Fitch Analyzes Brazil’s Overhaul of Reinsurance Rules

January 3, 2008

Fitch Ratings said it has “reviewed the main changes introduced by Resolutions 168, 169, 170, 171 and 172 of Brazil’s National Private Insurance Board, published in December 2007.” See also IJ web site:

Initially Fitch determined that the changes “complement the regulatory model of the reinsurance market, defining the scope of reinsurance and retrocession in Brazil in an environment of increased competition and capital and operational requirements.” The rating agency also indicated that the “changes should benefit the insurance industry despite pointing out that, as with any other important implementation, the new framework presents some restrictions.

“In particular, one restriction would limit the activities of foreign reinsurers in this first phase of opening the market, in which greater caution by the regulator and the implementation of a series of new concepts and controls within the industry can be observed.”

Fitch also noted that it “expects that evolution of the reinsurance regulatory environment, with its greater incentives for internationalization, will mainly benefit the insurance industry.” Brazil’s reinsurance market handled around Reals 3.5 billion – roughly $2 billion – in 2006 and there has been little recent growth. However Fitch said it expects this to pick up slightly from 8.5 percent growth between 2002 to 2006.

One of the features of the new law reserves “60 percent of the market of premiums assigned by each insurer for local reinsurers up to 2010 and 40 percent thereafter,” Fitch explained. “It also defined that all the risks relative to this reserved market must be offered first to local reinsurers, a group that is at first expected to be very small in Brazil. Only after they have refused the business can the premiums be offered to accepted or eventual reinsurers.”

In Fitch’s opinion this is “contrary to more developed markets, where legal dispositions promote a greater degree of freedom and internationalization in the sector, benefiting prices, product offerings and the potential for greater diversification in underwriting risks.”

Fitch also indicated that it “believes that as the sector develops further, the Private Insurance Superintendency (Susep) and the government may well review the legal instruments and allow greater liberalization in the long run, to the industry’s added benefit.

“Local reinsurers will follow rules similar to insurance companies, mainly regarding the constitution of reserves. The IRB Brasil RE (IRB), as the only local authorized reinsurer to date, is expected to maintain a large part of the premiums underwritten in the market over the short and medium terms and, furthermore, will have until June 2008 to comply with the new regulations.”

Fitch’s analysis concluded that the “the more stable economic environment, increased demand for insurance, and the new regulations related to insurance and reinsurance are positive for development of these markets. However, as with any new regulatory environment, there are uncertainties regarding the functionality of the new legal dispositions, since they still need to be tested.” The rating agency will continue to monitor developments

Source: Fitch ratings –

Topics Legislation Reinsurance Market

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