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Brazilian reinsurance rules complicate market access

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One of the biggest issues for foreign insurance operations accessing the Brazilian insurance market involves reinsurance.

Last year, Brazil adopted regulations that limit the degree to which non-Brazilian reinsurers can reinsure Brazilian risks. Under the regulations, which took effect March 31, 2011, 40% of reinsurance business must be placed with Brazilian reinsurers and local insurers and reinsurers are prohibited from ceding more than 20% of premiums to affiliated, intragroup reinsurers located abroad.

“Essentially, these are protectionist reinsurance regulations and prohibit losses in the Brazilian market to be distributed globally as they would be in other jurisdictions,” said Kara Morell, assistant general counsel at Washington-based Reinsurance Assn. of America. “There has been some question as to whether these regulations violate the Brazilian constitution and there has been a formal inquiry.”

Foreign reinsurers are not the only entities affected by the regulations, pointed out Coletta Kemper, vp-industry affairs at the Washington-based Council of Insurance Agents & Brokers.

The reinsurance rules make it difficult for brokers to put reinsurance packages together, said Ms. Kemper.

“It requires 40% to go to the local market, which means the indigenous market,” she said. “If the local reinsurer says it will reinsure the local risk, it doesn’t matter what the terms and conditions are. You have to accept that or find another market. You have to be declined by the local insurers first. You’re forced to either take that or find someone else in the local market, but if one local market accepts, then you can’t go to the nonadmitted market, which may have better term conditions and capacity.”

In December, a group of insurance trade organizations that include the RAA, the CIAB, the American Insurance Assn., the Assn. of Bermuda Insurers & Reinsurers and the Risk & Insurance Management Society Inc. made a joint submission to the Superintêndencia de Seguros Privados expressing their opposition to implementing the two rules: CNSP Resolutions No. 225/10 and No. 232/10.

The resolutions would continue preferential or protectionist treatment of domestic insurers and reinsurers while simultaneously restricting market access to foreign-affiliated reinsurers, said Kathy Doddridge, government affairs director at RIMS in Washington.

“Without a sufficiently competitive market, these domestic companies do not have the capacity all by themselves to meet the larger property and liability protection that accompanies growth. With insufficient capacity to address the needs of a growing economy and consumer base, prices will undoubtedly be adversely affected and RIMS members doing business in Brazil will bear part of that impact,” she said.

The rules may also be subject to legal challenge, Ms. Doddridge said.

“I think the intent (of the 40% rule) was to help Brazilian entities because it was designed to keep the risk in Brazil,” said the RAA’s Ms. Morell. But she said the regulations could actually put Brazil at risk in the event of a large natural catastrophe.

“Normally, if there’s a megaevent, foreign reinsurers outside of a particular country provide reinsurance for those losses. In the case of Brazil, that could really adversely impact the Brazilian economy because the losses would be concentrated in the economy rather than being spread amongst foreign reinsurers,” Ms. Morell said.

Allianz Global Corporate & Specialty, part of Munich-based Allianz S.E., has taken a step to try to overcome the restrictive reinsurance rules, said Hugh Burgess, New York-based chief executive of the Americas region. Allianz is in the process of applying for a license to establish a local reinsurer of its own, he said.

Brazilian reinsurance rules complicate market access

Mark A. Hofmann and Stuart Collins

One of the biggest issues for foreign insurance operations accessing the Brazilian insurance market involves reinsurance.

Last year, Brazil adopted regulations that limit the degree to which non-Brazilian reinsurers can reinsure Brazilian risks. Under the regulations, which took effect March 31, 2011, 40% of reinsurance business must be placed with Brazilian reinsurers and local insurers and reinsurers are prohibited from ceding more than 20% of premiums to affiliated, intragroup reinsurers located abroad.

“Essentially, these are protectionist reinsurance regulations and prohibit losses in the Brazilian market to be distributed globally as they would be in other jurisdictions,” said Kara Morell, assistant general counsel at Washington-based Reinsurance Assn. of America. “There has been some question as to whether these regulations violate the Brazilian constitution and there has been a formal inquiry.”

Foreign reinsurers are not the only entities affected by the regulations, pointed out Coletta Kemper, vp-industry affairs at the Washington-based Council of Insurance Agents & Brokers.

The reinsurance rules make it difficult for brokers to put reinsurance packages together, said Ms. Kemper.

“It requires 40% to go to the local market, which means the indigenous market,” she said. “If the local reinsurer says it will reinsure the local risk, it doesn’t matter what the terms and conditions are. You have to accept that or find another market. You have to be declined by the local insurers first. You’re forced to either take that or find someone else in the local market, but if one local market accepts, then you can’t go to the nonadmitted market, which may have better term conditions and capacity.”

In December, a group of insurance trade organizations that include the RAA, the CIAB, the American Insurance Assn., the Assn. of Bermuda Insurers & Reinsurers and the Risk & Insurance Management Society Inc. made a joint submission to the Superintêndencia de Seguros Privados expressing their opposition to implementing the two rules: CNSP Resolutions No. 225/10 and No. 232/10.

The resolutions would continue preferential or protectionist treatment of domestic insurers and reinsurers while simultaneously restricting market access to foreign-affiliated reinsurers, said Kathy Doddridge, government affairs director at RIMS in Washington.

“Without a sufficiently competitive market, these domestic companies do not have the capacity all by themselves to meet the larger property and liability protection that accompanies growth. With insufficient capacity to address the needs of a growing economy and consumer base, prices will undoubtedly be adversely affected and RIMS members doing business in Brazil will bear part of that impact,” she said.

The rules may also be subject to legal challenge, Ms. Doddridge said.

“I think the intent (of the 40% rule) was to help Brazilian entities because it was designed to keep the risk in Brazil,” said the RAA’s Ms. Morell. But she said the regulations could actually put Brazil at risk in the event of a large natural catastrophe.

“Normally, if there’s a megaevent, foreign reinsurers outside of a particular country provide reinsurance for those losses. In the case of Brazil, that could really adversely impact the Brazilian economy because the losses would be concentrated in the economy rather than being spread amongst foreign reinsurers,” Ms. Morell said.

Allianz Global Corporate & Specialty, part of Munich-based Allianz S.E., has taken a step to try to overcome the restrictive reinsurance rules, said Hugh Burgess, New York-based chief executive of the Americas region. Allianz is in the process of applying for a license to establish a local reinsurer of its own, he said.