Brazil’s muddled reinsurance market

The reinsurance market in Brazil is going through profound, but not necessarily positive, change as the regulator seeks to maintain a hefty share for locals.

The opening of Brazil’s reinsurance market has been slow and uneven. In 2008, private competition was allowed in for the first time when the monopoly held by the state company, the Reinsurance Institute of Brazil (IRB), was revoked.  Average growth of 13% per annum had increased the size of the insurance sector to 4% of GNP and the market is a hefty R$66.5bn ($32.8bn) today.

After market opening, better pricing in international markets choked the local market and after some intense lobbying, the Private Insurance National Council CNSP (law number 225/2010) was introduced. That reversed much of the previous liberalization, imposing limits on non-Brazilian participation. The law holds that local reinsurers must take 40% of any reinsurance order, although the order can represent less than 40% of the risk.

I recently interviewed João Francisco Borges da Costa president of HDI in Brazil and of the Association of Foreign Insurers. Legal changes connected to the reinsurance market have become the single most important issue for foreign insurers, he reckons. “Many foreign insurers have a substantial part of their income from reinsurnace and rely on the ability to use the retention of risks internally.” It is hard to find capacity in the domestic market. That has allowed the IRB to dominate the market and levy high charges.

The series of legal changes have made life trickier for risk managers in London. It is difficult to measure the implications for the London market as there have been various different rules which complicate assessment of risk and taxation when insurance or reinsurance is purchased.

The changes in legislation also mean that clients may need to carefully cultivate local reinsurers. But there’s a catch 22: low volumes of capital in Brazil are an issue in insurers’ capacity.

There are some advantages perhaps. A closer relationship brings fast decisions, local support for documentation and a concentrated channel, thinks Elias Silva, coordinator of the petrol risks group at JLT in Rio de Janeiro.

In energy, the European market will continue to play a large role thanks to high risk profiles. In construction, the impact is mixed. In medium-sized projects, local insurers and reinsurers are increasingly dominating the Brazilian market. In large projects, clients are placing business in the London markets still.

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I've been researching and writing on Brazilian financial markets, industry and economy since 2006 for a wide range of specialist media, consultancies and investors. Before that I spent over 10 years in London and New York writing for and editing magazines and journals dedicated to finance, investment and economics in developing markets, mostly for the Euromoney Institutional Investor group and Thomson Financial. Areas of coverage Below are samples of areas that I cover and some of the common themes that I investigate. Capital markets BM&FBovespa markets *capital raising trends: via equities (IPOs and secondary issuance), debt and loans *the asset management industry: legislation and coverage of the key hedge, pension and investment funds * corporate governance: how the regulator is seeking to strengthen best practice and limitations * debt markets: the nascent corporate markets, attempts to boost liquidity and new insturments. * private equity market: why this market has been so successful, who’s involved. *electronic, high frequency trading and alternative trading platforms: what does the future hold? Banking *credit: the growth of consumer and business credit and competition between banks and models *Public versus private: the role and market share of public and private sector banks and the politicization of the industry * internationalization: which Brazilian banks are expanding overseas and where * investment banking: the growth of the domestic market and who’s winning which mandates *regional banks and development banks: what role they play in the industry and how they compete Mining *licensing: the complex process of obtaining environmental, water, land and operating licenses at a state and federal level. * capacity: the feasibility and sustainability of capacity increases * financing: how miners are raising finance in Brazil and abroad *competition: the interplay Vale, MMX and junior miners *logistics: rail, road and port connections Oil and gas: the fund raising issues related to the massive of pre-salt (link) Multilatinas: Who are they and how and where they are expanding Meatpacking: Are debt burdens sustainable, what are the different business models for areas such as branding and distrbution Agriculture: How are farms consolidating, what are environmental risks, how can foreign investors be involved. IT and software: Can Brazil take on India and build a viable long-term IT industry? For more information on clients and work, please see the media and consultancy sections.
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