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Brazilian Reinsurance Regulation Changes Again by Ronald Poon Affat

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Brazilian Reinsurance Regulation Changes Again by Ronald Poon Affat Article from: Reinsurance News March 2012 – Issue 72 Brazilian Reinsurance Regulation Changes Again By Ronald Poon Affat n November 2011, a number of associations, However, Brazil is still not an open reinsurance market; including the American Council of Life Insurers rather it’s in the process of opening. At the moment, it’s I (ACLI), filed comments with the Brazilian regula- like a three-ring circus. Reinsurers may apply for clas- tory authority urging Brazil to stop restricting reinsur- sification as local, admitted or occasional reinsurers. ance access to only domestic reinsurers in one of the Each classification XLrequires Re different levels of capital world’s leading emerging markets for insurance. This and provides access 0%to varying percentages of ceded article examines the background and legitimacy of this risks. complaint. Lloyd’s Ronald Poon Affat, Mapfre Re Others FSA, FIA, MAAA, The graphs below0% and on pg. 25 set out Gross Premium CFA is both a VP In 1939, the Brazilian Reinsurance market was closed MarketJ. Malucelli Share percentages of the local reinsurers over of Tempo Assist (a to direct access by international reinsurers. It was offi- the period 2008 to 2010. 4% 3% Sao Paulo based cially reopened in April 2008 and is now home to 75Munich Re 3% heath conglomer- multinational reinsurance groups including the State We can clearly see5% that the IRB-Brasil Re’s share has ate) and a member Reinsurer, Instituto de Resseguros do Brasil (IRB- declined from 85 percent to 25 percent over a three- of the Board of the Brasil Re). Please note that several reinsurers (e.g., year period. So let’s summarize what it means to be a Society of Actuaries. He can be reached ACE) have multiple registrations, so records will show local or non-local reinsurer Brazil, and what were the at ronald.poon@ that there are 92 approved companies in total. altercations since the opening of the market that led to tempoassist.com. the ACLI’s complaint. IRB 85% The charts below show the variation in market share percentages, measured by Gross Premium 2008 - 2010.” 2008 2009 XL Re Lloyd’s 0% XL Re Mapfre Re Lloyd’s Others 0% Others J. Malucelli Mapfre Re 6% Munich Re 3% 4% 3% 9% 2% 5% J. Malucelli 4% 4% Munich Re 9% IRB IRB 67% 85% Lloyd’s XL Re Others IRB 25% 24 | MARCH 2012 | Reinsurance News Others Mapfre Re 6% 45% 9% 2% 4% Munich Re J. Malucelli 4% 4% 4% 4% 9% 3% J. Malucelli Munich Re 9% 1% IRB Mapfre Re 67% XL Re Ace Lloyd’s IRB 25% Others 45% 4% Munich Re 4% 4% 9% 3% J. Malucelli 1% Mapfre Re XL Re Ace Lloyd’s XL Re 0% Mapfre Re Lloyd’s 0% Others J. Malucelli Munich Re 3% 4% 3% 5% IRB 85% Lloyd’s XL Re Others Mapfre Re 6% 9% 2% J. Malucelli 4% 4% Munich Re 9% IRB 67% 2010 IRB 25% Others 45% 4% Munich Re 4% 4% 9% 3% J. Malucelli 1% Mapfre Re XL Re Ace Lloyd’s 1939 TO 2008 levels of capital and provides access to varying percent- IRB-Brasil Re was the only show in town. For a mul- ages of ceded risks. tinational reinsurer to obtain any risk they either had to be a registered retrocessionaire of IRB-Brasil Re Specifically, the definitions of these three tiers were or IRB-Brasil Re needed to give their explicit written the following: permission that such a risk/treaty could be executed 1. Local—have the right of refusal for at least between the said client/ceding company and rein- a minimum percentage of all reinsurance ces- surer. There was also no official law that regulated sions. During the first three years, insurance Reinsurance. The IRB-Brasil Re’s decision was the companies would have to offer local reinsurers law. IRB-Brasil Re could decide to assume a share of 60 percent of their reinsurance cessions, with this the risk that ranged from 0 to 100 percent, e.g., for life requirement reducing to 40 percent after this peri- business, the IRB-Brasil Re maintained a majority per- od. These companies have to be locally established centage of the cession, health business was retroceeded as a joint stock company with a minimum manda- 100 percent and certain special risks, e.g., petroleum tory capital of BRL60 million (about USD34 mil- companies, were given special dispensation and were lion). Company is regulated by SUSEP. allowed to work directly with foreign reinsurers. Local reinsurance companies could retrocede up to 2008 – 2010 50 percent of their portfolio’s premium. There was In January, 2007 the monopolist regime was abol- no law regarding inter-company transfers. ished with the establishment of new legislation (Law 126/07). This legislation defined the regulation of 2. Admitted—needs to have a representative office the reinsurance, retrocession and coinsurance markets in the country and set up an escrow account with and also transferred to SUSEP (Brazilian Insurance USD5 million for all lines or USD1 million for life Regulator) all regulatory responsibilities formerly held reinsurance only. Minimum rating of Baa3/BBB-. by IRB-Brasil Re. According to the new legislation, reinsurers would be classified as “local,” “admitted,” 3. Occasional reinsurers—do not need to set up a or “occasional.” Each classification requires different local office, but there is a limitation for insurance CONTINUED ON PAGE 26 Reinsurance News | MARCH 2012 | 25 Brazilian Reinsurance Regulation … | FROM PAGE 25 companies to cede only up to 10 percent of pre- SO WHY ARE ALL OF THESE CHANGES mium to them; they must have a minimum rating HAPPENING? of Baa2/BBB. There is no doubt that the rapid decline of fortunes of IRB-Brasil Re is the main reason for the changing Both the Admitted and Occasional effectively main- regulatory landscape. tained 100 percent of the risk offshore with no reserves held in Brazil. The pie-charts on pgs. 24 and 25 confirm that the main share of the reinsurance market has gone to the multi- RESOLUTIONS 225 AND 232 national reinsurance companies who are registered as When the market eventually opened in 2008, the rein- admitted or occasional. These companies are transfer- surance regulator (SUSEP) advised of this tiered struc- ring risk between their locally based direct writing ture, so all players choosing to enter the market would companies and their overseas reinsurance arms. No have been aware of the restrictions. However, the main local company is even in the double digits regarding reason behind the recent complaint is the fact that the market share. It would appear that the objective of Government keeps changing the rules and it always the regulation is to discourage the retroceeding to the appears that the revised rules are aimed at frustrating admitted and ccassionals and to insist on the forma- the multinationals with the main benefactor being the tion of more local reinsurers and hence ensure that the state reinsurer (IRB-Brasil Re) companies made their majority of the risk is kept in Brazil. This of course capital allocation decisions based on the initial rules. defeats one of the primary functions of reinsurance However, the way in which regulation has been con- which is to pool risks from many countries in one ducted just creates uncertainty. The ACLI complaints centralized location rather than maintaining reserves in were triggered by two new rules that came into effect every single country where it has risk exposure. during 2011, namely: The local reinsurers include IRB Re, Munich Re, XL 225—Cession of 40 percent to Local (licensed to oper- Re, ACE Re, Mapfre Re, Chartis Re, Austral Re and ate reinsurance in Brazil) reinsurers is now manda- JMaluchelli. Since these controversial resolutions (224 tory for all facultative and treaty business. Prior to the and 232) were effected, Swiss Re, Terra Brasis and new resolution, any type of business had only to be Argo Re have formally announced that they will be “offered” to Local reinsurers but not necessarily placed forming local reinsurers ... and several others are in with them (Formerly the local reinsurers had a right of the pipeline. first refusal, which if they did not exercise it, the ceding company could cede 100 percent abroad). I would like to suggest that there may be four main reasons why the rules keep changing in Brazil: 232—No reinsurance cessions or retrocessions will be allowed to cede more than 20 percent to any company 1) Share ownership from the same economic group, if the receiving com- Lets not forget who owns the IRB-Brasil Re. Fifty pany is located abroad. This limits cessions from any percent is owned by the Banco do Brasil, 21 percent by multinational insurance companies directly to their Bradesco, 15 percent by Itau Unibanco and the remain- home office. (The original resolution was numbered der by a variety others. 224 and initially forbid any inter-group cession). What is further complicating the market with this rule is “20 As of August 2011, http://www.relbanks.com/worlds- percent” is not clearly defined. No one knows if it is top-banks/market-capitalization-2011 ranked the three on a portfolio, line of business, or risk basis or if it is major shareholders of the IRB-Brasil Re within the top measured by premium, limits, or some other value. 25 of the world’s banks by market capitalization. The 26 | MARCH 2012 | Reinsurance News ... THE WORLD’S EYES ARE ON BRAZIL AND“ FRANKLY ... THE WORLD EXPECTS MORE. sudden decline of premium/profits and ultimately value CONCLUSION” of their joint venture would no doubt have concerned With the emergence of Brazil as the world’s 6th largest these three financial powerhouses.
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