A dispute has erupted in Brazil after a law change that looks set to severely impact the international reinsurance industry, writes Michael Turner.
At the time, Brazil’s 2007 Complementary Law was seen as a great step forward by international reinsurers as it ended the country’s 50-year reinsurance monopoly and allowed foreign players to set up in the country.
But now two resolutions have been added to the law which have stirred up an angry response from the international reinsurance market.
Doing what they [the Brazilian government] did created a serious obstacle for a lot of companies trying to do business in Brazil.”
Both of the resolutions affect the entire reinsurance market, from property to liability. Trade credit and political risk insurance (PRI) appear to have been caught up with the other, much larger, reinsurance markets in the country.
The first of the new resolutions prohibits reinsurers sharing risk with offshore affiliated companies, meaning that reinsurers have to fully capitalise their Brazilian operations. This is a concern for the risk market as international firms have only been admitted since 2007 and Brazil is still a relatively unknown entity.
However, this has been partially revoked for the trade credit and PRI industry and the Brazilian government is now allowing 20% of the risk to be shared with a related overseas entity.
The second resolution, which is still firmly in place for the trade credit and PRI market, requires 40% of a reinsurance deal to take place domestically.
If a reinsurer can’t find the appetite in the domestic market, the deal can’t legally be signed.
The resolutions were due to come into force in January 2011, but were pushed back to April 1 due to the overwhelming market backlash.
“Doing what they [the Brazilian government] did created a serious obstacle for a lot of companies trying to do business in Brazil,” says Stuart Barrowcliff, senior underwriter in the structured trade and political risk team at QBE.
Barrowcliff argues that the local firms are not interested in trade credit insurance. There are nine local reinsurance firms in Brazil; three of which come from domestic money and six funded by international currency.
He says: “An issue that came up for credit insurers, PRI and structured trade credit firms like QBE, is that to date the local reinsurance market really has demonstrated no appetite whatsoever to write credit business. This means we are out of luck on the 40% requirement, because nobody’s going to take our business.”
Return to monopoly
The two resolutions have also sparked claims by the international community that an attempted regression to the country’s reinsurance monopoly by state-owned firm IRB is underway. This is a claim that IRB strenuously denies.
“The protection [change in law] is for local reinsurers, not for IRB,” explains Leonardo Paixão, IRB’s chief executive officer and ex-regulator who voted in the Complementary Law in Brazil.
“If the law wanted to protect IRB, it would say 40% of the market goes to IRB, instead it said 40% of the market for local reinsurers. I don’t understand why that would be an attempt to go back to the monopoly.”
Paixão also brushes off the notion that the change to the law could lead to a lack of capacity for the reinsurance market, particularly with the huge twin projects of the 2014 World Cup and 2016 Olympics.
“I don’t think the resolutions will affect the World Cup or Olympics. We have to remember that four years ago, 100% of the market in Brazil was closed to every other reinsurer and there was no lack of capacity then, so why would 40% now cause any sort of capacity problem?”
While capacity may not be a problem, the decision comes at a complicated time for Brazil. More firms are looking to do business there and the country’s government, alongside the other BRICS members, is attempting to ascertain more control on a global stage. This shift in regulation could be a warning to international firms that Brazil is not yet an open market, just as the country is trying to encourage foreign entities to come and trade there.
“The market is very far from being a free market,” states Jorge Luzze, vice-president of industry group, the Federation of European Risk Management Associations (Ferma). “For IRB, to transfer 20% outside to a third party or another member of the group as per the new resolution is not an issue because IRB does not have someone outside, but for groups like Zurich Re or Ace it would be terrible because they could not use the capacity of their own group.”
IRB’s Paixão contests this. He suggests that Brazil has its own kind of free market which spared it from the brunt of the financial crisis that brought Europe and the US to its knees. Indeed, Paixão says that in terms of financial legislation and regulation, Brazil is well ahead of its developed country counterparts.
“I don’t think Brazil will be seen as a non-free market. We don’t want to be so free; we want to be part of the capitalist system, but with rules that enhance a healthy market. That is our goal. Brazil has nothing to learn in this moment from other countries in terms of legislation. We did not have a single bank, insurance company, reinsurance company or pension fund that broke because of the financial crisis. Our legislation is very prudent and I’m sure that the legislation of Brazil, which was considered quite conservative and maybe old fashioned, has proved its knowledge after the crisis.”
Paixão also states that the change in the regulations was always due: “[When the 2007 law was passed to allow foreign reinsurers to come to Brazil,] it was clear that in maybe three or four years we would need some adjustment to that legislation so the government decided to do it now.”
How apparent the Brazilian government made it to international reinsurers that there was a chance of law change is debatable. If the international players had known that Brazil was going to take this step, it is questionable whether they would they have put so much in the way of human resources and capital into the country after the 2007 Complementary Law was passed.
There is hope for the reinsurance market. Brazil has shown itself to be flexible with the rules if it is for the greater good of the country; typified by the government recognising that the PRI market needs to be able to share at least some of its risk offshore. It is now down to the reinsurance market to lobby and ensure that the Brazilian government is aware of the need for further alterations to the law if they are to continue growing their businesses there. GTR