After facing years of challenging economic times, Brazil has started to show signs of recovery following the election of a new government with a liberal approach to the economy. The Central Bank has approved lower interest rates, while the Congress has approved a pension reform and passed laws aiming at decreasing bureaucracy and state intervention.
In this scenario, the Brazilian insurance and reinsurance market continues to thrive, growing at reported two-digit rates. The sector has also benefited from the increased perception of need for coverage following significant events relating to corruption investigations under the Car Wash operation, environmental disasters and new regulations, including a larger consumer base and new products on offer.
The outlook for the sector for the year ahead remains positive, given the government’s efforts to overcome the crisis and set the country on a path for continued growth for the coming years. As part of its plan, the government announced the concession of roads, airports, ports and railways to the private sector, which should increase the demand for insurance coverage and reinsurance capacity in local and international markets.
The recent developments in the local market are described below, such as changes to the legal and regulatory landscape, and a proposed regulatory framework that should become effective in the coming years. As a result of the changes that have been implemented and proposed regulatory updates, Brazil is looking to become more aligned with other countries in terms of being a better place to do business and provide an environment that is more flexible for innovation and foreign business.
Changes in the Legal and Regulatory Landscape
Economic Freedom Law
As part of the new government’s liberal strategy, the so-called Economic Freedom Law (Law No 13.874/2019) was enacted, aiming at creating a better environment to do business in Brazil. The Economic Freedom Law had a direct impact on the insurance and reinsurance industry, by revoking Item III of Article 5 and Item X of Article 32 of Decree Law No 73/1966, which regulates insurance and reinsurance operations in Brazil. Said articles established a reciprocity for insurance operations and in the authorisation for the operation of foreign companies in Brazil.
Such changes are viewed as initial steps towards further opening of the sector for foreign players to operate in Brazil, which would be subject to further regulations.
Reshaping the reinsurance landscape for occasional reinsurers
The government has looked at reinsurance business by increasing the percentage of business that the local markets can cede to foreign reinsurers registered as occasional reinsurers in Brazil, pursuant to Article 8, paragraph 1, of Complementary Law No 126, of 15 January 2007.
Now, pursuant to Decree No 10.167/2019, insurance companies and insurance co-operatives can cede to occasional reinsurers up to 95% of the premiums ceded in reinsurance, considering their operations in each calendar year. This is a relevant increase compared to the 20% previously authorised by Decree 6,499/2008.
Pursuant to this new Decree, local reinsurers can cede 95% of the aggregate value of the premiums related to risks underwritten in a calendar year in contrast to the 50% previously authorised by the revoked Decree.
Tailored coverage insurance products
Following the trend of other countries, where insurers can offer insurance products with tailored coverage periods, on 26 August 2019 SUSEP, the Brazilian insurance regulator, issued Circular No 592/2019 regulating insurance products with a “reduced term” and “intermittent period” of coverage.
Based on this new regulation, Brazilian insurers can provide coverage for specific periods of time (months, days, hours, minutes); partial periods, with specific criteria for terminating and restarting coverage (as an “on-off” option); specific locations (as commuting paths or limited geographical areas); and other agreed limits.
The rules brought by Circular No 592/2019 open the Brazilian market for adaptation of insurance plans and products with the concept of usage-based insurance (a product with flexible coverage and prices based on usage), as commonly applied in per-pay-ride motor insurance and property insurance available in other countries.
The possibility of offering customers insurance products that are tailored to their needs should broaden the consumer base for the industry, engaging individuals or companies with specific needs that are not currently fulfilled by the products available on the market.
The need for fast and specific analysis, as well as a cost-effective operation, will also stimulate the use of new technologies by the insurance industry, with further use of big data (the structured crossing and analysis of data from different sources) and artificial intelligence to better assess the needs of its clients, evaluate the risks and price its products.
End of DPVAT
Provisional Measure No 04/2019 enacted by the President ended mandatory personal injury insurance for motor vehicles, known as DPVAT. This mandatory insurance was viewed as having a social purpose, by providing coverage for victims of accidents caused by motor vehicles, without a liability assessment. Such Provisional Measure is under scrutiny of the Supreme Court, which has ruled for the suspension and reinstatement of the mandatory insurance until final judgment.
The Brazilian President also enacted Provisional Measure No 905/2019 as a positive response to a long request of insurance brokers for self-regulation and a more flexible regulatory environment. According to the Provisional Measure, insurance brokers have been released from supervision by SUSEP and are now subject to registration by the National Council of Insurance Brokers (IBRACOR). Given the number of licensed insurance brokers, SUSEP has issued a letter confirming that this represents a better arrangement for the market, giving SUSEP more resources to become more efficient as a regulator to the other supervised entities.
Embargoes and sanctions
On 7 August 2019, SUSEP issued SUSEP/DIR2/CGCOM Circular Letter No 6 declaring a prohibition of the use of sanctions and embargoes exclusion clauses that exclude coverage based on other countries’ laws in products and policies issued in Brazil due to increased legal issues faced by insurers and insureds.
Following successful lobbying by the insurance industry on the relevance of such clauses in policy language, SUSEP issued SUSEP/DIR2/CGCOF Circular Letter No 5, revoking the previous Circular Letter and outlining new criteria for the use and enforcement of sanctions and embargoes exclusion clauses.
Currently, insurers have been permitted to include in their policy wording clauses relating to the loss of rights, limitations and/or coverage exclusions due to the violation of laws or regulation on economic embargoes or trade sanctions, provided that the wording is not generic or broad.
Proposed New Laws and Regulations
Sandbox framework for innovation
SUSEP has also demonstrated interest in providing a regulatory environment to encourage the development and establishment of new insurance products and to create a sandbox for innovation in Brazil. Again, the Brazilian regulator is following the trends of other countries and setting the tone and the parameters in which Brazilian insurers can innovate.
To that extent, on 30 September 2019, SUSEP made available for public consultation draft regulations with the intention to develop and create a regulatory framework as part of its innovation project for the Brazilian insurance market (“Innovation Project”).
A draft resolution under Public Consultation No 09/2019 intends to regulate the creation of innovative products as well as provide for minimum requirements for companies to participate in the Innovation Project. Innovative products are defined by the proposed regulation as those that promote the “development of products and/or services in the insurance market to be offered or developed through use of new technologies or existing technologies applied in a diverse way”.
Draft Circular under Public Consultation SUSEP No 10/2019 sets out financial guidelines, rules and criteria for operation of products, technical provisions, and asset investments as well as requirements for authorisation and operation of companies that will be involved in the Innovation Project.
Lastly, Public Consultation SUSEP No 11/2019 presents a bidding proposal draft, which shall be issued by SUSEP, to select companies and products to participate in the Innovation Project.
All drafts presented for public consultation aim to establish a regulatory sandbox framework for the development of new products and technologies for the Brazilian insurance market as part of a Public Agenda towards innovation (fomented and lobbied by the private sector) in line with policies in other economies of flexible regulatory framework and technological development.
Such framework aims to provide a controlled environment where private companies (regularly submitted to a stricter regulatory overview) can test in small scale and in real life new business models and products while subject to stronger regulatory rules.
Despite being applicable to companies of all sizes, this framework is commonly associated with start-up companies, as it allows and promotes the set-up, trial and decommission of new business models in less time and in a more simplified way than would regularly be required by the regulation in place.
Segmentation of the insurance market
SUSEP is also considering segmenting the Brazilian insurance market into groups (S1, S2, S3 and S4) based on financial guidelines and risk profile, for the purpose of prudential regulation, as set out in the draft regulation under Public Consultation No 14/2019. The proposal aims at stimulating competition, expanding product offerings and increasing market efficiency. As mentioned above, SUSEP is looking at ways to become an even more efficient regulator for supervised entities to operate in.
The Campos Mello Advogados team contributed the Brazil Chapter of the Chambers Insurance & Reinsurance 2020 Guide. To read the Law & Practice Guidelines, please click here.