Topic proposed by: Royanne Doi, Corporate Chief Ethics Officer, Prudential Holdings of Japan Inc

The International Association of Insurance Supervisors and the Organisation for Economic Cooperation and Development have both recognised the role that policyholder protection funds can play in maintaining consumer confidence in the insurance sector – something which has assumed even greater importance post-financial crisis. Experiences from countries where such schemes have already been tested can help to inform initiatives to strengthen policyholder protection elsewhere.

Does your country have a policy protection fund (PPF) system?

The Brazilian insurance regulatory framework does not include the maintenance of policyholder protection funds within its insolvency remedies.

In general, because of the applicable regulatory framework, stringent capitalisation and net equity requirements and constant oversight by the Superintendence of Private Insurance (SUSEP), it is uncommon for insurance, pension and capitalisation companies to become insolvent.

What alternative arrangements are in place for the protection of policyholders?

According to National Council on Private Insurance (CNSP) Resolution 316/2014, regulated entities must maintain minimum capital requirements and adjusted net equity at levels equal to or higher than the required minimum capital, as well as liquidity related to their risk capital.(1) These must be evidenced to the insurance authority through the disclosure of the company's monthly balance sheet.

Should a regulated entity have insufficient adjusted net equity relative to its minimum capital requirement at a rate of 50% (at most) or insufficient liquidity in relation to its risk capital, it must provide a solvency regularisation plan to SUSEP in order to remedy its solvency.

Further, a regulated entity will be subject to a special administration regime whenever its adjusted net equity's insufficiency in relation to its minimum capital requirement is greater than 50% or less than or equal to 70%.

Finally, a regulated entity will be subject to an extrajudicial liquidation proceeding whenever its adjusted net equity's insufficiency in relation to its minimum capital requirement is greater than 70%.

Solvency correction plans are prepared by insurance companies and presented to SUSEP. They diagnose and detail the cause of a company's insolvency status and corrective measures that the company intends to adopt.

SUSEP will request a solvency correction plan only if the insufficiencies described above continue for three consecutive months. There is a six-month maximum term for an insurance company to reinstate its solvency status based on a solvency correction plan founded on insufficient liquidity regarding its risk capital. The maximum term for correcting an insufficiency related to adjusted net equity is 18 months.

If a solvency correction plan is not presented or fulfilled or if SUSEP rejects a second solvency plan provided by the insurance company, the regulated entity will be subject to a special administration regime, even if its adjusted net equity or risk capital insufficiency is lower than 50%.

According to Article 89 of Decree-Law 73/1966, in case of insufficient technical reserves or a poor economic financial situation, SUSEP, among other measures, may appoint an officer to manage the company indefinitely. If this special administration regime or intervention does not improve the company's condition, SUSEP may revoke the company's operational licence. If the company is no longer authorised to operate, SUSEP must authorise the alienation or encumbrance of any of its assets. SUSEP will have control over the company's bank accounts and encumber or unencumber the relevant assets before any public authority.

According to Article 96 of Decree-Law 73, the following are triggers for the extrajudicial liquidation of insurance companies:

  • performance of acts which are contrary to the insurance directives enacted by regulatory authorities;
  • a lack of reserves, funds and provisions which are mandatory by law;
  • accumulation of large debts before reinsurers; and
  • insolvency.

CNSP Resolution 234/2011 specifies criteria under which insurance companies may request voluntary or 'ordinary' liquidation, provided that the insurance company:

  • does not trigger the extraordinary liquidation procedure;
  • does not present evidence that the controlling shareholders' conduct may be considered criminal;
  • provides a detailed list of all credits and creditors, specifying figures and the nature of each;
  • presents a detailed list of all assets of the company, specifying any burdens or limitations; and
  • presents a detailed timetable for payment of creditors within two years, which SUSEP may extend once.

The International Monetary Fund Country Report 12/334 of December 2012 – which sets out a detailed assessment of observance of International Association of Insurance Supervisors insurance core principles – states as follows:

"Insurers [in Brazil] are generally not subject to the ordinary rules of bankruptcy and may not apply for court-approved arrangements with their creditors… High legal priority is given to the protection of the rights and entitlements of policyholders only after liquidator fees, owned tax and salaries within certain limits, and credits with collaterals… The regulation does not provide for incentives to accelerate the winding up process. Further, a liquidator does not have the power to enter into agreements with creditors. This has led to situations where the liquidation can last for several years. The oldest still on-going liquidation is over 30 years old. There have been few insolvencies within the Brazilian insurance sector."

What have been the practical experiences of those arrangements to date?

Below is a summary of SUSEP's online records of companies that have been submitted to special regimes related to insolvency.(2)

Click here to view table.

To what extent can PPFs encourage and enable underpricing of coverage (and even fraud) by insurance company executives, and what can be done to revise executive compensation rules to combat this?

It is difficult to foresee whether PPFs would encourage or enable underpricing of coverage by executives. This is because PPFs do not exist in Brazil and because the reality of the Brazilian market in terms of executive compensation is significantly different from that of the United States. For example, most insurance companies are not listed on the stock exchange and the few that are listed usually have a defined controlling shareholder, which also changes the perspective in terms of corporate governance. Nevertheless, in general, executive compensation should always create incentives for the long-term creation of value in order to minimise pressure or short-term underpricing of coverage.

In addition, the regulations for premium and contribution collection have been steadily increasing,(3) and regulators have enacted several rules regarding premium mark-ups and methods of calculation regarding provisions and prices in technical actuarial notes, going as far as calculating the premiums that should be charged by insurance companies under certain classes of insurance which are of public importance (eg, personal injuries caused by land-based automotive vehicles insurance). Therefore, it is not easy to assess whether the adoption of rules regarding PPFs would have an effect, considering the regulatory framework in place.

What role does the insurance regulator play in this framework? Can the regulator be held liable for failing to protect the insureds in the event of an insurer being declared insolvent?

Pursuant to Decree-Law 73/1966, CNSP enacts regulations governing the insurance sector and SUSEP enforces CNSP's rules and oversees the insurance market. They are both subordinated to the Ministry of Finance. SUSEP and CNSP are active and focus heavily on consumer protection. Aggrieved consumers typically bring complaints against insurance companies to SUSEP or consumer protection agencies, which usually result in penalties applied by SUSEP against the insurance company.

Although possible in principle, if there is evidence of a lack of regulatory oversight, it is extremely rare that a government entity such as SUSEP would be sued and held liable to indemnify the market for a regulatory issue such as insolvency.

For further information on this topic please contact Marta Viegas or Juliana Mattar at TozziniFreire Advogados by telephone (+55 11 50 86 50 00) or email (mviegas@tozzinifreire.com.br or jmattar@tozzinifreire.com.br). The TozziniFreire Advogados website can be accessed at www.tozzinifreire.com.br.

Endnotes

(1) 'Risk capital' is defined as "variable capital the supervised entity must maintain, at any time, to ensure the risks inherent to its operation".

(2) See www.susep.gov.br/menu/informacoes-ao-publico/mercado-supervisonado/entidades-em-regime-especial.

(3) See www2.susep.gov.br/menuestatistica/monitormercado/index_chart.asp.

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