Worries over Brazil's reinsurance stance

Insurers in Brazil face big changes to the way they buy reinsurance if two new resolutions come into force on March 31, 2011. The new rules will restrict their ability to reinsure risks internally and will force them to use more local players.

Resolution 224/2010 will prevent insurers reinsuring their businesses within their own financial group. This resolution was meant to come into force on January 31, but was delayed. The second resolution, 225/2010, means that insurers must place at least 40 percent of their reinsurance with locally admitted reinsurers.

There has been heated debate over the affect that the resolutions, which were announced at the end of 2010, will have on the reinsurance market in Brazil—and also criticism of the way they have been introduced.

“We were taken by surprise with these new regulations and are still assessing the potential impact on Lloyd’s,” said Marco Castro, general representative, Brazil, at Lloyd’s. “However, I believe that the Brazilian insurance and reinsurance market, more widely, was concerned that such important regulatory changes were introduced without any prior consultation.”

Others have questioned whether the authorities have thoroughly considered the ramifications of these resolutions.

“The problem is that the regulator and the government in supporting the regulator do not seem to understand or accept diversification and how reinsurance companies operate,” said Hermes Marangos, partner and head of international, Davies Arnold Cooper.

“The present model cannot involve capital being kept in all countries where a reinsurer has operations. Leaving aside the irregularity of the new provisions, if intra reinsurance arrangements are not allowed, this will not necessarily lead to more companies becoming local as there would not be enough capital being brought into Brazil.”

Similarly, Argentina has announced that from September 1, 2011, Argentinean cedants will only be able to enter into reinsurance contracts with reinsurance companies or branches of foreign companies established locally, with capital of at least AR20 million ($4.9 million), according to Alex Guillamont, director, Kennedys Latin America.

“The new reinsurance rules in Argentina, if finally implemented, will make life more challenging for international carriers. It’s important that reinsurance companies and brokers adapt within the next few months without discarding the possibility of focusing on retrocessions if making the investment to set up a local branch is out of the question for them.” he said.