The first years of the newly liberalized Brazilian reinsurance market were marked by a fiercely competitive and soft market, as well as some unwelcome protectionist measures from the country's regulator.

But despite the bumpy start, foreign reinsurers remain optimistic about the long-term prospects for Brazil, with its booming oil sector, massive infrastructure investments and an expanding middle class.

From 1939 until market liberalization in 2008, the Brazilian reinsurance market was dominated by a government-owned reinsurance monopoly, the Instituto de Resseguros do Brasil, more commonly known as IRB Brasil Re. But legislation passed in 2007, known as Complementary Law 126, opened the market to domestic and foreign players, changing the cost, type and scope of reinsurance purchased by many Brazilian insurers, experts say.

Brazil is a very challenging market for reinsurers, said Margo Black, head of reinsurance for Latin America South and president of Swiss Re Brasil Resseguros S.A., the Brazilian subsidiary of Swiss Re Ltd. formed in June. More than 100 reinsurers have entered the market in the past four years, adding capacity and putting pressure on rates, she said.

Reinsurance demand is mostly in industrial lines such as property, engineering, construction and marine, with little demand in personal lines, said Kurt Müller, president of Munich Re do Brasil Resseguradora S.A. in São Paulo.

There also is potential demand from some property and motor insurers for reinsurance products, such as quota share, that provide capital relief, said Mr. Müller, as the Brazilian regulator in 2011 embarked on a five-year plan to introduce stricter solvency rules that could require some insurers to bolster their capital bases.

%%BREAK%%

But because of the excess capacity, rates have dropped in every line of business, Mr. Müller said. For example, rates in engineering lines fell 25% last year and are expected to fall a similar amount again in 2012. “It is a similar story in property,” he said.

The situation is becoming increasingly difficult for reinsurers, said Ms. Black. “Some reinsurers may have been lenient on rates to get a foot in the door but this approach is not sustainable over the long term. Some are writing at terms and at rates that are not adequate, and this may have to change.”

Some foreign reinsurers have tried to raise property rates, said Fernando Prado, chief executive of Cooper Gay Do Brasil Corretora de Resseguros Ltda. in São Paulo. But if a reinsurer requests an increase they will likely lose the business and be replaced by another reinsurer offering lower rates, he said.

“The market is still young, and it is proving difficult for international reinsurers to apply their own global guidelines and approaches to underwriting,” said Mr. Prado.

Brazil's insurers have had to quickly adjust to a very different market to that under the IRB Brazil Re monopoly, experts say.

The opening of the reinsurance market brought competition and new products to the Brazilian reinsurance market, said Nicolau Daudt, Rio De Janeiro-based CEO of JLT Re Brasil, a unit of London-based Jardine Lloyd Thompson Group P.L.C.

As a result, the learning curve for Brazilian insurers has been steep since the reinsurance market opened, said Ms. Black. The market is becoming more sophisticated, with insurers increasingly using excess-of-loss and stop-loss covers, as well as accepting sublimits in treaties, she said.

%%BREAK%%

One victim of the market upheaval has been facultative reinsurance, which is typically used to reinsure commercial and specialty risks.

Demand for facultative reinsurance has reduced as Brazilian insurers increasingly co-insure and buy more substantial reinsurance treaties, said Ms. Black. “Middle-market facultative reinsurance has given way to co-insurance and adequate treaties,” she said.

Since the market opened, there has been a significant change in the profile of reinsurance business, with a clear move away from facultative cover in favor of treaty, said Marco Castro, Lloyd's representative in Brazil. In 2007 Lloyd's Brazil business was 92% facultative reinsurance, but this proportion has shrunk to 75% in 2010, Mr. Castro said.

Lloyd's operates as a licensed admitted reinsurer in Brazil, although it operates an umbrella office that covers eight Lloyd's syndicates (see related story).

Brazilian insurers are becoming better capitalized and buy larger reinsurance treaties as pro-rata reinsurance capacity has grown, said Mike Hughes, Miami-based chief executive of Latin America at Aon Benfield, a unit of London-based Aon P.L.C. Insurers are therefore increasingly able to write net lines and are therefore more willing to write large risks on a co-insurance basis, he said.

Regulatory risk has increased in Brazil since the market opened, said Florian Kummer, manager of the Latin America Operation at Liberty Syndicate Management Ltd., the Lloyd's arm of Liberty Mutual Holding Co. There have been three major regulatory changes in recent years, all of which restricted the foreign reinsurance industry in an effort to protect state-owned IRB Brasil Re, he said.

%%BREAK%%

According to Mr. Kummer, the changes included 2010 Resolution No. 225 that requires at least 40% of each reinsurance cession to be placed with local licensed reinsurers — IRB Brazil Re and the foreign-owned local licensed reinsurers like Munich Re and Swiss Re. Also in 2010, Resolution No. 224 placed a 20% limit of inter-company reinsurance cessions, while this year saw the creation of Agência Brasileira Gestora de Fundos e Garantias S.A., a state-owned insurer to write boom lines such as energy and construction.

The Brazilian reinsurance market is still not really open, said Mr. Müller. “It was never the intention of the government to totally liberalize the reinsurance market in Brazil. It wanted to protect local reinsurers but give foreign reinsurers a chance to compete in the market on the same terms as IRB Brazil Re,” he said.

Brazil is still an attractive market for international investors and corporations across all sectors, said Ms. Black. Foreign firms are required to buy cover locally, which generates demand for international insurers and reinsurers in Brazil, she said.