(Re) insurance and the capital market: new developments

​On July 10, 2020, the Brazilian Private Insurance Authority (SUSEP) submitted a draft resolution for public consultation (Public Consultation No. 14/2020) to obtain suggestions to regulate the issuance – by a specific risk-carrying vehicle in the form of a local reinsurer named “exclusive purpose reinsurer” or simply “RPE” – of securities linked to (re)insurance risks, namely, the insurance-linked securities (ILS). After receiving suggestions in the aforementioned public consultation, SUSEP changed the draft resolution and, on October 15, 2020, submitted a new public consultation in this regard (Public Consultation No. 20/2020). Such Public Consultation was open for suggestions up to October 30, 2020.

ILS are risk transfer mechanisms that are usual in other jurisdictions and whose performance is based on the (non) materialization of specific insurance or actuarial risks, which may result from natural catastrophes (cat bonds), death or disability, among others, as set forth in each ILS. ILS will represent a new alternative for financing and transferring insurance and reinsurance risks by regulated entities, an option that will only be possible through RPEs.

Main changes on the Public Consultation 

In our memo dated July 13, 2020, we presented our perceptions about the draft resolution submitted to the Public Consultation No. 14/2020 in detail. Public Consultation No. 20/2020, in turn, brought important changes, among which we highlight the following:

• SUSEP now defines the securities linked to (re)insurance risks issued by an RPE as Insurance Risk Bill (LRS);
• The maximum maturity term of LRS has increased from 3 to 10 years;
• The new draft resolution now provides that the RPEs should register the assets guaranteeing technical provisions and the LRS to be registered with SUSEP and sets forth that such assets cannot be sold or encumbered without SUSEP’s written prior authorization;
• The new draft resolution also provides that the reinsurance or retrocession agreement and the ILS’ issuance document may establish a maximum period for notice of loss by the assignor after the expiration of LRS. Claims notified after such period will not be recognized by the RPEs;
• The new draft resolution provides that the reinsurance or retrocession contract can be based on a foreign currency provided that the RPE hedges the foreign exchange variation of the Maximum Risk Exposure (EMR);
• If the LRS’ fundraising does not reach the amount necessary to cover the EMR originally set forth in the reinsurance or retrocession contract, the EMR may be adjusted to reflect the amounts effectively raised; and
• SUSEP detailed the prohibitions to RPEs in the new draft resolution, aiming to improve governance, avoid conflicts of interest, and preserve the liquidity and solvency of these companies.

SUSEP’s market alignment 

The changes promoted by SUSEP in the draft resolution evidence the alignment of the authority with the insurance and reinsurance industry and show great concern of the governmental authority with prudential aspects and with the governance of the RPEs, seeking, to enhance the improvement and expansion of the insurance market, generating conditions to improve the integration of the insurance market into the country’s economic and social process.

For further information regarding the draft resolutions proposed by SUSEP, contact Mattos Filho’s Insurance, Reinsurance and Pensions practice.