Changes on the horizon for (re)insurance regulatory proceedings
New resolution is expected to simplify and modernize authorization proceedings and governance rules
On September 16, 2021, Brazilian Private Insurance Authority (SUSEP) published a notice for Public Consultation No. 30/2021 concerning a new resolution issued by the Brazilian Private Insurance Council (CNSP), which is intended to replace a previous CNSP resolution from 2015. The new resolution seeks to establish rules in relation to authorizing various corporate transactions involving insurance companies, capitalization companies, local reinsurers and open end private pension funds (collectively, ‘Regulated Entities’) – as well as foreign reinsurers and reinsurance brokers.
The publication of Public Consultation No. 30/2021 falls within a broader movement towards modernizing the insurance, reinsurance, private pension and capitalization markets. It introduces important proposals to simplify proceedings for obtaining authorization required for the market to function properly, in line with a decree and a law from 2019 that provided for a review of infra-legal acts and regulations on economic freedom.
The main changes included in the draft resolution are outlined below:
Procedural rules and regulatory authorization
- Technical presentations
Prior to filing an authorization request to organize and operate or transfer corporate control, Regulated Entities must appoint a person to present technical information on the intended transaction. This person must be indicated in the corresponding petition submitted to SUSEP.
- Reduced deadline for implementing corporate transactions after approval has been granted
The draft resolution proposes establishing a 90-day deadline (instead of 180 days) for Regulated Entities to implement the closing of SUSEP-approved corporate transactions. This change presents an added challenge for such entities, which may be required to go through the entire authorization proceeding again if they fail to close the transaction within the stipulated deadline. Regulated Entities are also unable to request an extension of the 90-day deadline.
- Communication proceeding
In response to an old complaint reported by the (re)insurance market, the public consultation has made it clear that the transfer of control of reinsurance brokers is subject solely to a notification/communication process (instead of an authorization per se). This simplified proceeding would also apply to the change of the designated functions of the members of the board of directors of Regulated Entities.
The draft resolution also introduces important changes regarding Regulated Entities’ control structures and corporate purpose, as well as to how their directors are appointed.
- Direct control structure
Perhaps the most significant change proposed by the draft resolution concerns who may exercise the corporate control of Regulated Entities. The draft’s wording clearly states that any legal entity or equity investment fund (FIP) may control Regulated Entities, so long as their respective corporate purpose includes participating in such entities.
This proposed rule would remove a requirement for direct controllers to be either:
- Brazilian holding companies with an exclusive corporate purpose; or
- FIPs with the specific corporate purpose of participating in SUSEP-authorized companies, whose shares are destined exclusively for those companies or corporate pension funds (EFPCs).
However, under the terms of the draft, other business activities controllers carry out (as per their corporate purpose) must correlate in some way with the insurance and reinsurance market. Therefore, prior to establishing or acquiring Regulated Entities, it is important to ensure that the types of activities their controllers carry out are linked to the insurance and reinsurance market.
- Undefined control vs. defined controllers
The possibility of Regulated Entities without a defined controller or controlling group is also more clearly addressed by the draft resolution. Importantly, it provides that SUSEP cannot demand a shareholders’ agreement expressly defining the controlling group regarding Regulated Entities or reinsurance brokers with pulverized control structures.
A potentially controversial provision within the draft resolution prohibits Regulated Entities with undefined control from distributing dividends in the first five years following the commencement of operations. It remains unclear whether this rule (which would have to be included in Regulated Entities’ bylaws) would apply only to companies that are specifically incorporated with a dispersed control structure, or to any company that eventually ends up with this type of structure. Depending on how this rule is enforced, Regulated Entities may find that conducting transactions in capital markets becomes a less attractive prospect, if not unfeasible altogether.
Furthermore, the draft resolution allows economic and financial capability requirements compatible with their operations’ size, nature, and purpose (required for purposes of certain authorization proceedings) to be evidenced by the Regulated Entities themselves. In such a case, the supervised entity’s adjusted net worth must be equal to or greater than the figure calculated in its business plan during its first twelve months of operation. This would correspond to double the minimum capital required for insurers, reinsurers and open end private pension funds.
- Regulated Entities and exclusive corporate purpose
Another controversial aspect of the proposed draft relates to the flexibility of Regulated Entities’ corporate purpose. Although the draft resolution allows them to carry out activities that support operations and provide technical services for reinsurance and retrocession operations, these must be expressly described within such entities’ corporate purpose.
- Additional certification for statutory positions
The draft resolution may also stir controversy as it establishes that SUSEP may demand additional technical certification for the exercise of positions in Regulated Entities’ statutory boards and committees. Though the resolution does not define which positions this rule would apply to, this may end up being outlined in other complementary regulations.
- Classifying foreign reinsurers
In Brazil, foreign reinsurers are classified into two categories – admitted reinsurers and occasional reinsurers. Although both types relate to reinsurers based outside Brazil, admitted reinsurers have representative offices operating in Brazil and hold Brazilian currency bank accounts in order to guarantee their local operations, while occasional reinsurers do not.
An explanatory memorandum published with the draft resolution outlines a proposal for stimulating greater competition and development within the sector. It proposes that admitted reinsurers should face the same requirements currently applicable to occasional reinsurers, to the extents and limits permitted by Complementary Law No. 126, of January 15th, 2007.
The draft proposes unifying certain registration requirements for occasional reinsurers and admitted reinsurers in Brazil, providing for the application to both entities of the requirements currently applicable only to occasional reinsurers. To register, pursuant to the draft, both reinsurers must meet (i) a net worth of no less than BRL 150 million (instead of the BRL 100 million figure previously required from admitted reinsurers) and (ii) unified minimum solvency rating levels (as issued by risk rating agencies).
- Prohibition of foreign reinsurers based in tax havens
Tax havens are considered countries or dependencies with an income tax rate lower than 20% or whose legislation permits secrecy regarding corporate ownership or structure. While occasional reinsurers headquartered in tax havens are currently prohibited from registering in Brazil, the draft resolution proposes extending this restriction to admitted reinsurers. As reinsurers headquartered in tax havens can already register in Brazil as admitted reinsurers, the new resolution proposes a 3-year period for these companies to adapt.
- Outsourcing representative offices and phasing out deputy representatives
The draft resolution also simplifies rules governing admitted insurers’ representative offices. A deputy representative would no longer be required, while it would also be possible for admitted reinsurers to be represented by contracted third parties.
How to contribute to the new resolution
The draft proposal submitted for public consultation introduces important changes to rules for authorization proceeding and corporate governance of Regulated Entities, seeking to eliminate unnecessary bureaucratic obstacles. In this way, it aims to encourage new players to enter Brazil’s insurance, reinsurance and private pension sectors, whether via acquisitions or forming new companies.
A specific standardized table must be used to submit any suggestions or comments on the draft resolution, which should be sent to [email protected] by October 18, 2021.
For further information or in case of any questions, please contact Mattos Filho’s Insurance, Reinsurance and Private Pensions practice area.