Regulated entities in Brazil’s (re)insurance sector: new year, new rules

​On January 3, 2022, CNSP Resolution No. 422/2021 came into effect, revoking CNSP Resolution No. 330/2015. The new resolution establishes new rules for authorizing various corporate transactions involving insurance companies, capitalization companies, local reinsurers and open-end private pension funds (regulated entities), as well as foreign reinsurers and reinsurance brokers.

The CNSP published the new resolution in the wake of a public consultation conducted by the Brazilian Private Insurance Authority (Susep), which sought to gather suggestions from the market in relation to the rules it proposed.

The new resolution has been published in the context of a broader movement towards modernizing the insurance, reinsurance, pension and savings bond markets. It proposes simplifying processes for obtaining authorization necessary 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.

Important changes introduced by the new resolution are outlined below:

Procedural rules and regulatory authorization

• Technical presentations

Prior to filing an authorization request to operate or transfer corporate control, regulated entities (insurance companies, capitalization companies, open-end private pension funds and local reinsurers) must appoint a person to make a technical presentation on the intended transaction. This person must be clearly indicated within the corresponding petition submitted to Susep.

• Reduced deadline for carrying out corporate transactions after approval has been granted
  

The new resolution has reduced the deadline from 180 days to 90 days for regulated entities to implement the closing of Susep-approved corporate transactions. This presents an added challenge for such entities, which may be required to go through the entire authorization process again if they fail to close the transaction within the deadline. The resolution expressly gives Susep sole discretion to extend this deadline for regulated entities if they request it, which was not considered in the draft resolution submitted for public consultation.

• Communication procedures
  

In response to an older demand from the market, the CNSP’s new resolution (reflecting a similar provision established during the public consultation) has made it clear that transferring the control of reinsurance brokers is now subject solely to a notification/communication process instead of an authorization per se. This simplified procedure also applies when changing the designated functions of regulated entities’ board members.

• Creating, closing and changing branch office addresses                                                                

Considering that Susep has yet to update the provisions in SUSEP Circulars No. 529/2016, No. 527/2016, No. 528/2016 and No. 529/2016, controversy lingers in respect to authorization proceedings for certain matters. This is particularly noticeable in regard to establishing, closing and relocating branches, as CNSP Resolution No. 422/2021 revokes CNSP Resolution No. 19/1978 and CNSP Resolution No. 17/1992, which previously required Susep to ratify regulated entities’ corresponding corporate approval. However, Susep Circular No. 529/2016 remains in effect and still requires Susep to ratify the corporate approvals. Considering that this matter is part of the everyday functioning of Susep-regulated entities, this conflict in regulation ought to be addressed as soon as possible.

Governance rules

The resolution introduces important changes regarding regulated entities’ control structures and corporate purpose, as well as how their directors are elected.

• Direct control structure
  

Perhaps the most significant change the new resolution has introduced concerns who may exercise the corporate control of Susep-regulated entities. The new resolution clarifies that any legal entity or private equity investment fund (FIP) may control a regulated entity (regardless of its date of incorporation), provided that participating in regulated entities is included within their corporate purpose.

This rule revokes 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 either corporate pension funds (EFPCs) or Susep-authorized companies.

However, other business activities these controllers carry out (as per their corporate purpose) must correlate in some way with the insurance and reinsurance market.

• Incorporating reinsurance brokers
  

The new resolution also establishes limitations on incorporating reinsurance brokers, which must now be incorporated as joint-stock or limited liability companies to be authorized to operate. However, it remains unclear if existing reinsurance brokers incorporated as single-member limited liability companies (sociedades limitadas unipessoais) and sole proprietorships (empresas individuais de responsabilidade limitada) are required to adapt to the new rules.

• Diffuse control vs. defined controllers
  

The possibility of regulated entities without a defined controller or controlling group has also been more clearly addressed. The new resolution provides that Susep cannot demand a shareholders’ agreement expressly defining the controlling group in regard to regulated entities or reinsurance brokers with dispersed control structures.

A potentially controversial point partially addressed in the new resolution concerns regulated entities with diffuse control. In principle, they will not be able to distribute dividends in the first two fiscal years following the commencement of operations (the draft resolution had originally proposed five years) except for mandatory dividends – equivalent to 25% of net income – which will continue to be distributed in accordance with applicable corporate law.

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, capital market transactions involving regulated entities may become a less attractive prospect.

Furthermore, the new resolution allows regulated entities to be solely responsible for meeting economic and financial capability requirements compatible with their operations’ size, nature, and purpose. In such a case, the adjusted net equity must be equal to or greater than the figure calculated and projected in the first twelve months of the supervised entity’s business plan. This would correspond to double the minimum capital required for insurers, reinsurers and private pension funds.

Regulated entities and exclusive corporate purpose

Regarding Susep-regulated entities’ corporate purpose, CNSP Resolution No. 422/2021 allows them to conduct support activities for their operations and technical services associated with reinsurance and retrocession transactions. Regulated entities must have these activities clearly described in their corporate purpose, which Susep must ratify.

• Appointing and electing statutory positions
  

Another new aspect of CNSP Resolution No. 422/2021 relates to a restriction hindering regulated entities from appointing foreign residents to more than thirty-five percent of the existing positions in statutory bodies. This directly affects existing statutory bodies (boards of directors in particular) whose current members are mostly foreign residents. Furthermore, the new resolution does not clarify whether statutory bodies with more than thirty-five percent of positions held by non-residents when the resolution took effect must change their composition in light of the new rules.

The development above is connected to recent amendments to the Brazilian Corporations Law (Law No. 6,404/1976) enacted by Law No. 14,195/2021, which allowed joint-stock companies to appoint officers residing abroad.

The new resolution may also stir controversy as it establishes that Susep may demand additional technical certification from regulated entities in order for them to maintain certain statutory or contractual job positions. Though the new resolution does not define which positions this rule would apply to, this may be outlined in complementary regulation.

Foreign reinsurers

• 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.

In this context, CNSP Resolution No. 422/2021 aims to stimulate greater competition and development within the sector – as outlined in the explanatory memorandum published with the draft submitted for public consultation. The new resolution proposes that admitted reinsurers face the same requirements currently applicable to occasional reinsurers, to the extent permitted by Complementary Law No. 126/2007.

For instance, the new resolution unifies certain registration requirements for occasional reinsurers and admitted reinsurers in Brazil. To register, both types of reinsurers must have a net worth of no less than USD 150 million (instead of USD 100 million as was previously required for admitted reinsurers) as well as unified minimum solvency rating levels (issued by risk rating agencies).

• Prohibitions on foreign reinsurers in tax havens
  

CNSP Resolution No. 422/2021 has comprehensively addressed a controversial matter in the draft version submitted for public consultation regarding the incorporation of admitted reinsurers in tax havens (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 had proposed extending this restriction to admitted reinsurers. However, this proposal was not included in CNSP Resolution No. 422/2021, which continues to impose the restriction only upon occasional reinsurers.

• Outsourcing representative offices and phasing out deputy representatives
  

The new 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.

• Updating foreign reinsurers’ registration information
  

The new resolution clarifies important questions with respect to updating foreign reinsurers’ information with Susep. From now on, these entities are only required to notify Susep about information entailing a breach of the minimum registration requirements for foreign reinsurers in Brazil. As per the draft submitted to public consultation and CNSP Resolution No. 330/2015, updates to referential information could be required at any given time, regardless of whether any breach of applicable regulation has occurred.

Changes create a need for further updates

The new resolution’s changes – largely in line with the spirit of the draft version previously subject to Susep’s public consultation – represent an important improvement in the rules governing regulatory authorization procedures and corporate governance of regulated entities, seeking to eliminate unnecessary bureaucratic obstacles. In this way, the resolution aims to encourage new players to enter the insurance, reinsurance, private pension and capitalization markets, either via incorporation or via acquisitions of new companies.

However, Susep Circulars No. 526/2016, 527/2016, 528/2016 and 529/2016 should be revised as soon as possible, as these regulations are partially inconsistent with the CNSP Resolution No. 422/2021 and generate legal uncertainty within the insurance market.

For further information about CNSP Resolution No. 422/2021, please contact Mattos Filho’s Insurance, Reinsurance & Private Pensions practice area.