New rules on issuance of Insurance-Linked Securities through a Special Purpose Insurer

The Superintendence of Private Insurance (“SUSEP”) opened CNSP Resolution No. 453/2022 for public consultation, establishing rules on the issuance of Insurance-Linked Securities (“LRS”) through a Special Purpose Insurer (“SSPE”).

The new Resolution repeals CNSP Resolution No. 396, of December 11, 2020, and implements Law No. 14,430/2022, which attributed to the Brazilian National Council of Private Insurance (“CNSP”) the responsibility to:

i. establish the guidelines and rules regarding contracts and the SSPE’s acceptance of insurance and reinsurance risks, the financing of such risks through the issuance of LRS, and the conditions for issuance of LRS;

ii. regulate limits and restrictions on LRS operations;

iii. regulate criteria for the assignment of insurance and reinsurance risks to the SSPE;

iv. establish the form and conditions for the registration and deposit of LRS;

v. determine the financial statements to be prepared by the SSPE, their periodicity and need for auditing; and

vi. regulate other aspects necessary to carry out the provisions of Law No. 14,430/2022.

The SSPE is an insurance company with the exclusive purpose of carrying out one or independent asset operations for the transfer of insurance, pension plan, supplementary health, reinsurance or retrocession risks from one or more counterparts and the financing of such risks through the issuance of LRS (a debt instrument linked to insurance and reinsurance risks).

As a result, the Resolution establishes the following rules:

The SSPE must appoint:

i. A chief actuary, who will be responsible for the calculation of technical provisions and actuarial information submitted to SUSEP.

ii. A chief technical officer, who will be accountable to SUSEP for the monitoring, oversight and fulfillment of actuarial procedures provided for in the rules in force.

iii. A chief accounting officer, who will be accountable to SUSEP for the monitoring, oversight and fulfillment of accounting rules and procedures provided for in the regulations in force.

Obtaining a SUSEP operation license by the SSPE:

i. The authorization of the SSPE must comply, as applicable, with the provisions on authorization, operating license, initiation of operations, holding positions under articles of organization, paid-in capital, transfer of portfolio and conditions of corporate control structure of insurance companies.

ii. The trade name of the insurance company should highlight its corporate purpose, which is to act exclusively as SSPE.

The transfer of insurance and reinsurance risks from one SSPE to another with similar activity is permitted, provided the following requirements are met:

i. The SSPE that receives the transferred risk is previously authorized by SUSEP.

ii. Assets and liabilities of each securitization operation are included individually.

iii. The transfer agreement includes a clause providing that all rights and obligations will be preserved from the original insurance and reinsurance risk acceptance agreement entered into between the counterpart (insurer/reinsurer/complementary pension entity/legal entity assigning risks) and the SSPE.

iv. LRS investors have agreed to the transfer of insurance or reinsurance risk.

v. The counterpart has agreed to the transfer of insurance or reinsurance risk.

vi. The specific regulations of SUSEP have been followed.

Fundraising:

The SSPE will raise, through the issuance of LRS, necessary funds as securitization guarantees.

The transfer of risks to the SSPE may be carried out through direct negotiation with the counterpart, insurance broker (legal entity) or reinsurance broker.

Risk Transfer Agreement:

The LRS will establish a parity (equal conditions) relationship with the risks accepted by the SSPE, by means of a contract and risk transfer agreement.

The contract and subsequent issuance of LRS must be exclusively associated with a specific risk, which can be:

i. insurance risk;

ii. supplementary pension plan;

iii. supplementary health;

iv. reinsurance; or

In addition, the contract must be made available by SSPE to those interested in acquiring the LRS.

Content of the risk transfer agreement:

The agreement can provide for a reintegration clause, subject to the existence of the necessary funds to guarantee the Maximum Risk Exposure (“EMR”).

The agreement must provide for the latest date possible for reporting losses by the counterpart (“expiration date of the insurance and reinsurance coverage”).

Such “latest date” must be equal to or earlier than the LRS due date, which in turn cannot exceed ten years.

LRS Issuance Document:

The document must be clear and to the point about the general terms and characteristics of the security, including, but not limited to:

i. identification of the corresponding contract;

ii. conditions for coverage of accepted risks;

iii. characterization of loss;

iv. amount of EMR;

v. amount of possible expenses;

vi. maximum term for the termination of obligations;

vii. validity period of the contract;

viii. reference to related parties, when the SSPE belongs to the same economic group as the counterpart; and

ix. periodic information to be forwarded to investors, as agreed between the parties.

In addition, the LRS issuance document must contain clauses, which provide for, at least, the following:

i. The amount of independent assets set up must be sufficient to meet the obligations of the guaranteed operation under the terms of the risk transfer agreement.

ii. LRS investor holders do not have any right to the assets of SSPE.

iii. LRS investor holders cannot request the settlement of the SSPE.

iv. The rights of LRS investor holders are conditioned to the obligations provided for in the corresponding risk transfer agreement entered into by the SSPE;

v. The redemption of the LRS will only take place after the extinction of obligations related to the risk transfer agreement. Partial redemption is possible, as long as there are sufficient funds to guarantee the remaining EMR.

Communication of risk transfer operation:

The SSPE will report to SUSEP each risk transfer operation and consequent issuance of LRS:

i. within up to five days after the approval by the Board of Directors and, if any, by the Executive Board; and

ii. before the LRS is effectively issued.

Risk assumption by the SSPE:

Risk assumption will only be effective after fundraising through the issuance of the LRS.

If such fundraising through the issuance of the LRS does not reach the amount required to cover the EMR originally anticipated, the LRS may be adjusted so that its terms are appropriate to the amount effectively raised. In case of adjustment, SUSEP must be informed in up to five days.

Asset independence:

The risk securitization operation and risk financing via LRS issuance will have independent assets.

As a result, the amount of independent assets should be sufficient, at the time of the effective obligation, to cover the obligations assumed with investors and counterparts of the securitization operation.

Provisions:

The insurance and reinsurance risk securitization operation must constitute its technical provisions from the insurance and reinsurance risks assumed, based on CNSP and SUSEP regulations, applied to insurance companies.

As a result, the following technical provisions must be established:

i. Provision of Unearned Premiums (“PPNG”)

Provision of Losses to be Settled (“PSL”)

Provision of Unreported Losses (“IBNR”)

In addition, the SSPE must establish:

a. a profit guarantee provision (“PGR”), at the end of each month, which covers the current amount of obligations assumed in relation to the profit guarantee of the LRS; and

b. a technical shortfall provision, providing for an amount equal to the sum of asset shortfall amounts for each securitization operation.

Application of assets:

The application of assets to guarantee the technical provisions of each securitization operation and the technical provision of the SSPE must follow the regulation of the Brazilian National Monetary Council (“CMN”).

The CMN provides for the rules that regulate the application of resources from technical reserves, provisions and funds of insurance companies, capitalization companies, open complementary pension funds and local reinsurers.

As a result, the SSPE must comply with the criteria and prohibitions attributed by the CNSP regulation to insurance companies, regarding investments and operations for each securitization in investments of assets that guarantee the obligations with LRS investor holders.

Capital required for the SSPE operations:

The minimum capital required (“CMR”) for the SSPE to operate will be equivalent to the higher amount between the base capital and the risk capital.

The SSPE must maintain, at any times, a base capital consisting of the sum of:

a. a fixed portion (the fixed portion of the base capital is BRL 1,200,000.00), corresponding to the operating authorization; and

b. a variable portion (the variable portion of the base capital corresponds to BRL 100,000.00), corresponding to the amount of securitization operations in force.

Accounting standard:

The SSPE must comply with the Accounting Standards under the terms of regulation published by SUSEP for insurance companies.

The bookkeeping for each securitization operation will be carried out separately from the SSPE accounting.

The SSPE must draft the financial statements for each securitization operation, on the same base dates as the SSPE’s financial statements, and send them to SUSEP, along with such financial statements.

Internal control:

The managers of the SSPE, as well as of service providers eventually contracted by it, must be independent of the counterparts and LRS investor holders.

Accordingly, the managers cannot be:

i. LRS investor holders;

ii. managers or employees of the counterpart or of the investor holders, their controllers or controlling companies, affiliates, or companies under common control;

iii. spouses, relatives by direct or indirect bloodline (up to the third degree), and by affinity (up to the second degree), of the directors or employees of counterparts or investors.

Risk Management:

The SSPE must implement and maintain a Risk Management Structure, Internal Control System and Internal Audit activities, in accordance with the specific regulations applicable to insurance companies.

Therefore, in addition to adopting the cybersecurity requirements determined by SUSEP, the SSPE must adopt measures to prevent and fight:

i. crimes of “laundering” or concealment of assets, rights and amounts;

ii. crimes that may relate to those mentioned above; and

iii. financing terrorism.

LRS Registration:

i. When issued in Brazil, the LRS must be registered through registration systems or subject to centralized deposit, always with institutions authorized by the Central Bank of Brazil (BCB) or the Securities and Commission of Brazil (CVM).

ii. When issued abroad, the LRS must be registered through registration systems and centralized deposit, in a custody center, or regularly registered, always with institutions authorized by the competent authority in the country where the issuance is carried out.

SUSEP Supervision:

The SSPE must be subject to the supervision of SUSEP, including with regard to securitization operations provided for in CNSP Resolution No. 453/2022. Administrative sanctions applicable to insurance companies will be applicable to the SSPE.

The Resolution will come into force on January 02, 2023.

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