New rules on assignment and acceptance of reinsurance and retrocession operations, intermediation, coinsurance operations, operations in foreign currency and contracting of insurance abroad

The Superintendence of Private Insurance (“SUSEP”) published CNSP Resolution No. 451/2022, which established new guidelines for assignment and acceptance of reinsurance and retrocession operations, as well as its forms of intermediation, in addition to other provisions regarding coinsurance operations, foreign currency operations and contracting of insurance abroad.

The new Resolution repeals 25 resolutions of the Brazilian National Private Insurance Council (“CNSP”), which provided for the matters mentioned above and consolidated them, in addition to bringing important changes to the rule of the global transfer limit, as detailed below.

For the purposes of the Resolution, the cooperatives authorized to operate in private insurance are treated as insurers. In addition, the following bodies are also treated as insurers, when they contract reinsurance operations:

i. the open supplementary private pension fund (“EAPC”);
ii. the closed supplementary private pension fund (“EFPC”); and
iii. the the private health care plan operator.

For items (ii) and (iii), SUSEP will be in charge of supervising these specific operations.

Conditions for Contracting Reinsurance

Regarding the conditions for contracting reinsurance or retrocession, the Resolution establishes that the negotiation can be carried out freely between the assignor and the reinsurer/recessionaire, with or without the intermediation of a reinsurance broker.

As a measure to protect free and fair competition for reinsurance and retrocession operations, the Resolution introduces the provision that whenever the assignor and the reinsurer/recessionaire belong to the same financial group, they must demonstrate that the reinsurance and/or retrocession operations were carried out under competitive conditions equivalent to those practiced in the market between independent parties.

In this regard, the rule maintains the concept of “preferential offer”, but no longer expressly indicates the percentage of the offer, and only refers to the legislation in force.

Other important change introduced by the Resolution consists in the assignment limits that must be followed by local insurers and reinsurers. The new rule adopts a more principle-based approach, focused on the risk transfer policies of supervised entities, instead of establishing fixed percentages.

In turn, for retrocession operations involving local reinsurers, the Resolution establishes a limit of 70% of issued premiums, with exceptions for the following insurance lines:

• financial risks;
• rural; and
• nuclear

Simultaneously, SUSEP can authorize assignments in a higher percentage, provided that there is technical justification. However, insurers must submit to SUSEP, by March 31, 2023, a technical justification report regarding the assignment operation carried out with a percentage greater than 90% per calendar year.

Local reinsurers are the exclusive holders of reinsurance operations with regard to cash value insurance and supplementary private pension plans.

Finally, ceding companies and local reinsurers must provide SUSEP with all documentation related to reinsurance operations, such as control of the contracts signed, portfolio of assigned and/or accepted risks, among others.

Contracts

The Resolution establishes that reinsurance contracts must contain a clause providing that, in the event of liquidation of the assignor, the liability of reinsurers remains restricted to the amount of reinsurance.

Still, in the event of insolvency of the assignor, the regulation allows the reinsurer to pay indemnities and other similar amounts directly to the insured, participant, beneficiary or assisted party, provided that the payment has not been carried out by the assignor. In the event of an automatic reinsurance contract, there must be a clause providing for the possibility of direct payment. Conversely, in the event of an optional contract, there is no need for a contractual provision to this effect.

As for the execution of the reinsurance contract, the Resolution reduces the deadline previously provided for, from270 to 180 days, calculated from the Resolution’s entry into force.

Although there is a provision for free negotiation of reinsurance contracts by the parties, the Resolution requires the inclusion of express provisions for:

“I – the commencement and termination of each party’s rights and obligations, also providing for how these responsibilities will cease in cases of cancellation;

II – the criteria for cancellation;

III – covered risks and excluded risks; and

IV – the period of coverage, identifying the time of initiation of reinsurer’s liability and the exact moment the losses are covered in the contract.”

Transfer of Risks with Unauthorized Reinsurers in Brazil

The Resolution maintains the rule which establishes that risk transfer in reinsurance and retrocession operations, to reinsurers not authorized to operate in Brazil, is only possible if the underwriting capacity of local admitted and occasional reinsurers is attestedly insufficient.

It is worth noting that if any irregularities are identified in such proof of insufficient capacity are identified (unbalanced treatment of reinsurers or endorsements that distort the conditions of the contract), the reinsurance contract can be disregarded as a cautionary measure.

As for the requirements to be met by reinsurers not authorized to operate in Brazil, the Resolution proposes to equate them with the requirements applicable to occasional reinsurers, for the purposes of risk transfer. Additionally, the Resolution introduces a specific provision for foreign reinsurers specializing in nuclear risks in the form of a consortium or mutual association.

Acceptance of Reinsurance and Retrocession by Assignors Abroad and Insurers

The rule provides that the acceptance of reinsurance or retrocession from an assignor abroad by a local reinsurer can be carried out through:

i. direct negotiation between the parties;
ii. intermediation of reinsurance broker headquartered in Brazil; or
iii. intermediary party abroad.

The Resolution also establishes that companies or entities with authorization to contract reinsurance are comparable to assignors abroad.
The Resolution maintained the prohibition for insurers to accept reinsurance from insurers based abroad, regardless of their registration status in Brazil. In addition, the Resolution prohibited the acceptance of any retrocession operation by EAPCs or authorized cooperatives.
Finally, in regard to retrocession operations, the rule also prohibits the acceptance of a percentage higher than 2% of the insurance premiums issued in connection with the risks underwritten by the insurers in each calendar year.

Activities of Reinsurance Brokers

Among the obligations of reinsurance brokers, the rule provides for the obligation to:
i. confirm the reinsurance coverage and its respective conditions with the percentages of acceptance before the risk’s entry into force;
ii. submit, within a maximum of five working days from the date of acceptance, the duly signed cover notes documenting the operations;
iii. submit, within a maximum of five working days, the duly signed reinsurance or retrocession contracts as of the formalization date; and
iv. inform, according to the deadline stipulated by the parties, all amounts of prizes, indemnities and benefits received by such parties as a result of intermediation.

The Resolution also establishes that reinsurance brokers must maintain an archive of supporting documents for reinsurance and retrocession operations that they intermediated.

Coinsurance Operations

The Resolution clearly establishes that coinsurance operations depend on the consent of the insured, its legal representative or its intermediary, and confirms the previous understanding that there is no joint and several liability among insurers.

In addition, the rule prohibits coinsurance operations with the participation of an insurer without assumption of liability. Not only that, the rule also establishes that documents such as certificates and proposals, among others, must identify the insurers that are part of the coinsurance operation, as well as the respective limits of liability assumed.

Finally, the policy or individual certificate must specify the leading insurer and its respective attributions in the contract, as well as highlight the absence of joint and several liability among the insurers.

Operations in Foreign Currency and Insurance Abroad

The Resolution provides for the possibility of contracting insurance in Brazil using foreign currency (characterized by the establishment of insured capital or maximum limit of indemnity in foreign currency) through an agreement between insurers and insureds.

The main innovations introduced in this regard are:

i. authorization to contract reinsurance or retrocession in Brazil through foreign currency; and
ii. provision for how the premium and indemnity payments must be carried out when the insured capital or maximum limit of indemnity is established in foreign currency.

Additionally, the Resolution lists scenarios in which the contracting of insurance abroad by individuals or legal entities resided in Brazil is allowed:

“I – risk coverage for which there is no offer of insurance in Brazil, provided that its contracting does not represent a violation of the legislation in force;

II – risk coverage abroad in which the insured is an individual resident in the Country, for which the effectiveness of the contracted insurance is restricted, exclusively, to the period in which the insured is abroad;

III – insurance which is the subject of international agreements referred to by the National Congress; or

IV – hull, machinery and civil liability insurance by Brazilian shipping companies for their own or chartered vessels, under terms of paragraph 2 of art. 11 of Law No. 9,432, of January 08, 1997.”

In addition to the situations described in the provision, legal entities can contract coverage for risks abroad, provided that they notify SUSEP.

As for nuclear risks, the text establishes that, in order to characterize the lack of offers in Brazil, presenting one proposal in a previous bid procedure or consultation is sufficient.

Finally, the Resolution included a provision establishing that the only scenario in which the issuance of an endorsement will not be considered a new insurance contract abroad is if the conditions of the original contract are preserved.

Final provisions

Finally, SUSEP established that the amounts related to the insurance contract (LMI, premiums, indemnities, etc.), must be specified in Brazilian currency.

International documents requested by the agency, whether public or private, must be notarized or apostilled, and translated into Portuguese by a sworn translator.

Insurers are also authorized to accept risks from abroad within the same lines of insurance in which they operate in Brazil.

The following must adapt to the rule at the time of renewal:

• Assignments of reinsurance or retrocession and any respective intermediation.

Operations in foreign currency or contracting of insurance abroad, whose entry into force dates prior to the Resolution’s entry into force.

The Resolution will enter into force on January 01, 2023.

Demarest’s Insurance, Reinsurance, Health and Private Pension team is available to provide any further clarifications that may be necessary.