All Business Is Local
Brazil is the seventh-largest economy in the world and the largest in Latin America. It’s a country brimming with potential, thanks to 200 million consumers, abundant natural resources and good growth opportunities. Who wouldn’t want to do business there?
The excitement surrounding the World Cup is over, but the legendary Rio nightlife and Copacabana beach, with its white sand and beautiful two-legged creatures, remain. So you might have to try a little harder to actually concentrate on business when you visit.
The restrictive insurance and reinsurance regulations in Brazil are meant to protect the local markets. The old “IRB,” the previous estate and monopolist reinsurer, is gone, and we hope to have fewer restrictions in the future. For now, you still have to place local property coverage with the Brazilian operations—not only property-casualty, but all coverage. Non-admitted insurance is prohibited in Brazil except in rare instances when coverage is not available.
The biggest exception is some maritime coverage, but otherwise non-admitted coverage will be very rare.
The good news is that most coverage available in the United States and Europe is available in Brazil. And many of the main global insurers are already represented and have significant capacities, although we already see reduced capacity of some local insurers and reinsurers for some specific business lines, such as pulp and paper, plastics and warehouses.
On the flip side, local policies are not as broad or comprehensive as they are in Europe or the United States. Specific policy changes to standard policies have to be individually approved by the local regulator, the Superintendencia de Seguros Privados. As you might imagine, it takes time.
You might be thinking of placing a basic local policy and relying on the “Difference in Conditions/Difference in Limits” (DIC/DIL) clauses, which are included in your global programs. Nice try but not a good idea. This is still a non-admitted coverage, and currency exchange control is a major issue.
It’s illegal to remit money abroad to pay the premium of non-admitted policies. Furthermore, no money can be officially received in Brazil as indemnity under non-admitted policies. So the DIC/DIL portion of any loss indemnity would have to be paid in the company’s home country. It would be economically prohibitive to transfer the funds in Brazil, as they would be taxed by the Central Bank and considered a capital increase, which also involves heavy taxation.
So regulators can severely punish both insurers and insureds, which could put their reputations at risk. For this reason, insurers generally exclude Brazil from any global program these days to be compliant with the country’s strict regulations. And because there is an industrywide focus on compliance in recent years (due to increased regulatory and tax scrutiny around the world), insurers even remove from the insured and additional insureds all subsidiaries, affiliates and joint ventures in countries that don’t allow non-admitted insurance coverage.
What about a local fronting solution for your global program or your captive? Fronting a global program placed via an insurer or a captive domiciled outside Brazil is possible, but you must comply with local regulations. Like any placement in Brazil, local insurers must keep at least 40% of the risk in country before transferring to the reinsurance market. Likewise, a minimum of 40% of the reinsurance must be placed with local reinsurers. The remaining 60% can go with an “admitted” or “occasional” reinsurer.
Additionally, approved reinsurers cannot retrocede more than 20% to foreign affiliated entities. Since the captive is generally not an approved reinsurer in Brazil, the use of captives is limited. They can get involved only after the risk is fronted (insurance and reinsurance) in compliance with regulations. It is also important to mention that minimum capital and rating rules apply to captives.
A recent approach, to complement the local insurance, is to include the parent company’s “financial interest” clause in the global program. The idea is the insured is solely the parent company—not a foreign subsidiary, affiliate or joint venture—and coverage addresses the post-loss reduction in the subsidiary’s value to the parent (which is arguably different from the actual loss sustained by the subsidiary). While this is potentially not violating local regulations, the financial interest clause is based on the concept of insurable interest of the parent that is suffering an economic loss as a result of a direct property loss abroad.
It’s important to note that, although the legal concept of insurable interest exists under Brazilian law, this insurance clause is pretty recent and we don’t have much experience on how it will work in the real world.
With your local coverage, some better wording awaiting approval by local regulators and a financial interest clause in your global program, your insurance coverage is as good as it gets. So sit back, relax and enjoy your caipirinha, Brazil’s national cocktail—a sublime melding of cachaca, sugar, lime and ice.