Public consultation open on reinsurance, retrocession, foreign currency and other matters
Brazil's Private Insurance Authority (Susep) has proposed changing reinsurance cession limits and reinsurers' retrocession limits
On July 19, 2022, Susep published Public Consultation Notice No. 9/2022 regarding a draft resolution concerning reinsurance and retrocession transactions and intermediaries, as well as coinsurance, the use of foreign currency in (re)insurance agreements, and insurance contracted abroad. Interested parties may submit comments and suggestions to Susep by August 18, 2022.
This draft resolution has emerged in the wake of proposals to simplify regulations, reduce bureaucracy and foster the development of the insurance and reinsurance markets. It consolidates certain provisions on these matters that currently exist in CNSP Resolutions No. 68/2001 (coinsurance), No. 168/2007 (reinsurance, retrocession and their intermediation), No. 197/2008 (contracting insurance in foreign currency and contracting insurance abroad) and No. 350/2017 (retrocession). The draft also no longer paraphrases legal concepts or repeats unnecessary text already provided for in Complementary Law No. 126/2007.
After analyzing the statement of reasons and the draft resolution, the following aspects stand out:
Changes to limits applicable to reinsurance cessions
Susep’s draft resolution proposes a principled, qualitative approach to reinsurance cession limits. Accordingly, the currently existing 50% cession limit would no longer apply, and insurance companies and local reinsurers would have to manage their reinsurance and retrocession transactions by implementing a risk retention and cession policy – which would be complementary to the risk management policy provided for in CNSP Resolution No. 416/2021. All insurers would have to retain a minimum of 10% of the premium related to the risks they have underwritten each calendar year. However, they may also cede risks exceeding this 90% limit, as long as they justify it to Susep within the first three months of the following calendar year.
As for the retrocession limits applicable to local reinsurers, Susep has proposed changing the current limit from 50% to 70%. It would still be possible to request a higher cession rate from Susep in advance, as long as it is technically justifiable.
Given the draft resolution makes no distinction between the insurance lines currently excepted by CNSP Resolution No. 168/2007, local insurers and reinsurers dealing in surety bonds, rural insurance, and export and domestic credit insurance that are willing to cede risks at limits exceeding those mentioned above would need to – respectively – justify and/or make a special request to Susep each year.
Furthermore, transactions between companies within the same financial group would have to be conducted on an arm’s length basis, under similar conditions to those between independent entities. Although Susep has not determined specific criteria for this situation, the parties involved would be required to demonstrate that the transactions were conducted in market conditions.
Finally, as previously introduced by CNSP Resolution No. 380/2020, the draft resolution has maintained the authorization for pension funds (EFPCs) and healthcare operators to contract reinsurance.
The public consultation proposes a shorter period for formalizing reinsurance transactions (120 days instead of 270 days), and provides that formalization can take place by way of digital signatures
Transferring risks to reinsurers that are not authorized to operate in Brazil
The draft resolution maintains the provisions of CNSP Resolution No. 241/2011 that enable risk transfers to reinsurers that are not authorized to operate in Brazil, as long as it is proven that all authorized local and foreign reinsurers have no offering capability (regardless of the prices and conditions these reinsurers provide). If reinsurers authorized to operate in Brazil are able to accept a certain portion of the risk, only the uncovered portion of the risk can be ceded to unauthorized reinsurers.
However, the draft resolution still prohibits the transfer of risks to foreign reinsurers based in tax haven jurisdictions (defined in Brazil as locations where income is taxed at a rate below 20% or where legislation allows members of legal entities to remain anonymous).
Susep has also proposed that the criteria applicable to occasional reinsurers (foreign reinsurers without representative offices in Brazil or bank accounts in Brazilian currency) should also apply to reinsurers without authorization to operate in Brazil, so that the latter would also need to comply with the requirements contained in CNSP Resolution No. 422/2021 regarding net worth, solvency classification, five years of reinsurance underwriting experience, and compliance with local solvency rules, as confirmed by its supervising authority abroad.
Acceptance of retrocession
The draft resolution would reduce the cap for the acceptance of risks in retrocession by local insurers from 3% to 2% of the premiums related to the risks an insurer has underwritten in a given calendar year.
The public consultation expressly stresses the need for reinsurance brokers to transfer premiums, indemnities and benefits in a timely manner (as already determined in CNSP Resolution No. 393/2020). It also proposes that brokers inform Brazilian cedants of their reinsurance coverage (and respective conditions) by the beginning of the risk period, and issue the relevant cover notes within five business days from the date of formalization.
Susep has made it clear that coinsurance transactions require the consent of insured parties or their legal representatives. Although this requirement was already provided for in Complementary Law No. 126/2007, Susep had remained silent on the matter until now.
Transactions in foreign currency and contracting insurance abroad
Susep has refined its definition of insurance in foreign currency, making it clear that it refers to insurance policies whose policy limits and/or maximum indemnity amounts are expressed in foreign currency.
Moreover, Susep has clarified that endorsements for insurance contracted outside Brazil do not represent newly contracted insurance as long as the original conditions are maintained. This is important for avoiding misunderstandings on whether these endorsements would trigger the need for a new consultation to check local market capacity.
Finally, Susep has expressly clarified that insurance companies can accept direct risks from abroad without Susep’s authorization, provided that such risks are consistent with the lines of business the company is authorized to accept risks for in Brazil.
Provided Susep publishes the resolution in the second half of 2022, it will take effect as of January 1, 2023.
Contributions to Susep’s draft resolution can be submitted via a suggestion board on Susep’s website by August 18, 2022.
For further information on this matter, please contact Mattos Filho’s Insurance, Reinsurance & Private Pensions practice area.
*With the collaboration of Diego Cadiz