Cracking the Brazil nut

With the Brazilian reinsurance market opening up to local and foreign reinsurers for the first time this year, Hermes Marangos explains the options for breaking into a new and potentially lucrative area

The Brazilian reinsurance market, which together with those in Cuba and Costa Rica was one of the last reinsurance monopolies in Latin America, was finally opened to local and foreign reinsurers on 17 April 2008. This introduces competition to the domestic market and ends 70 years of monopoly by the state-owned reinsurer, IRB, which was the only company authorised to both operate and regulate the industry in Brazil.

Now, under Complementary Law 126 of January 2007, the regulation of co-insurance, reinsurance and retrocession transactions and their intermediation will be the task for the insurance regulator - the National Private Insurance Council. The insurance supervisory body will be the Brazilian Private Insurance Superintendence, known as SUSEP.

As far as current market conditions are concerned, Brazil is by far the largest insurance market in Latin America with a 40% market share in the continent.

A growth area

The opening up of the reinsurance market did not take place overnight: domestic insurers were gradually prepared by SUSEP to cope with the best international practices, such as: the implementation of internal controls and stricter rules for auditors and actuaries; the requirement of a business plan; the replacement of technical notes for each product with technical notes on portfolios; and the requirement of a broader view of insurer activities. Among those measures with a significant impact on the market is the creation of new solvency rules, with the implementation of risk-based capital rules based on underwriting, credit, market, legal, and operational risks.

Reinsurance companies authorised to operate in Brazil fall into three categories. The 'local reinsurer' is the reinsurer with registered offices in Brazil and incorporated as a corporation with the sole purpose of conducting reinsurance and retrocession transactions. There is also an 'admitted reinsurer' - the foreign reinsurer with registered offices abroad and with a representative office in Brazil, which is registered with SUSEP to carry out reinsurance and retrocession business. The third and final category is the 'occasional reinsurer' - the foreign reinsurers with registered offices abroad without a representative office in Brazil, which is registered with SUSEP to conduct reinsurance and retrocession business. In this context, IRB will continue operating in the market as a local reinsurer.

In addition to IRB, there are two other local reinsurers already licensed in Brazil: Munich Re and J Malucelli Re. SUSEP has also registered 11 admitted and 16 occasional reinsurers.

IRB is allowed to retrocede to foreign reinsurers not yet registered in Brazil until 31 December 2008. Thereafter, IRB will not be allowed to retrocede to non-registered foreign reinsurers.

Local reinsurers are subject to the same extensive regulatory requirements and legislation applicable to insurance companies in Brazil. These include, inter alia, guidelines for technical reserves, payment of inspection fees and the duty to submit reports to SUSEP.

As local reinsurers are headquartered in Brazil, they must comply with Brazilian law applicable to Brazilian corporations. One of the requirements is to have at least three officers, who must be shareholders (residents or not in Brazil), and two directors, both of whom must be resident in Brazil. Both officers and directors must comply with minimum regulatory requirements in order to be appointed. Foreign officers, as well as foreign shareholders, must be represented in Brazil by attorneys-in-fact.

The maximum retention limit applicable to local reinsurers is calculated by reference to the net assets they have in Brazil. They are not allowed to cede by retrocession more than 50% of the premium calculated annually, with the exception of the following lines of business: surety bonds, export credit, rural and internal credit insurances.

Local reinsurers must also be offered first refusal of 60% (by premium) of risks ceded by Brazilian insurers until 16 January 2010, and 40% thereafter (the cedant being obliged to consult formally with one or more local reinsurers). However, prior to approaching the local reinsurers, the cedant can obtain quotes from admitted or occasional reinsurers, provided that the quotes represent at least 60% of the cession, and submit them to local reinsurers so that they have an opportunity to improve on those quotes. The effect is that admitted and/or occasional reinsurers may only write 40% (by premium) of risks ceded by Brazilian insurers, increasing to 60% after 16 January 2010 - unless they are first rejected by all local reinsurers.

Another advantage to holding this status is that reinsurance operations concerning endowment life insurance and private pensions plans are exclusive to local reinsurers.

As for technical reserves, local reinsurers may only invest in fixed-income securities such as government bonds, variable income instruments such as securities of Brazilian companies or funds, and real estate. In each case this must be in accordance with limits established by regulation.

For their part, admitted and occasional reinsurers must comply with a number of requirements not imposed on local reinsurers. Foreign reinsurers who wish to register as admitted or occasional must be established for more than five years in accordance to their domestic law to underwrite local and international reinsurance in the lines that the reinsurer intends to operate in Brazil. They must also be solvent and rated by a rating agency acknowledged by SUSEP at no less than 'investment grade' level. Further, the admitted reinsurer must have net assets worth at least $100m (£60.4m) and is required to open a foreign currency bank account at a bank in Brazil with a minimum sum of $5m on deposit (for those intending to operate in different fields of reinsurance) or $1m (for those limiting their operations to risks related to general life insurance or personal injury).

This sum will serve as collateral to obligations undertaken in Brazil. A percentage of all premium reserves and loss reserves established by the admitted reinsurer to guarantee losses reported by local reinsurers or Brazilian insurers must be covered by such deposits at a percentage determined by reference to the admitted reinsurer's rating. In the event the funds on deposit are not sufficient to cover such reserves at the applicable percentage, the admitted reinsurer is required to increase the funds in its bank account in Brazil.

In contrast, the net assets required of the occasional reinsurer must be worth at least $150m but the reinsurer is not required to open a foreign currency bank account at a bank in Brazil with a minimum deposit.

Occasional limitations

Other requirements apply to the registration of the admitted reinsurer, mainly related to the documentation required to open a representative office and conduct business in Brazil. Brazilian investment rules are only applicable to the investment of the admitted reinsurer's collateral deposits in Brazil.

The requirements applicable to the occasional reinsurer are less burdensome than for those admitted reinsurers as they only need to appoint an attorney-in-fact in Brazil. Their investments are likewise not subject to Brazilian investment rules.

However, occasional reinsurers are subject to two important limitations - the first of which is a maximum annual limit of business that insurers and local reinsurers may cede to them. Further, reinsurers headquartered in tax havens cannot be registered as occasional reinsurers.

Reinsurance contracts must provide that in the event of the insolvency of the ceding party, the obligations of the reinsurer towards it shall survive. Although the reinsurers and retrocessionaires shall not be directly liable for any payment due to the insured, if the contract is facultative, or contains a cut-through clause, in the event of the cedant's insolvency, liquidation or bankruptcy, direct payments are allowed provided that the payment has not been impacted by the cedant or by the reinsurer to the cedant. Where a payment has been made directly by the reinsurer to the insured, the contract may contain provisions that release the reinsurer from obligations to the cedant upon payment to the local insured.

Relationship restrictions

In contracts concluded through a reinsurance broker, clauses limiting the direct relationship between cedants and reinsurers or granting the broker powers beyond those necessary and appropriate to perform its duties as an independent intermediary are not allowed. However, in such contracts it is mandatory to include a clause defining whether the broker is authorised to collect reinsurance premiums and/or amounts corresponding to recoveries of indemnities or benefits.

Formal documentation evidencing the reinsurance contracts must be complete within 180 days from the commencement of the cover.

Insurance companies and local reinsurers are free to reinsure or retrocede their risks to any reinsurer/retrocessionaire, provided, however, that the right of first refusal for insurance companies and the retrocession limit for local reinsurers is observed. In the event that transactions are performed with companies of the same 'economic group' or are regularly performed with the same counterparts, such transactions must be reported to SUSEP.

Clauses in respect of the participation of the reinsurer in loss adjustment may be agreed without prejudice of the insurer's liability to the insured.

Local reinsurers are subject to the same tax treatment as local insurance companies. Specifically, income tax on profits at a rate of 15% plus 10% on profits over R$20,000 a month and social security taxes on net profits at a rate of 15%. Revenues are similarly subject to charges for Brazil's 'social integration program contribution' (PIS) and 'social security contribution' (COFINS) at a joint rate of 4.65%. In addition, reinsurance transactions are subject to the financial transactions tax (IOF) although the applicable rate is currently zero.

Taxing issues

Reinsurance premiums remitted abroad by admitted and occasional reinsurers are subject to withholding income tax (IRRF) at a rate of 15% or 25% (for the latter case if the remittance is made to a tax haven jurisdiction), as well as PIS and COFINS taxes levied at a rate of 9.25%. All of these taxes are calculated on a reduced tax basis that corresponds to 8% of the amount paid, credited or remitted abroad. An IOF tax of 0.38% on currency exchange transactions is also levied.

In respect of IRRF, Brazil has broadened the concept of 'tax havens' effective from January 2009, by including countries or dependencies where legislation does not permit access to information regarding the shareholding structure or ownership of legal entities or the identification of the actual beneficiary of income attributed to non-residents. The tax authority is expected to publish a new 'Blacklist' soon that includes countries affected by the new concept of tax havens.

The industry is expected to maintain consistent growth. Brazil presents significant potential for greater development at a time of regulatory transition and expected consolidation in the industry, driven by the prospect of improved insurer credit profiles, the implementation of new prudential rules and the opening up of the reinsurance market.

- Hermes Marangos is partner and head of international at law firm Davies Arnold Cooper


Litigation is still the main dispute resolution method. Insurance law in Brazil is governed by provisions of the Brazilian Civil Code and by Law Decree 73 of 1966. The Bill of Law no 3555 of 2004, which provides general rules for private insurance contracts and revokes provisions of the Civil Code and Decree Law 73/66, has been considered by various committees at the Brazilian House of Representatives and, if approved, will replace the current legislation. The Bill of Law provides specific rules in relation to reinsurance, loss adjustment and has other relevant provisions.

Contracts providing protection against risks located in Brazil must be subject to the laws and jurisdiction of Brazil, although there is an exception for arbitration clauses: a very important point relating to negotiations as to the application of foreign law.

In the event disputes are to be settled by arbitration, reinsurers may choose the applicable law, subject to restrictions in the Brazilian arbitration and civil laws. Retrocession agreements entered into by admitted or occasional reinsurers abroad are not subject to such limitations. Therefore, the choice of law is an issue that deserves close attention if a dispute is to be determined by an English tribunal, given that an agreement on applicable law is likely to be upheld.

It should be noted that, in cases where the insurance contract is between an insurer and a consumer, the Consumer Defence and Protection Code provides that any clause that unfairly prejudices the consumer will be null and void. Clauses dealing with jurisdiction or governing law will therefore be subject to this code.

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