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allowed in for the first time when the monopoly held by the state company, the Reinsurance Institute of Brazil (IRB), was revoked.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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