The rules governing preferential offers and mandatory cessions for local reinsurers, and the limits on cessions for companies of the same economic group, have been altered. The preferential offer rate for local reinsurers remains at 40% of each reinsurance cession, but mandatory cessions will be annually decreased to 30%, 25%, 20% and 15% from 2017 to 2020.
The limits for retrocession to companies within the same economic group have also changed, increasing from 20% to:
- 30% in 2017;
- 45% in 2018;
- 60% in 2019; and
- 75% in 2020.
This update provides the historical background of the system and a detailed framework of the new regulations.
Before 2008 the Brazilian reinsurance industry was controlled by government-owned reinsurer IRB Brasil Re, which held a monopoly on the reinsurance market for 69 years. In 2007 the government enacted legislation which opened up the reinsurance market to other reinsurers, subject to compliance with registration requirements.
Complementary Law 126/2007 – which opened up the reinsurance market to foreign reinsurers – sets out that at least 40% of all reinsurance cessions must be "contracted or preferentially offered" to local reinsurers.
In December 2007 the Council of Private Insurance (CNSP) issued Resolutions 168 through 173, which established the criteria for registering and operating foreign reinsurers in Brazil. Since then, Brazil has established three different categories of reinsurer which are permitted to participate in the reinsurance market:
- local reinsurers (domiciled in Brazil);
- admitted reinsurers (which maintain a representative office in Brazil but underwrite from abroad); and
- occasional reinsurers (which have no representative office in Brazil).
In 2010 the CNSP issued two regulations which were considered controversial, as they curtailed market access to international players:
- Resolution 224/2010 – which provided that obligations undertaken in Brazil regarding insurance, reinsurance and retrocession could not be transferred abroad to companies within the same economic group; and
- Resolution 225/2010 – which provided that at least 40% of automatic or facultative reinsurance agreements had to be contracted with local reinsurers.
In 2011, as a result of complaints and discussions between local regulatory authorities and market players, Resolution 224 was replaced by Resolution 232, which allowed cessions to companies within the same economic group, up to 20% of the premium corresponding to each contracted coverage.
The new rules (CNSP Resolutions 322/2015 and 325/2015) amended CNSP Resolution 168 and revoked the former regulations. They were well received by the market.
According to both resolutions, the preferential offer to local reinsurers is maintained at 40%, but the mandatory reinsurance purchase limit will be reduced annually as follows:
- 2017 – 30%;
- 2018 – 25%;
- 2019 – 20%; and
- 2020 – 15%.
The limit for retrocession to foreign affiliate companies or companies within the same economic group – as long as they are either admitted or occasional reinsurers – will also increase. The limit on retrocession was originally 20%. As of 2017 this will be increased to 30%. In 2018 the limit will increase to 45%, in 2019 to 60% and in 2020 to 75% of the premium corresponding to each automatic or facultative agreement.
Article 14(5) of Resolution 325 describes affiliate companies or companies within the same economic group as follows:
"The group of entities which are, directly or indirectly, related to each other with equity interest of 10% of more in the corporate capital or effective operational control, which is characterised by common management or administration or performance within the market under the same trade name or trademark."
Additionally, among other legal restrictions (eg, classes of insurance that may not be reinsured abroad) that have not been altered, Decree 6499/2008 remains the same; therefore, insurers must still abide by the rule under which they may assign only up to 10% of the total amount of reinsured premiums to occasional reinsurers each year.
The liberalisation of the reinsurance and retrocession market is seen as a step in the right direction, with analysts indicating as follows:
"The evidence shows that the supply of reinsurance causes an increase in the supply of insurance which, in turn, justifies the expansion of the supply of reinsurance. In this sense, the relationship is bi-causal, with the strongest causality flowing in the direction of reinsurance to insurance."(1)
Further, the liberalisation is expected to bring significant benefits to the sector and Brazil's economy.
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