Growing Pains In A Newly 'Opened' Reinsurance Market

Over the last year, we have discussed in detail the operation of "cession limits" and "right of first refusal" such that the "opening" of the Brazilian reinsurance market clearly had its limits. Even after the "opening," certain clear benefits remained in favor of the government-owned former monopoly holder and other insurance and reinsurance companies willing to establish locally. In 2009 and early 2010, several regulatory changes occurred to affect both of these requirements, some planned, others instituted in reaction to emerging market conditions:

Brazilian law previously imposed a 10% limit on total annual premiums that a local insurer could cede to an occasional foreign reinsurer. In April 2009, however, SUSEP relaxed that limitation significantly, but only as to two lines of business. By Resolution No. 203/09, published in the Diario Oficial on April 29, 2009, SUSEP raised the cession limit to occasional foreign reinsurers to 25% for surety and petroleum risk business. Resolution No. 203/09, which became effective as of its publication date, did not indicate the reason for the special treatment of the surety and petroleum risk lines or indicate whether or not any similar relaxation of the cession limit can be expected in any other lines. Despite the lack of official comment, the resolution is likely the result of pressure from the local market due to insufficient reinsurance capacity for petroleum risk and surety lines from local and admitted insurers. The move brought some comment from local observers that cession limits should be relaxed as to other lines of insurance as well. No such further relaxation of cession limits occurred through the end of 2009, but raises interesting issues about the relationship between lobbying efforts by local companies and the interests of foreign reinsurers. As of Sunday January 17, 2010, foreign reinsurers are now permitted access to a larger portion of the Brazilian reinsurance market as local reinsurers' right of first refusal was reduced from 60% of risks in the market to only 40%. The change was automatically triggered by the passage of three years since the enactment of Supplemental Law 126, which first opened the Brazilian reinsurance market to foreign competition. Among the issues to watch in regard to this fundamental change in the market (more than half of risk was previously subject to the right of first refusal as opposed to less than half as of January 17), is the effect upon the profitability and competitiveness of IRB Re-Brasil and the other local reinsurers. In the Fall of 2009, SUSEP also released Circular No. 392 confirming the requirements for purchase of foreign insurance and which lines of insurance may be purchased in foreign currency. SUSEP confirmed that foreign insurance may not be purchased by a Brazilian company unless it has previously received ten (10) declinations from Brazilian insurance companies. In the case of lines of business in which fewer than ten Brazilian insurers offer cover, the Brazilian company must obtain declinations from each of the Brazilian insurers offering such cover. SUSEP also reiterated that the proposal rejected by the local insurers must mirror the proposal presented to the foreign insurer. Circular No. 392 also confirms that certain lines of insurance may be purchased with foreign currency, including the following: export credit; aviation; satellite; international transport; marine hull (with some limitation); petroleum risks; certain engineering risks concerning public projects; and certain types of civil...