20.1 Regulation of the Brazilian Insurance Market
The National System of Private Insurance, created by the Decree-Law No. 73/1966, as amended, is composed as follows:
- National Council of Private Insurance – CNSP;
- Superintendence of Private Insurance – SUSEP;
- Companies authorized to operate with private insurance, capitalization and private pension;
- Companies authorized to operate with reinsurance;
- Licensed insurance and reinsurance brokers.
The CNSP is the normative body of the insurance and reinsurance activities in Brazil, which sets forth the guidelines and rules of the governmental policy for private insurance, capitalization, private pension (open pension plans) and reinsurance. The CNSP has been subject to several changes to its composition – the last one through Law No. 10,190, of February 14, 2001, which determined CNSP’s current structure.
The SUSEP, an autonomous government agency linked to the Ministry of Finance, supervises the insurance and reinsurance markets, inspecting the companies authorized to operate with private insurance, capitalization, private pension (open pension plans) and reinsurance, including the incorporation, organization and operation of such companies. The SUSEP also has the attribution of regulating the rules enacted by the CNSP.
Law no. 12,249 of June 11th, 2010 created a fee to be paid by all entities supervised by SUSEP (Taxa de Fiscalização dos Mercados de Seguro e Resseguro, de Capitalização e de Previdência Complementar Aberta), in light of its role as enforcer of the sector’s regulation. Only companies that operate with health insurance are exempted from payment.
20.2. Insurance, capitalization and open Private Pension companies
Insurance companies are entities incorporated as stock corporations (sociedades anônimas) that offer insurance agreements, whereby such companies undertake the obligation to pay the insured, or whoever the insured appoints, an indemnification, in case risks arise as indicated and feared, receiving, for such purposes, the agreed premium.
Capitalization companies are incorporated as stock corporations and negotiate agreements (capitalization bonds) by means of which the client periodically deposits a pecuniary sum and has, after the term of the agreement, the right to redeem part of the deposited amount plus an interest rate contractually established. The contracting party may also have the right to be included in lotteries that grant monetary prizes.
Private pension companies are also incorporated as stock corporations and have as their main objective the institution and execution of pension plans.
All three types of companies must be granted a prior governmental authorization, in order to operate, issued by the Ministry of Finance, after a requirement is presented to SUSEP, and submitted to the CNSP.
The Resolution CNSP No. 321 of 2015 establishes the minimum capital requirements for the granting of the authorization to operate. The minimum capital is comprised of two portions: the base capital and the risk capital. The base capital varies in accordance to the region of the Brazilian territory in which the company wishes to operate and according to the size of each Company. To operate in all of Brazil the base capital shall be of R$ 15,000,000.00 for insurance companies of larger size, that is, classified as S1 and S2, R$ 8,100,000.00 for insurers classified as S3, R$ 3,960,000.00 for insurers classified as S4, R$ 3,000,000.00 for supervised companies that operate exclusively in microinsurance and R$ 10,800,000.00 for capitalization companies. The risk capital is calculated based on a formula that takes into account the underwritten risks, of credit and of market.
The insurance companies must maintain provisions to guarantee their operations, pursuant to the criteria set forth by the CNSP and further rules enacted by the SUSEP. The investments must be diversified, according to the rules enacted by the National Monetary Council.
Due to its importance in the society, amendment to the bylaws of insurance companies, as well as the election of each of the members of its management or supervisory body, shall be previously submitted to the analysis and approval by the SUSEP.
20.3. Placing the products in the market
SUSEP has enacted new rules that divided the market into large risks and consumer risks. Large risks are insurance policies purchased by legal entities that present, at the time of contracting and of renewal, at least one of the following characteristics: (i) maximum guarantee limit greater than R$ 15,000,000.00; (ii) total assets exceeding R$ 27,000,000.00, in the immediately preceding fiscal year; or (iii) gross annual revenue exceeding R$ 57,000,000.00, in the immediately preceding fiscal year. Oil/Petroleum Risks, Named Perils and Operational Risks, Global Banking, Aeronautical, Maritime Maritime and Nuclear Risks, as well as Internal Credit and Export Credit in the event that the Insured is a legal entity, are also classified in large risks under SUSEP rule. The rule aims to create more transparency and a better understanding of the wording of the policies by the insured, granting more autonomy for insurers.
Products classified as consumer risks are automatically registered with SUSEP and large risks products do not need to be registered.
In the future, changes are also expected for life insurance lines of products.
The distribution of insurance in the market is usually made through duly licensed insurance brokers who submit the proposals for the acceptance by the insurance companies. In case the insurance company receives insurance proposals directly from the insured, the correspondent brokerage commission, nevertheless, shall be paid to the Insurance Educational Development Fund, managed by the Insurance National School Foundation – FUNENSEG.
20.4. Civil liability of directirs and officers of insurance companies
Directors and officers of insurance companies are jointly liable for the losses caused to third parties, including the company’s shareholders, due to the noncompliance with laws, rules and instructions related to the operation of insurance, coinsurance, reinsurance and retrocession, and, specially, for the lack of constitution of mandatory reserves.
Regarding the lack of constitution of mandatory reserves, it is important to mention that the action or omission, personal or collective, from which the insufficiency of the reserves and coverage arises, related to the guarantee of the obligations of the insurance companies, is considered a crime against the public economy, punishable pursuant to the respective legislation.
20.5.1. Brief History
Until the creation of the Reinsurance Institute of Brasil (IRB), in 1939, the reinsurance activities in Brazil were practiced, mostly, by foreign companies. From 1939 until April 17, 2008, the reinsurance market in Brazil was a monopoly of the IRB, which had also the power of regulating the market.
In 2000, Brazil rehearsed an opening of the reinsurance market. However, an Unconstitutionality Action was filed challenging the law that approved the opening. Only in 2007, the Complementary Law No. 126 was enacted. Such Complementary Law finally provided the guidelines for the opening of the reinsurance market in Brazil.
Currently, the reinsurance market in Brazil is regulated by several Resolutions enacted by the CNSP, to further detail the provisions of Complementary Law No. 126.
20.5.2. Types of reinsurance companies
Reinsurance companies interested in operating in Brazil shall be qualified as local, admitted or occasional reinsurers, pursuant to the following rules:
Local Reinsurance Company: is the reinsurer headquartered in Brazil, incorporated under the corporate form of a stock corporation, which has as its sole corporate purpose operations of reinsurance and retrocession. The local reinsurance company shall be subject to the same rules applicable to the insurance companies, such as: authorization for incorporation, operation, transfer of corporate control, election and responsibilities of the members of the management, and constitution of technical reserves. The local reinsurance company shall have the minimum capital comprised by the sum of the “risk capital” (BRL 60 million) with the “additional capital” (calculated with basis on the risks inherent to its operation).
Admitted Reinsurance Company: is the reinsurer headquartered abroad, with a representation office in Brazil, duly registered as such before the SUSEP, to carry on operations of reinsurance and retrocession. The registration and operation of the admitted reinsurer shall depend on the compliance with certain requirements, such as, among others: experience, in the country of origin, of at least 5 years in the lines of reinsurance which it intends to operate, net worth not inferior to US$ 100 million, minimum solvency classification (S&P: BBB-; Fitch: BBB-; Moody’s: Baa3; AM Best: B+), and a foreign currency account in Brazil, linked to SUSEP, in a bank authorized to operate in foreign exchange in Brazil, with a minimum balance of US$ 5 million or equivalent in freely convertible foreign currency for admitted reinsurers operating in all lines of business.
Occasional Reinsurance Company: is the reinsurer headquartered abroad, without a representation office in Brazil, duly registered as such before the SUSEP. Its activities in Brazil shall be limited to carrying out reinsurance and retrocession operations. The registration and operation of the occasional reinsurer shall depend on the compliance with the following requirements: experience, in the country of origin, of at least 5 years in the lines of reinsurance which it intends to operate, net worth not inferior to US$ 150 million, minimum solvency classification (S&P: BBB; Fitch: BBB; Moody’s: Baa2; AM Best: B++), and the occasional reinsurer must not be incorporated in a tax haven.
20.5.3. Limits on reinsurance cession
The supervised companies may cede and transfer risks to foreign reinsurance companies, as long as the regulatory restrictions are observed (Complementary Law No. 126 of January 15th, 2007, Resolution CNSP No. 168 of 2007 – as altered.
First of all, there are limitations to fronting in Brazil. Insurance companies and the local reinsurance companies may not assign, respectively, in reinsurance and retrocession, more than 50% of the premiums issued related to the risks which they have underwritten, considering the totality of their operations, yearly. The SUSEP may approve exceptions, upon analysis of a technically justified requirement.
The remaining part may be assigned, but only for reinsurance companies registered with SUSESP, as described above. Only in the event of lack of capacity of the reinsurance companies registered with SUSESP, the assignors may contract with non-registered reinsurance companies and, in these cases, additional restrictions will apply.
The reinsurance cessions to reinsurers registered in Brazil must also comply with certain requirements:
- The assignors shall preferably offer to local reinsurers at least 40% (forty percent) of their reinsurance cessions to each automatic or facultative contract, and such offer shall ensure equitable treatment of all reinsurers under penalty of reinsurance contract be disregarded, in addition to the applicable pecuniary penalties.
- The assignors must not assign to occasional reinsurers more than 95% of the aggregate value of the premiums ceded in reinsurance, considering all of their operations in each calendar year.
- The assignors may transfer to related companies or companies of the same economic group provided that the reinsurance or the retrocession operation takes place under balanced conditions of competition. Related companies are those directly or indirectly related to each other due to (i) ownership of 10% or more of the corporate capital, (ii) actual corporate control, or (iii) operations under the same trade name. Notwithstanding the above, the Resolution CNSP No. 325 of 2015 modified the assign percentage for 30% as of 2017, 45% as of 2018, 60% as of 2019 and 75% as of 2020.
- The assigning insurer or reinsurer must inform to SUSEP every time it concentrates, in one single admitted or occasional reinsurer, its reinsurance operations above certain percentages of assigned premium in relation to shareholders equity and recoverable losses in relation to shareholders equity – the percentages vary depending on the risk classification of the reinsurers.
There are exceptions to the above rules for certain lines of insurance: surety bonds, export credit insurance, rural insurance and domestic credit insurance.
Author: Marcio Mello Baptista and Bárbara Bassani de Souza