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Buyers in Brazil expected to benefit from privatization of reinsurance

IRB to lose monopoly status

Global policies possible in countries that prohibit foreign-based insurers

Brazilian risk management conference draws 300

Buyers in Brazil expected to benefit from privatization of reinsurance

Changes in regulation could encourage formation of captives


Published Dec. 3, 2007

SÃO PAULO, Brazil—The long-awaited opening of Brazil's reinsurance market to private reinsurers is expected to benefit insurance buyers and could give a boost to alternative risk transfer mechanisms, experts say.

Reinsurer Instituto de Resseguros do Brasil S.A. has had a monopoly in Brazil since its creation in 1939. But the country is finalizing rules for a recently adopted law that will phase in private reinsurers' direct participation in Brazilian risks (see related story). The rules are expected to be completed and available by Dec. 15.

The "sea change" about to take place in Brazil would allow both insurers and insurance buyers in Brazil to directly tap reinsurers worldwide, said Warren Cabral, a managing partner in the London office of law firm Appleby.

And while insurance prices could decrease for some Brazilian risks, they may increase for other exposures if the new participants price their reinsurance to make up for losses occurring beyond Brazil's borders, said Jorge Luzzi, director of corporate risk management in São Paulo for tire manufacturer Pirelli S.A.

One key area of change for risk managers will be in the area of captives.

While a few Brazilian companies previously formed captive insurers, a prohibition against Brazilian businesses contracting with reinsurers other than the IRB has hampered the formation of more captives, Mr. Cabral said.

Once Brazil's risk managers can directly transact with reinsurance companies, more captive formations are likely to follow, Mr. Cabral added.

"Given the freedom, the flexibility, who wouldn't use a captive structure for exactly all the reasons the United States and other countries have had captives for years?" Mr. Cabral said.

The changes also open the door to capital market capacity, he said.

While the new law's intent is to allow foreign reinsurers to compete in Brazil, uncertainties remain over implementation. Until the final rules are released, it remains difficult to gauge the law's ultimate impact, said speakers and attendees at the Nov. 19-21 conference in São Paulo, sponsored by Brazil's risk management association, the Associação Brasileira de Gerencia de Risco.

"The law has been passed, and its intent is understood. But the devil is in the details, and the mechanics are going to define how it works for (insurance) customers," said Bruce S. Abrams, senior vp and director of the risk management major accounts practice at American International Underwriters, a unit of American International Group Inc. in New York.

But despite the uncertainty, Mr. Abrams said he expects that having access to worldwide reinsurance markets will help Brazilian risk managers improve their companies' competitive position.

That will happen as buyers move away from a system that set rates, terms and conditions for them. They likely will be able to find new methods to reduce their cost of risk, Mr. Abrams said.

Opening the market to competition could help reduce the cost of excess coverage that many Brazilian corporations buy from the IRB, said Mr. Luzzi, who also is president of the ABGR.

At the same time, Brazil faces few natural catastrophes, such as earthquakes or hurricanes. By obtaining coverage from the IRB, Brazilians have been spared paying for reinsurers' worldwide catastrophe losses, Mr. Luzzi noted.

If Brazilian risks are eventually transferred to worldwide reinsurers, that would change and could increase pricing for them, said Mr. Luzzi, who stressed that he does not advocate remaining under a monopoly system.

The changes, however, would force Brazilian risk managers to improve their expertise, he said. Those who are inefficient no longer could blame monopolistic market conditions for their own shortcomings.

The change also is expected to boost the types of coverage available.

Currently, when the IRB declines to support certain coverages, Brazilian insurers generally follow the IRB's lead, said Eduardo Lucena, chief executive for broker Colemont Brasil Corretores de Seguro Ltda., a unit of Dallas-based Colemont Insurance Group Inc.

Many coverages available in other countries therefore are not available in Brazil, Mr. Lucena said, citing the example of coverage for retail jewelers.

But with new reinsurers bringing capacity to Brazil, such coverages are more likely to become available, Mr. Lucena said.

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IRB to lose monopoly status


Published Dec. 3, 2007

SÃO PAULO, Brazil—Brazil's monopoly reinsurer, IRB-Brasil Resseguros S.A, will be reduced to the status of "local reinsurer" under the country's ongoing efforts to liberalize its reinsurance market.

No longer will the IRB regulate all reinsurance transactions in Brazil. In addition, the reinsurer, which is 50% owned by the government and 50% owned by local insurers, will not hold the monopoly position it has maintained since 1939.

Instead, Brazil's superintendent of private insurance, Superintendencia de Seguros Privados—or SUSEP—will regulate reinsurance. Under implementation of Complementary Law 126, passed in January, SUSEP says IRB will compete as a local reinsurer.

A local reinsurer is one of three categories of reinsurers that will be allowed to operate in the country.

According to SUSEP, the three categories are:

  • A "local reinsurer" maintaining a registered office in Brazil. Local reinsurers will have preferential access to 60% of Brazil's property/casualty reinsurance business for three years. That will decrease to 40% the following three years, with the potential of a future law entirely eliminating the preferential treatment.

  • An "admitted reinsurer" that is located abroad but maintains a representative office in Brazil.

  • An "occasional reinsurer" that operates in Brazil without a local office.

    Brazilian insurance observers are awaiting release of underlying rules for the three types of reinsurers, including the capital and reserve requirements they will be expected to meet. They say the rules are expected to be released by Dec. 15.

    SUSEP along with Brazil's National Board of Private Insurers is drafting the rules after receiving public comment on draft regulations.

    The rules will help determine how competitive Brazil's reinsurance industry becomes, observers say. If, for example, reserve and capital requirements are too high, then the IRB could remain the only reinsurer in the country by default.

    But SUSEP said that following the release of its regulations, it expects to see global reinsurers take on more of Brazil's risks and more reinsurance capacity entering the South American nation.

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    Global policies possible in countries that prohibit foreign-based insurers


    Published Dec. 3, 2007

    SÃO PAULO, Brazil—A so-called "financial interest" or "financial indemnity" clause inserted in the master policy of a global insurance program can help companies recover losses in countries that prohibit nonadmitted, or foreign-based insurers, speakers told a Latin American risk management conference.

    Royal Dutch Shell P.L.C., which self-insures the first $400 million of its risk, has such a clause in global coverage provided by its Swiss-based captive insurer, said Leonardo Baeta, regional risk and insurance adviser for Shell Brasil Ltda. in Rio de Janeiro.

    In some countries, laws permit only locally based companies to sell insurance and prohibit nonadmitted insurers from doing so.

    Global programs are typically structured with a master policy issued by a worldwide insurer, often in the United States or Europe. The master policy often sits atop limits issued by local insurers in nations such as Brazil, China or India, said Don Baker, executive vp in Hamilton, Bermuda, for XL Insurance Ltd.

    For casualty coverage, local policies might provide, for example, $2 million to $5 million in limits, Mr. Baker said. The master policy, meanwhile, might provide another $20 million to $30 million in difference-in-conditions or difference-in-limits coverage.

    A company may want to buy separate local policies instead of implementing a global program, Mr. Baker told the Nov. 19-21, conference in São Paulo, Brazil, sponsored by the Associação Brasileira de Gerência de Risco, Brazil's risk management organization.

    Some companies may desire local coverage if a bank or mortgage lender demands it, Mr. Baker added. A company also may want local coverage for tax purposes, such as the potential to deduct premium expenses.

    But global insurance programs offer advantages, Mr. Baker said. They can provide consistent coverage and risk management philosophy across numerous countries. They also eliminate numerous local negotiations and administrative responsibilities for multiple policies, he said.

    With a global program, risk managers can instead focus on loss prevention efforts, Mr. Baker said.

    Global policies also facilitate reinsurance arrangements by funneling premiums from numerous countries to reinsurers or to the client's captive, Mr. Baker said.

    Properly worded global policies also can help risk managers address an emerging issue, Mr. Baker added. Increasingly, countries are fining companies that fail to comply with local regulations that prohibit nonadmitted insurance. "Clearly, this is an area of growing concern for risk managers," Mr. Baker said.

    But a global program can address the potential problem with a "financial interest" clause inserted in the master policy, Mr. Baker said.

    The clause helps policyholders avoid violating local regulations against nonadmitted insurance because it guarantees that payment for a loss at a subsidiary in one country will be made in the country where the master policy was issued.

    For a loss that occurs in China, for example, the insurer would pay in the United States or Europe, Mr. Baker said.

    The insurer, however, does not guarantee the insured’s compliance with local laws, Mr. Baker said.

    "You are at the whims of the law in that local country and (the law) can be interpreted differently at any point in time" as regulators change their stance on their country's regulations, Mr. Baker said.

    Shell's Mr. Baeta, who spoke through an interpreter, agreed that it is difficult to guarantee 100% compliance with local regulations. So Shell uses local insurers for fronting arrangements in countries where it might otherwise encounter regulatory challenges, he said.

    The energy company also has a clause in its global policy similar to the financial interest clause that Mr. Baker discussed, which Mr. Baeta said is known as "financial indemnity cover."

    Shell operates in about 140 nations and its Swiss-based captive, Solen Insurance Ltd., collects about $500 million in annual premiums and had maintained a retention of $150 million until recently, Mr. Baeta said. But Shell re-evaluated its coverage after sustaining hurricane losses during 2005 and increased its retention to $400 million this year, he said.

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    Brazilian risk management conference draws 300


    Published Dec. 3, 2007

    SÃO PAULO, Brazil—More than 300 risk managers and other insurance professionals registered for the VII Seminario Internacional conference, sponsored by Brazil's risk management organization, the Associação Brasileira de Gerencia de Risco.

    Held Nov. 19-21 in São Paulo, the conference also was sponsored by the Latin American risk management association, the Asociación Latinoamericana de Administradores de Riesgos y Seguros.

    Seminar topics included environmental liability and corporate responsibility, directors and officers liability, and developing an effective risk management strategy. The impact of globalization and Brazil's booming economy on insurance arrangements and the ending of the country's monopoly reinsurance structure also were discussed.

    Neither the AGBR nor ALARYS has set a date and location for the next conference.

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