Insurance Groups Lobby Brazilian Government for Reinsurance Rules Change

Posted on Apr 28, 2011 by Sergio Ulloa (G+)  | Tags: Brazil, Brazil Insurance, Reinsurance

A coalition of 18 international insurance associations from Europe, Asia and the Americas have drafted a letter to the Brazilian government, petitioning them to reconsider two recently enacted reinsurance regulations that could threaten the market and severely reduce the availability of insurance in Brazil, including coverage for the upcoming 2016 Olympics and 2014 FIFA World Cup being held in the country. The letter follows joint calls made by both the Federation of European Risk Management Associations (FERMA) and International Federation of Risk Management Associations (IFRIMA) on Brazil's CNSP (National Board of Private Insurance) to revoke Resolution 225 and 232 and the checks now placed on the Brazilian reinsurance business. Brazil's insurance industry has undergone significant evolution in recent years and has been experiencing healthy growth as a result of improving economic conditions and the loosening of market regulations in the country. The background of the dispute between the CNSP and private insurers springs from 2007 reforms the Brazilian government implemented to update and restructure its laws governing the insurance sector in the country, namely Complementary Law 126/07 which eliminated the previously existing state monopoly on the reinsurance trade. The goal of these reforms has been to open the local markets to increased competition and improve the availability of insurance coverage and lower the costs to Brazilian citizens. Multinational insurance associations were pleased with these initial developments, as IFIRMA notes in a recent statement: "With the opening of the national market to other Brazilian and foreign reinsurance players, within less than three years, insurers could offer very good products to meet the needs of society and companies of all sizes. The result of that appropriate and necessary opening was the reshaping of the insurance sector, with companies focused on various fields of activity to offer products of high quality, substance and reliance to all buyers." However, two new resolutions that came into force March 31st are seen as undermining these previous reforms and attempting to rollback the liberalization of the Brazil's reinsurance market by means of an unexpected executive order from the CNSP. Resolution 225 and 232 will require 40 percent of all reinsurance business to be allocated to Brazilian companies, rather than the current ruling granting them the right of first refusal. The legislation would further prohibit local insurers from ceding more than 20 percent of premium, related to coverage provided, to affiliated intracompany reinsurers located abroad. In a prior statement, FERMA President Peter den Dekker said that his association believed that these regulations would "damage the interests of our members and the development of the insurance and reinsurance market in Brazil. We, therefore, ask the Brazilian government to rescind them." The Brazilian authority's attempt to restrict insurance and reinsurance capacity in the largest South American market is seen as one of the most significant issues facing the global insurance industry. In the letter, the 18 multinational organizations agree that both CNSP regulations represent a marked departure from international regulatory standards and would "dramatically restrict the ability of private insurers and reinsurers--both Brazilian and foreign--to do business in Brazil." The letter asserts that international insurance groups would no longer be able to utilize globally accepted prudent risk management strategies to meet the greater insurance capacity requirements that will prove critical to the development of the Brazilian economy. The new resolutions expose existing Brazilian policyholders to greater risk and would also impair local job creation and tax collection. Reducing foreign insurance capacity for handling large commercial risks in Brazil will drive up prices as it will be become more difficult and expensive for Brazilian insurers to access foreign reinsurers. "The benefits of diversification of risk into the global insurance market will be lost and, as a result, insurance likely will cost more for Brazilian consumers," the letter said. Many international companies have significant interests in Brazil and are calling into question the need to jeopardize global investment in Brazilian insurance and reinsurance operations at this time. Those of which operate in captive insurance are concerned that the new regulations will mean that arranging reinsurance for the captive will mean more intermediaries, added transactions, and thus greater cost. An open and competitive insurance market helps create a favorable business environment overall. The letter agrees that changing the rules is not necessary: "the local market currently does not have the capacity to bear the significant risk required for economic growth½which once again demonstrates the total incompatibility of the new Resolutions with the reality of the domestic market." The letter further maintains that if applied to current foreign license holders in Brazil, the regulations would constitute an abrogation of contract terms and be declared illegal under Brazilian law. Multinational insurers stress that such drastic moves could call into question Brazil's ability to provide sufficient insurance and reinsurance for the Olympic Games and World Cup. Insurance groups are now looking to work with the Brazilian authorities to examine and reassess the consequences of these resolutions and to better develop new regulations that will allow for the growth and sustainable development of a healthy and dynamic insurance market in Brazil. "We hope to work with the Brazilian government to expand the insurance and reinsurance markets, maintain adequate capacity and provide people and businesses in Brazil with a wide array of innovative insurance products. Leaders in Brazil had been working for many years to remove unnecessary restrictions and open the market to more competition. A more open and competitive market will benefit consumers and businesses alike," said Dirk Kempthorne, president and CEO of The American Council of Life Insurers (ACLI), one of the signatories to the letter, in a statement. The Brazilian insurance market is the largest in South America, and offers the potential to become a more prominent international insurance market across all disciplines. Recent economic stability, positive credit trends, and regulatory reforms that have stabilized the currency and promoted domestic savings, have all contributed to continued growth across the insurance industry in Brazil. In spite of continued regulatory hurdles, large multinational insurers cannot ignore the market's size and growth potential and will be looking to invest themselves further in Brazil, and other emerging economies, to offset the continued static performance of the established North American and Western European markets. The full list of signatories includes: American Council on Life Insurers American Insurance Association America's Health Insurance Plans Association of Bermuda Insurers and Reinsurers Association of British Insurers Asociacion Mexicana de Instituciones de Seguros Brazil US Business Council--US Chamber of Commerce European Insurance and Reinsurance Federation (CEA) Coalition of Service Industries Council of Insurance Agents and Brokers Dublin International Insurance & Management Association European Federation of Insurance Intermediaries Federacion Interamericana de Empresas de Seguros International Engineering Insurance Association International Underwriting Association General Insurance Association of Japan Property and Casualty Insurers Association of America Reinsurance Association of America Organizations Mentioned ACLI The American Council of Life Insurers (ACLI) represents over 300 life insurance and assorted financial service companies operating in the United States. ACLI member companies deal in pensions and other retirement plans, 401k, long-term care and disability compensation insurance, as well as reinsurance. IFRIMA The International Federation of Risk and Insurance Management Associations (IFRIMA) is an international umbrella organization representing 23 risk management associations in over 30 countries around the world. FERMA Federation of European Risk Management Associations (FERMA) is comprised of 19 European Risk Management Associations, representing over 4800 individual members and a wide range of industries, including manufacturing, financial services, health organizations and government.