New sustainability rules applicable to supervised companies from August 2022

The Superintendence of Private Insurance (SUSEP) published Circular No. 666/2022, which provides for sustainability requirements that must be fulfilled by insurance companies, open supplementary private pension entities, capitalization companies and local reinsurers.

According to the new Circular, the management of sustainability risks is part of the general context of the Internal Controls System (SCI) and the Risk Management Structure (EGR). In addition, sustainability risks must, whenever possible, be taken into consideration in the mandatory categories of underwriting risk, credit risk, market risk, operational risk and liquidity risk.

Regarding the Sustainability Risk Management, the new Circular introduces the following provisions:

• COMPATIBILITY BETWEEN RISK MANAGEMENT AND OPERATIONS OF SUPERVISED COMPANIES

The management of sustainability risk will be compatible with the supervised companies’ size, according to the nature and complexity of their operations, as well as the materiality of sustainability risks.

• RISK MATERIALITY STUDY

The supervised companies must develop a materiality study of sustainability risks to which they are exposed, so that such risks can be identified, assessed and classified. This study must be:

1. reassessed every three years or whenever there is a significant change in the risk profile;
2. approved by the director responsible for internal controls, in the event that the implementation of management is waived due to the conclusion of immaterial risks;
3. made publicly available on the supervised companies’ website in the event that there is conclusion of immaterial sustainability risks for all its operations;
4. carried out in a unified manner for those supervised by an Internal Control System and Risk Management Structure.

• SUPERVISED COMPANIES DUTIES IN RELATION TO SUSTAINABILITY RISKS

The supervised must:

1. Adopt methods, processes, procedures and specific controls to identify, measure, classify, address, monitor, and report, in due time, the risks to which they are exposed;
   
2. Establish limits regarding the concentration and/or restrictions of risks for carrying out business, that could expose certain economic sectors, geographic regions, products and services to sustainability risks;
3. Regarding exclusively supervised companies classified in segments S1 and S2, incorporate projections of events associated with sustainability risks, including long-term ones, and record relevant information to sustainability risk management.

• CRITERIA AND PROCEDURES FOR RISK PRICING AND UNDERWRITING

The criteria and procedures to be implemented for risk pricing and underwriting must be integrated into the underwriting risk management and must be expressly included in the underwriting policy and/or internal regulations related to the policy, as well as consider:

1. the client’s history and commitment to sustainability risk management;
2. the client’s capability and willingness to mitigate sustainability risks associated with the transaction;
3. any limits and restrictions established for the concentration of risks.

• CRITERIA AND PROCEDURES FOR INVESTMENT SELECTION

Except for those classified under the S4 segment, supervised entities must implement the criteria and procedures for selecting investments, which take into consideration (i) the risks arising from exposure of assets and/or their issuers to sustainability risks and non-adoption of good corporate governance practices by the issuers of the assets, and (ii) any restrictions or limits established for the concentration of risks.

• CRITERIA AND PROCEDURES FOR SELECTION OF SERVICE PROVIDERS

Except for those classified under the S3 and S4 segments, supervised entities must adopt criteria and procedures for selecting suppliers and service providers that take into consideration their exposure to sustainability risks.

• ADAPTATION PERIOD RELATED TO SUSTAINABILITY RISK MANAGEMENT

1. supervised companies classified under the S1 segment: by December 31, 2023, except for information registration, whose adaptation period expires on June 30, 2024;
2. supervised companies classified under the S2 segment: by February 28, 2024, except for registration of information, whose adaptation period expires on June 30, 2024;
3. supervised companies classified under the S3 or S4 segments: by April 30, 2024.

• SUSTAINABILITY POLICY

The supervised companies must draft a Sustainability Policy in order to establish principles and guidelines to be fulfilled when carrying out its business, such as:

1. respect and protection of fundamental rights and guarantees;
2. preservation of the environment and its repair;
3. reduction of impacts related to weather and environmental change;
4. transition into a low carbon economy; and
5. fostering of a more resilient and inclusive society.

The Sustainability Policy must be reassessed, at least, every three years or whenever the supervised company deems it necessary and also be announced to employees and the external public.

• GOVERNANCE

The management bodies of the supervised companies must advertise the Sustainability Policy to employees and other interested parties, as well as ensure (i) that the Sustainability Policy is aligned with the supervised company’s business plan and its maintenance; and (ii) that the Sustainability is compatible and integrated with the supervised entity’s other policies.

In addition, the management bodies must ensure that the performance assessment methods and remuneration structure of the supervised company are also aligned with the Sustainability Policy terms.

• SUSTAINABILITY REPORT

The supervised companies must draft and announce a sustainability report until April 30 of each financial year, describing the actions implemented to promote the Sustainability Policy and the most relevant aspects related to the management of the sustainability risks to which they are exposed.

• ADAPTATION PERIOD RELATED TO THE DRAFTING OF THE SUSTAINABILITY POLICY
  
  

1. supervised companies classified under S1 Segment: by December 31, 2022.
2. supervised companies classified under S2 Segment: by February 28, 2023.
3. supervised companies classified under S3 or S4 Segments: by April 30, 2023.

• ADAPTATION PERIOD RELATED TO THE DRAFTING OF THE SUSTAINABILITY REPORT:

1. supervised companies classified under S1 segment: by June 30, 2024, in relation to the base date of December 31 of the previous year;
2. supervised companies classified under S2, S3 and S4 segments: by June 30, 2025, in relation to the base date of December 31 of the previous year.

The new Circular will come into force on August 01, 2022.

Demarest’s Insurance, Reinsurance, Health and Private Pension team is available to provide more information on this and other related topics.