Co-insurance creates risks for industry in Brazil, experts warn

In a debate during the first day of the annual Brazilian Reinsurance Conference in Rio de Janeiro, participants were told that lax practices in co-insurance arrangements could prove costly in the long run, especially when the industry faces a large catastrophic event. “Co-insurance has not created great problems so far, but one day we will have an enormous big loss which will affect several insurance companies, and as a result several reinsurers too,” said Margo Black, the CEO in Brazil of Willis Corretora de Resseguros, the reinsurance broker, during the event that is organised by reinsurance publication Reactions. Participants said that co-insurance is not tightly regulated in Brazil when compared with the reinsurance sector which has recently been the target of new rules that force insurers to offer at least 40% of the risks they want to transfer to locally-based reinsurers.hideSpeakers at the event warned that some arrangements may not be up to the highest standards, which could ultimately create risks for insurance buyers that are attracted by the lower prices offered by insurers that engage in such practices. “We have lost some of the big contracts that have hit the market because of the rigidity of our technical requirements,” claimed Marcos Fugise, Commercial Lines Director at Chartis Seguros Brasil. He warned that companies that are not following minimal technical requirements in their co-insurance agreements could face problems in the future. Reinsurance capacity concerns have been raised in Brazil since restrictive rules were implemented by the government last year, a mere three years after the market was opened to the outside world following seven decades of a state reinsurance monopoly. Experts at the conference said that the emergence of co-insurance has been an understandable development in a relatively young market that has gone through a good number of changes in recent years. But Fabio Basilone, the CEO of broker Cooper Gay do Brasil, expressed concerns that such arrangements have evolved beyond merely providing a substitution of reinsurance capacity to become active tools used by insurance companies to reduce the prices they charge final clients in an increasingly competitive market. “Especially in engineering lines, rates have been reduced in a very aggressive way,” he said, mentioning a sector that is looking particularly attractive to insurers and reinsurers because of the giant infrastructure works that are taking place in the South American country. Rolf Steiner, Regional Head for Brazil and the southern zone at Swiss Re, said that co-insurance is a system that is much more present in Brazil than in other Latin American countries and which raises several matters that need to be considered. For example, he said, clients may end up transferring their risks to companies that do not necessarily have the same capabilities and financial health of the firm with which they negotiated the original contract. But Mr Fugise highlighted that reinsurance companies also play a role in the situation. This is because automatic reinsurance lines granted to Brazilian insurance firms make it possible for the latter to engage in co-insurance arrangements. He hinted that reinsurers may have been a little too aggressive as they tried to win business in a fast growing but still developing market. “Ferraris have been given to people who are still learning how to drive,” he said. Another fear is that, if a reinsurer has taken risks from several insurers that share a large risk from a big company, its exposure to a big loss will be much higher than if it had taken the risks of only one of the insurance companies. On the other hand, co-insurance arrangements, if properly constructed, provide a degree of agility that has been highly valued by insurance companies in a market that moves at a high pace. “It is too early to say whether the spreading of co-insurance is a good thing or a bad one,” Mr Basilone said. “Perhaps it is a solution that the market found for the particularities of the insurance industry in Brazil.” The discussion took place against the backdrop of a fast growing market that is drawing ever more players despite hard to grasp and often changing reinsurance rules. In 2011, the reinsurance market increased by 23% in Brazil, compared to growth of around 17% in the direct insurance sector, according to Mr Steiner, who believes that the best is yet to come for the industry. “We are very happy with the rate of growth in Brazil, but the potential of the country still lies in the future,” he pointed out. And even with the emergence of co-insurance, reinsurers should not have reason to complain, Ms Black stressed. “What is sure is that there are opportunities for everybody,” she remarked. Full of coverage of the Brazilian Reinsurance Conference will be published in the May issue of Commercial Risk Europe.

Co-insurance creates risks for industry in Brazil, experts warn

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