Retrocession and captives help tackle Brazil’s challenges

Solutions that have been successfully employed of late include a wider use of captive strategies and retrocession contracts between reinsurance firms that operate in the country, said Angelo Colombo, the CEO for the Americas at Allianz Global Corporate & Specialty. "It is a little more difficult to integrate a Brazilian coverage to the master policy than is the case in other countries, where you can connect the local coverage directly to the central headquarters," he remarked. "But it is not impossible. Companies in Brazil have used creativity to devise ways to transfer the risks to the master policy, even though it may imply costs a little higher." Brazil opened its reinsurance market only in 2008, but barely three years later the authorities imposed new restrictions to the placement of premiums abroad. As of today, at least 40% of risk needs to be placed with local reinsurers. Multinational groups operating in the country as local reinsurers also face restrictions to their ability to send premiums to their mother companies, as only 20% of the risks taken can be sent abroad.hideMr Colombo told IPN that one of the measures that have worked well for insurance buyers in this context is the signing of retrocession contracts that will enable the transfer of risks outside Brazil, thus integrating them in their global programmes. "You will need a local reinsurer, which will enforce its right to take 40% of the risk. Then it will accept to perform a retrocession to the master policy," he said. There are some aspects to be considered, though, in such a strategy, Mr Colombo said. He noted for instance that the retrocession contract will often involve a fee to at least cover credit risk. "And sometimes, the whole process makes it somewhat harder for the money to flow across the entities involved, both in terms of premiums and of the settlement of losses, because there is an extra layer between the client and the company that is acting as its global insurer." It may sound like extra work, but for companies that have adopted Brazil as a strategic market, the situation was much worse in previous years, especially when a state-owned firm, IRB, helped create a monopoly in the reinsurance market. "You had to sign a policy in Brazil that was completely disconnected from the global programme," Mr Colombo said. "So large companies usually left Brazil out of their programmes, because they knew it would be very expensive or even impossible to take the premium money out of the country. But today you can make sure that at least 60% of the coverage can be connected to the global programme. For the other 40% of the risk, you can find in the Brazilian market very reasonable deals to include them in a retrocession contract." Companies have also made use of their captives, as they are independent entities that can be registered in Brazil like eventual reinsurers, the kind of reinsurance firm that needs to meet the lowest capital requirements in Brazil. They can then hire a local insurer to take their risks, and which will subsequently transfer the risks to the client's captive. The law requires that insurers keep 40% of their risks with local reinsurers, but as the clients' risk will often represent well below 10% of the total portfolio of a large insurer, it can be comfortably counted in the 60% of premiums that the insurance company can place freely in the market. "The most significant problem today is the delays caused by the whole process," Mr Colombo said. "But it has worked well. We have plenty of multinational clients here in Brazil that have been able to integrate their local policies to global programmes. Losses have been paid without problems, even though it requires careful diligence from the insurance providers so that the system works smoothly."

Retrocession and captives help tackle Brazil’s challenges

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