New bill threatens capacity for corporate risks in Brazil

A bill that creates an Insurance Code in Brazil has spooked corporate insurance buyers, who fear that it may reverse market improvements recently seen in the country. The PLC 29/2017, as the bill is known, is under analysis by Brazil’s Upper House and was described as “horrible”, “worrying” and “very bad” by insurance experts during a conference of risk managers. “A bill that stiffens the flexibility that we have today does not help. It has raised a red alert inside the company,” said Rafael Amadiu, the group head of Insurance at Votorantim, a mining group, during the conference organised by ABGR, Brazil’s risk management association, in São Paulo. Risk managers and lawyers fear that the new bill will force reinsurers to restrict the offer of capacity for large risks in Brazil and reverse the recently acquired freedom enjoyed by corporate buyers to negotiate tailor-made wordings for their policies. They claim the proposed legislation will be born already anachronistic, as it was first drafted in 2004 when Brazil had a state-owned reinsurance monopoly. Worst of all, it fails to reflect the reality of a market that, since the end of the monopoly in 2007, has significantly opened to international sources of capacity, and where premiums have grown strongly as a result. “The bill was drafted by officials that have never worked on an insurance account,” said Fabio Torres, a Rio de Janeiro-based insurance lawyer, during the conference. “It was not written by market operators or risk managers.” Torres said that, if approved in its current state, the bill will create situations that have no comparison with any markets for corporate risks and reinsurance in the world. For example, the bill creates the concept of a “tacit acceptance” of a risk by a reinsurer, if it does not answer to a request by a cedant after 21 days. The request can be formalised as easily as by sending an email, which could be blocked by a spam filter, or a phone call. “Reinsurers may not even know they have taken a risk,” Torres said. “It causes me horror.” João Marcelo dos Santos, a São Paulo-based lawyer, noted that the new bill claims universal competence for the Brazilian justice to decide on legal conflicts regarding reinsurance contracts for risks based in the country. In his view, such a measure is likely to make reinsurers think twice before allocating capacity for Brazilian risks, causing policies in the country to be out of sync with reinsurance contracts. Another provision criticised by Santos establishes that policyholders will have no deadline to report a claim, and prescription clauses will only be triggered when the notification is registered. As a result, in liability covers, for example, there may be cases where a claim is filed several years after the actual loss event, and insurers will have to set up reserves for this kind of contingency. “It will create some crazy long-tail risks of over 50 years,” he said. Barbara Bassani, a partner at the TozziniFreire Associados law office, said that negotiations between the industry, regulators and lawmakers helped to mitigate some of the worst aspects of the bill, but insurance buyers still have plenty of reasons to be concerned about it. “I am very worried about the impact on large risks and surety bonds,” she said. The latter could be an especially difficult knot to untangle as Brazil is right now on the cusp of implementing a new law for public tenders that will increase the role played by surety bonds in infrastructure projects. This change been eagerly awaited by both project sponsors and underwriters. The reasoning behind the bill is that insurance buyers need to receive better protection against bad practices by the insurance industry. Lawmakers have justified it by claiming they are acting on behalf of mass market insurance buyers and that it will help boost trust in the industry. “We want insurance consumers to have the best possible experience so that, with confidence, they will buy more insurance and consume ever more,” said Alessandro Octaviani, the head of Susep, Brazil’s insurance regulator, during the presentation of the bill to Congress, the day before the start of the ABGR conference. But critics say that the new bill is not necessary to protect retail buyers as Brazil already has a comprehensive Consumer Code. Rather, it will likely harm mass market buyers and curtail the growth of retail insurance in the country, according to Santos. One example is the obligation created by the bill for the automatic renewal of life insurance contracts after a client holds the policy for nine years. “It will create the nine-year insurance policy, something unique in the world,” he said. The lawyers also criticised the bill for resurrecting outdated procedures that will increase red tape in claims settling processes and limit the ability of insurers to elaborate wordings that have not been pre-approved by Susep, Brazil’s insurance regulators. “It is bad for corporate buyers because it removes from the market the ability to negotiate,” Torres warned. If the bill is approved in its last known form, Ramos said, insurers and reinsurers will have to urgently reassess their contracts, taking measures to mitigate the negative impact on their businesses such as summarily declining the renewal of many policies. “With the liberalisation and opening of the market, Brazil jumped from 16th to 13th-largest insurance sector in the world in 2022,” Ramos said. “This trend will come to an end.” The experts that discussed the topic at ABGR urged the Brazilian Congress to listen to the concerns of the market. “The modernisation of the market cannot be driven by a bill that was born in 2004,” Bassani concluded.

New bill threatens capacity for corporate risks in Brazil

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