DIC/DIL policies to top up cover arranged through master policies overseas are possible, they have not been tested yet in Brazil. It is yet to be seen whether difficulties with regard to tax and exchange controls concerning remittance of premium out and payment of indemnity into the country will arise.”

He added the insured and/or its intermediary, when domiciled or residing in Brazil, will be subject to the penalties in the case of a placement of insurance abroad that is not compliant with the terms of Brazilian regulations.

The tax regime in Brazil is highly complex. In general terms, the following taxes are relevant for insurance operations:

• withholding tax: nearly all remittances to companies/individuals domiciled abroad are subject to income tax at source. The standard applicable rate to insurance remittance is 2%;
• financial operations tax (IOF): tax applicable on foreign currency operations at 0.38% payable by the contracting party of the foreign currency exchange transaction.

Local policies that are part of global programmes are subject to the same taxes as stand-alone Brazilian policies in which a 7.38% tax is accrued to the final premium. If the policy in Brazil reinsures part of the risk to the global programme, a 2.38% reinsurance tax is applied to the reinsurance premium ceded back to the global programme.

Global Programmes

Only Brazilian companies duly authorised by SUSEP can operate in Brazil, Mr Marangos explained, but foreign insurers can register with SUSEP to carry out business in Brazil, which will require the incorporation of a Brazilian company and compliance with a number of requirements set out under Brazilian law. There is no restriction in terms of foreign ownership of domestic insurers.

Most of the large international groups are already operating in Brazil. For new entrants, as long as the foreign insurance company can acquire a licence and move through an extensive application process, there are no restrictions applied to these companies, said Mr Harvey.

Changes made to the legislation which was aimed at opening up the reinsurance market have made the reinsurance process more restrictive for international insurers, which ultimately are the one’s writing global programmes, he added.

The process of incorporating Brazilian risks is still not easy, he pointed out, especially when you have lower value at risks in Brazil. “But with the opening of the reinsurance market the process has become easier than it was when there was only one monopolist reinsurer. The learning curve has increased since then and made global programme insurers more effective in better integrating local policies with the global programmes abroad,” he said.

“Most of the larger groups are now registered or are in the process of registering a local reinsurance company in Brazil, which provides them greater flexibility in ceding reinsurance to global programmes, as opposed to admitted and eventual reinsurers which have greater limitations in this sense,” he explained.

According to Mr Marangos, the Brazilian government and insurance authorities have increasingly taken a protective stance in an attempt to shift capital into the country and favour Brazilian enterprises. “An example of this is the restrictions regime imposed on reinsurance operations and the recent creation of a state-run insurance company which will focus mainly on large infrastructure projects. Although the Brazilian authorities are yet to take a formal stance in respect of global programmes and DIC/DIL arrangements which are becoming more and more common, in light of the Brazilian restrictive regime it is unlikely that things will get any easier, as these arrangements can be perceived by the authorities as an attempt to circumvent Brazilian insurance regulations.”