EAPD lawyer Machua Millett recently participated in the American Conference Institute’s ReAct Brazil International Forum on Positioning for Success in the Brazilian Reinsurance Market.
Discussion at the forum revolved around several core themes:
- Potential: Brazil is a largely untapped and potentially very lucrative insurance and reinsurance market. Brazil’s insurance market is considered to have the third best growth potential in the world, behind only China and India. It has the sixth largest economy in the world by purchasing power and tenth largest by GDP, and has a stable political environment. On the other hand, Brazil represents less than 1% of the world’s premium volume, has only 3% insurance premium penetration by GNP and more than 81% of its existing premiums are concentrated in life, auto and fire insurance. Based on these factors, several studies have indicated that the Brazilian (re)insurance market should see rapid growth in the coming years. Therefore, Brazil is not only an attractive market in its own right, but a logical entry point to other markets in Latin America.
- Restriction: Although significantly liberalized by the new reinsurance statute and regulations, Brazil is not yet an entirely free market, instead having opted for a “orderly opening of the market” reflected in several significant limitations on the role of foreign reinsurers:
(1) During the first three years under the statute, insurers will be required to initially offer 60% of ceded risk to local reinsurers before it can be offered to foreign reinsurers;
(2) No insurer may cede more than 50% of its total annual risk to foreign reinsurers;
(3) No insurer may cede more than 10% of its total annual risk to occasional reinsurers; and
(4) No foreign reinsurer organized in a “tax haven” will be permitted to register as an occasional reinsurer.
- Uncertainty: Although prospects for foreign reinsurers appear bright, a number of significant issues remain, including the following:
(1) Is the Brazilian reinsurance market, even if it grows as predicted, of a size sufficient to support the recent influx of foreign reinsurer?
(2) Will the restrictions discussed above be progressively loosened, remain the same or be further tightened as foreign participation in the Brazilian reinsurance market grows?
(3) How, if at all, will admitted and occasional reinsurers be taxed by Brazilian authorities?
(4) Will admitted and occasional reinsurers be permitted to resolve disputes with ceding insurers in foreign abitration or be required to litigate or arbitrate disputes within Brazil?
(5) What role will the IRB now play in the Brazilian reinsurance market?
(6) How will the Brazilian authorities interpret the term “tax haven” in considering registration applications?
(7) How will the Brazilian authorities interpret and enforce the “preferential offer” requirement discussed above and how will local reinsurers generally respond to such offers? and
(8) Can enough qualified personnel be found in Brazil and/or brought in from abroad to properly staff branch and representative offices of foreign reinsurers?
All of these issues were discussed and debated in some length by the participants in the forum, with the tax haven, 10% occasional reinsurer cap, taxation and preferential offer issues of particular prominence. As only time will tell as to many of these factors, it is important that companies interested in entering the Brazilian market obtain the assistance of qualified advisors to assist in making proper decisions based upon the available information and in monitoring ongoing developments in the areas of regulation, legislation and market trends.