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Opening of the Brazilian Reinsurance Market

Opening of the Brazilian Reinsurance Market

The Brazilian reinsurance market is growing in size and sophistication. Some say Brazil has the potential to evolve into the hub of Latin American reinsurance.
By Ronald Poon–Affat and Karsten Steinmetz

The Brazilian market is presently the largest life market in Latin America, so the recent news regarding the abolishment of the reinsurance monopoly will certainly place Brazil on the radar screens of all major life reinsurers. In 2005 the Brazilian Insurance Market had life premiums of US $8 billion. This can be compared to Mexico which posted US $6 billion and Chile with US $3 billion.

The Instituto de Resseguros do Brasil SA (IRB) was founded in 1939 and is 50 percent owned by the insurance companies that are licensed to do business in Brazil (non–voting shares) and 50 percent by the government of Brazil (voting shares). All reinsurance business must be transacted with and via the IRB. Since 1939 the IRB has enjoyed a monopolistic position with regard to reinsurance. External reinsurers participate in Brazilian risks via:

  • Retrocession–approximately 30 percent of the IRB's premium is retroceded making the IRB the world's largest purchaser of Retrocession protection.
  • Some lines are simply passed through (up to 100 percent) to foreign reinsurers subject to a reinsurance commission (depends on volume) and a fixed 2 percent retrocession tax applied on premiums ceded.

Life And Health Reinsurance Market Size

Present annual volumes that the IRB wrote in 2006;

Life: US $67 million, and Health: US $1.5 million. (approximately)

In general, life business is reinsured by the IRB on a proportional surplus basis and health business is reinsured on a specific excess of loss basis.

Total life risk premium (excluding savings) in Brazil is US $4 billion, which implies that only 1.67 percent is currently being ceded to the IRB thus providing significant opportunities for growth in life reinsurance.

Regulation: Then, Now and for the Future

The Brazilian insurance industry is expected to pass through an intense transformation and development process. A milestone of this process was the sanctioning of the Complementary Law No. 126 that regulates the reinsurance sector after almost 70 years of the existence of the Brazilian monopoly reinsurer IRB Brasil Re. With this Complementary Law, in principle, the Brazilian reinsurance market is accessible to professional reinsurers from abroad.

Following the approval of the Complementary Law by the vice president of Brazil at the beginning of 2007, the National Board of Private Insurers (CNSP), together with the insurance supervisor SUSEP, has been asked to draft the regulations that will define how international reinsurance companies can set up their operations in Brazil and the way reinsurance business can be developed with local insurance companies. For example, issues such as minimum capital requirements for local reinsurers, treatment of retrocessions and necessary documentation with the local authorities have to be defined. The final regulations are expected within a timeframe of half a year following the approval of the Complementary Law.

Three types of reinsurance operations will exist:

  1. Local reinsurance companies: International reinsurers may decide to set up local reinsurance subsidiaries that will be subject to local minimum capital, solvency and supervisory rules. Local insurance companies will have preferential access to 60 percent of an insurance company's total reinsurance cessions in the first three years of the open market environment. For the following three years, this preferential access will drop to 40 percent. A new Complementary Law is required in order to diminish this preferential access further after the first six years. For life and pension business it is important to note that life policies with a savings component as well as risks from pension plans can only be reinsured by local reinsurers. The regulation to be determined now will define whether this restriction applies to all risks or whether the pure insurance risk is exempted.
  2. Admitted reinsurance companies: As usual practice in other Latin American markets, international reinsurers may also set up local representation offices with the objective to provide services to cedants in Brazil. Apart from certain minimum requirements, such as the demonstration of a minimum credit rating and a deposit with the local supervisor, no local solvency rules and capital requirements are expected to apply.
  3. Occasional reinsurers: These are companies that decide to operate in Brazil without any local presence. The restrictions that will apply to those reinsurers are still to be determined.

Any foreign reinsurer domiciled in any tax haven will not be permitted to register as a reinsurer with the Brazilian insurance supervisory body. Any country or territory in which income tax is below 20 percent, or that imposes legal restrictions on the access of information about the shareholders or owners of any firm domiciled in it, is considered a tax haven. Of particular importance for the development of the reinsurance sector will be the future role of the IRB Brasil Re. As 50 percent of the monopolist's shares are currently held by local insurance companies it is to be expected that those companies have a strong interest to preserve the value of their investment. One option for them is to negotiate with the Brazilian government a withdrawal of their capital, i.e., the Brazilian government would then own the IRB Brasil Re entirely. The Complementary Law would then require those companies to use the funds to establish their own reinsurance entities, possibly in cooperation with international reinsurers.

However, the IRB Brasil Re was given the preferential right to adapt itself within a period of 180 days to the open market environment following the establishment of the reinsurance regulations.

An additional item that will need to be defined is the tax treatment of reinsurance. Currently a premium tax of 2 percent applies to all retrocessions from the IRB Brasil Re to the international market.

What Are the Business Opportunities?

New Minimum Capital Requirements for Life Companies: These will be effective as of Jan. 1, 2008. The proposed regulations are almost in final form and this could encourage the cession of reinsurance instead of possible requirements for additional capital injections. As Brazilian insurance companies cannot issue debt or take loans, any additional capital would need to come from shareholders.

Large Group Facultative Life Quotes: Reinsurance is presently undertaken on a treaty basis. Claims data for very large groups are very detailed and could allow reinsurance on a facultative basis subject to a pricing based on the group's own claims experience.

Health Reinsurance: Health reinsurance ceded via the IRB can lead to long delays (sometimes up to six months) in claim reimbursements for cedants. The most interested potential purchasers of health reinsurance are small– or medium–sized health clients for whom expeditious cash reimbursement is an issue.

Fall in Interest Rates: In general, net investment income that goes to the shareholders (over and above that which is being used to increase technical reserves) is expected to fall dramatically in 2007 compared to 2006. This trend is currently expected to continue for the coming years. The vast majority of insurance companies in Brazil have combined ratios well in excess of 100 percent. Insurance companies will be looking to partner with reinsurers to improve their underwriting skills quickly in order to compensate for reduced net investment income.

The Future Market ... What Could It Look Like?

These are several of the unanswered questions regarding the future of the IRB.

Lines of Business: In what lines of business does the IRB want to operate? The monopoly status provided the unique opportunity for the IRB to work in many lines of business. This may be reduced to those lines it believes to have superior underwriting expertise, comparative advantages to external competitors and the ability to earn higher margins. The lines that the IRB chooses not to operate in will probably be the main focus of foreign reinsurers.

Proportional or Non–Proportional: The P&C European reinsurers have typically provided capacity, hence the market follows the proportional model. Interestingly, in life, it has always been proportional (surplus) and in health it has been all non–proportional (excess of loss).

Segregate Run–Off Business: The IRB may decide to establish a new company for business going forward in the post–monopoly era. This strategy depends on if the IRB decides to effect a paradigm shift that will present a marked difference from the past. Continuing to run the business with a mixture of pre–monopoly and post–monopoly business may distort future results, e.g., insufficient historical IBNR or legal claim reserves could adversely affect future profits. As an independent reinsurer, the new IRB would need to demonstrate to cedants, rating agencies, retrocessionaires, profitable post–monopoly results. It would be disadvantageous to keep explaining the effects of past skeletons in future results. Lloyds of London adopted this approach many years ago and the run–off portfolio was recently acquired by Berkshire Hathaway.

Market Protection: Does the IRB wish to take advantage of the "market protection" for as long as the law requires or will it embrace the future beforehand? Does the IRB wish to maintain the right to 60 percent for all lines of business?

Strategic Alignments: Does the IRB wish to make strategic alignments with international reinsurers for certain lines of business based on their expertise and ability to assist the IRB develop technical expertise?

Territory: Does the IRB wish to operate solely in Brazil, Mercosur (Brazil, Argentina, Uruguay and Paraguay) or internationally?


We would expect that by as early as 1Q 2008, the reinsurance market could be operating in a quasi–open manner. Regulation will be the main driver that will determine the market characteristics. Looking further down the road, we will expect that because of its size and sophistication of its financial markets, Brazil has the potential to evolve into the hub of Latin American reinsurance.

Ronald Poon–Affat, FIA, FSA, MAAA, CFA, is the CFO of Icatu Hartford Seguros based in Rio de Janeiro.

Karsten Steinmetz, FIA, FSA, is the head of Life Department (Southern Europe, Latin America and Middle East) of Munich Re based in Munich.