Stand by for action!

Everyone agrees, from analysts, to brokers and reinsurers, the opening up of the Brazilian reinsurance market - officially sanctioned by law in January 2007 - offers huge potential for the industry.

However, no one knows what will emerge from the detailed legislation that has been due since June this year but is not expected to appear until well after the New Year.

Foreign insurers, reinsurers and brokers have been licking their chops, eagerly awaiting information which will allow them to set up shop - and finally cash in on Latin America's largest insurance market.

"There has been a lot of speculation as to the application of the new legislation but nothing has actually been formalised yet," said Jason Howard, CEO of Willis Re International, who has a special interest in the area.

In the absence of government guidelines on how to proceed, in July, the National Insurance Council - Conselho Nacional de Seguros Privados (CNSP) - established some "provisory rules" for reinsurance and retrocession transactions made with foreign reinsurers until the definitive rules are issued (see details below). The Brazilian Insurance and Reinsurance Authority - Superintendencia de Seguros Privados (SUSEP) - said it believes the government will issue rules in December, though many observers have said that is an optimistic timeline. SUSEP and other (re)insurance bodies have urged all interested parties to lobby government to inform them of their needs in the new legislation.

Opened up market

The January law and the CNSP rules have effectively opened up Brazil's market but companies are still waiting to hear what regulatory hurdles they will have to jump over to do business there and what exact protection the federal reinsurer, IRB Brasil Re, will have during its first few years.

What is sure is that it will be in the best interests of the Brazilian government to ensure that there is a strong, vibrant local reinsurance market replacing the current monopoly and when the legislation is finally brought into being, this must be a core consideration.

Worth about $20bn last year, the insurance industry has had no choice but to deal with the monopoly of the IRB or retain its own risk before January.

Many of the countries companies, from large multinationals to smaller local companies retain a great deal of risk, unwilling to place business with the IRB. However, this is all expected to change now.

In January 2007, after decades of speculation, a law was finally passed de-regulating the IRB. At the time it was said that, after six months of consultation, the details of how the deregulation would work would be revealed. That date has been and gone, and there is now a moving "in six month's time" mentioned by officials before the details are revealed.

"Brazil is continuing its path towards becoming a more modern insurance and reinsurance market," said Jorge Caminha, head of Brazil operations, Guy Carpenter. He added that with such a large change in Brazil, it "takes time to settle".

"Everything now depends on the new and definitive regulations being announced, and this likely will not happen before the end of the year. However, Brazil is sometimes surprising, as it was when the law opening the market was approved in less than one month."

Benfield's Latin American specialist Aidan Pope said that the law sets the scene but does not give detailed guidelines, and these details are the subject of intense speculation in the market.

"All this is still to be defined," he said. "How do you monitor it and how do other reinsurers fit in? There are three classifications but the definitions of what are 'local', 'admitted' or 'eventual' are still to be explained. And this is not going to happen before the end of the year."

Mr Pope added that even after the details were finalised the IRB would be given 120 days of grace to adapt itself to the new market environment.

"If everything goes to plan, there could be opening up by mid-2008. But we have been waiting 30 years, so a few more months won't really make any difference."

Mr Howard said that everyone recognises the chances for success offered in Brazil, with underwriters liking the fact there are no cat perils, while others see Latin America as an emerging market with huge potential - insurance only represents 2.6% of GDP and this figure can only go up.

"Brazil offers up great opportunities," says Mr Howard. "Everyone would like a slice of the pie."

The country is by far the largest on the South American continent, its population of approximately 180 million representing half of the total number of inhabitants of South America. Against this backdrop, Brazil currently represents 40% of the Latin American insurance market.

The Brazilian insurance market "looks well placed for growth given the improving economic environment and the deregulation of reinsurance," said Benfield in its Latin American report this year.

Double the industry

Ratings agency Standard & Poor's (S&P) said it expects the insurance industry to double in the medium to long term.

S&P's July report on Brazil said: "We expect improved economic conditions with higher prospects for income per capita to enhance demand for protection products, boosting the insurance market."

According to Mr Howard, the opening up will bring some changes, irrespective of the specific detail on what will eventually happen with the interpretation of the legislation.

"The current insurance market in Brazil is a big one, the biggest market in Latin America by far. Therefore, it stands to reason that when you take the cork out of the bottle, and give risk carriers easier access to that market, there will be a lot of business ceded outside."

He said that one thing Brazil has not got, unlike most other Latin American countries, is significant catastrophe peril, as well as some very sizable and professional companies, which makes it attractive.

"I would imagine the large local insurers will take on a retention strategy, if not right away, then in the medium term, of any large multi-national company. They will retain quite a lot of their risk, I would expect.

"And there will be a lot of mergers and acquisitions, because if you haven't got a monopoly in place, which is obliged by law to offer treaties to everybody, you will see that some of the smaller players will find it difficult to survive in the new world. So the market will go through a process of consolidation in the next few years after the opening, but I still believe you will see a lot of business ending up in the international reinsurance markets."

Mr Caminha said there are three factors that will have an influence on Brazil's insurance market during the years to come.

"The introduction of more strict solvency margin regulations, a free reinsurance market, and finally, increased volume of personal lines that will of course depend on economic stability and growth," he said.

He added that the solvency margin will leave some insurance companies with the options of increasing capital, reducing operations or merging or buying more reinsurance in what hopefully should be a more competitive environment.

He also said the choice of seeking reinsurance support overseas will represent a completely new operating environment that should provide smaller insurance companies, including local subsidiaries of majors foreign groups, with the means to compete for certain lines of business that previously were dominated by major local players.

Taking advantage

Mr Caminha said the opportunity to explore new ways of protecting policyholder's surplus and aligning local products to conditions found overseas should generate opportunities for all market agents, contrary to the previous situation where, generally speaking, business would change hands only because of small reductions on final cost.

However, he added: "After decades of monopoly, it is natural that insurance buyers, insurance companies and IRB itself likely will face difficulties in creating adequate operations and procedures to take full advantage of a new market environment. This will reflect on reinsurers and reinsurance brokers that have previously operated with IRB and will now have to apply the same procedures applicable elsewhere in Brazil. There is uncertainty about how the insurance superintendence will conduct its supervisory task and simultaneously ensure that we will have a real open market. However, this is not likely to be a continuing issue after one or two years of a free reinsurance market."

Willis' Mr Howard described what is happening in Brazil at the moment a "real opportunity".

"I imagine what will happen initially is that the reinsurance market will be fairly competitive because everyone will want to go in and get market share," said Mr Howard. "What you have in this case is a very big, strong insurance sector dominated by very large players (multi-nationals as well), and so when the reinsurance market opens up they will very much exert their will and buy when it suits them to do so - not because they have to. This would seem to be the key difference when compared with the openings we saw 15 to 20 years ago (in Chile, Peru and Argentina) where the local companies were, relatively speaking, quite small."

"The big opportunities for reinsurance are going to be in on the big single risk side and in the specialist classes, such as professional lines, liability, engineering, petrochemical, mining - that is where we are going to see the most interest on behalf of the buyers and sellers."

THE LAW AS IT STANDS NOW

Law 126 opening the reinsurance market was approved at an unprecedented pace through the Brazilian Congress, up to the final signing by the President of Brazil on 16 January 2007. It took everyone by surprise. The law marks the end of the IRB's ability to impose, unilaterally, settlement terms on the contracting parties by virtue of its dominant market position and its claims-control powers. Under the law, the IRB now becomes a 'local' reinsurer (defined as a reinsurer with its head office in Brazil) and will have to compete on an equal basis with all other local reinsurers authorised to operate in Brazil. Foreign reinsurers are to operate in the market either as local 'admitted' (with only a representative office in Brazil) or 'occasional' reinsurers (with no representative office in Brazil). Local reinsurers have been granted a right of preference in order to protect the local market. In addition, at the time of placing risks through reinsurance, local cedents will have to offer local reinsurers certain percentages of their reinsurance placings - 60% during the first three years from 16 January 2007, and 40% after these first three years, indefinitely.

CNSP RESOLUTION

On July 20, the CNSP, the highest insurance and reinsurance authority in Brazil, published Resolution 164 with transitory regulations that will prevail until definitive and complete regulations are approved. The main points of Resolution 164 are the following: Brazilian insurance companies must cede their risks to a local reinsurer. However, in the event that the local reinsurer refuses such risk, the cedants are allowed to offer said risk to foreign reinsurers. But these foreign reinsurers must meet the following requirements: 1. Not be headed in a tax haven jurisdiction; 2. Have a net worth equivalent to, at least, $100m; 3. Have a solvency rating issued by rating agencies approved by SUSEP of at least two levels higher than the respective "investment grade" rates. 4. Send the cedant copies of its balance sheets and financial statements of the past three fiscal years, together with its audit reports.

HOT AREAS

Specialist lines of business - professional lines, liability, engineering, petrochemical and mining. All areas of facultative reinsurance (which is currently retained by IRB)

Brazil is ranked as the 10th largest economy in the world, with the 5th largest population and 5th largest land mass. Currently, its insurance market has a total premium income of $33.8bn, which represents 41% of Latin America's total and is 20th in the world. There are approximately 150 insurance companies operating in Brazil, writing business in four broad segments: P&C, life, retirement savings (known as previdencia) and capitalisation products (known as capitalizacao, which combines savings with a lottery-type element, and is unique to the Brazilian market.) Growth of the latter two segments has been supported by the favourable tax treatment accorded these products.

The government is also hoping to establish the city of Rio de Janeiro as an international reinsurance centre and attract captive insurance companies, according to the Brazilian pension association Anapp. The Rio de Janeiro government wants the state capital to remain the reinsurance and insurance hub in Brazil and plans to build an 'insurance city' through a public-private partnership, local financial daily Valor Econmico reported last month. Federal reinsurer IRB-Brasil Re and insurance regulator SUSEP are both based in Rio as well as key industry entities like insurance federation Fenaseg, insurance foundation Funenseg and broker federation Fenacor. Several of Brazil's largest firms have their captive insurers located in tax havens in Central America and the Caribbean and those units could return if the centre becomes a reality, according to the Anapp report.