On 17th October 2018, Resolução CNSP No. 363 (“Resolution”) was published in the Brazilian Official Gazette, regulating the cession of risks in reinsurance and retrocession by cedents (defined by the new regulation as “insurers” and “reinsurers”) headquartered outside Brazil to Local Reinsurers (“Transactions”). In accordance with the information provided by SUSEP in the 7th Reinsurance Meeting earlier in April of this year, the main purpose of the new normative would be to foster the Transactions. The Resolution has some important effects that must be observed and are highlighted below.
The new regulation sets forth that the Transaction may or may not be intermediated by reinsurance brokers and they can be either headquartered in Brazil or in the country of origin of the foreign cedent.
The foreign cedents and the Local Reinsurers shall be free to negotiate their respective reinsurance/retrocession contracts, provided, nonetheless, that such contracts (a) comply with the Brazilian regulations and legislations relating to the prevention and combat of money laundering crimes and finance of terrorism and (b) clearly contemplate the covered and excluded risks.
In accordance with the Regulation, the Transactions are restricted to groups and lines of business in which the Local Reinsurer is authorised to operate in Brazil. In the event where the groups and line of business do not have a corresponding group or line of business pursuant to the Brazilian regulation, the Local Reinsurer shall accept the risk, provided the coverage risk has similar technical characteristics to the group and line of business in which the Local Reinsurer is authorised to conduct business in Brazil.
Resolução CNSP No. 363/18 requires Local Reinsurers to set out mechanisms and controls to avoid accumulation and exposure to risks originated abroad.
In addition, section 8 of the Resolution sets forth that the retrocessions which originate as a Transaction must comply with all retrocession rules applicable to cedents headquartered in Brazil.
The new regulation amends Resolução CNSP No. 168/07 to include section 40-A with the following wording:
“Section 40-A The provisions of this Chapter shall not include reinsurance or retrocession contracts accepted from cedents based abroad by local reinsurers, and the retrocession contracts accepted from cedents based abroad by insurance companies.”
In accordance with such flexibility, reinsurance and retrocession contracts in which foreign cedents cede risks to Local Reinsurers and the retrocession contracts in which foreign cedents cede risks to Local Insurers are:
(i) Not subject to the requirement of 270 days for formalisation of contract;
(ii) Not required to have the mandatory clauses/provisions set forth in the Resolução CNSP No. 168/07, such as cancelation clauses, inception and end of the term of the contracts, date of proposal, among others; and
(iii) Not required to be governed by Brazilian laws.
It seems that such flexibility provided by CNSP relates to the fact that such contracts will be likely subject to the regulations of country of origin of the cedent/of the risk.
Although the Resolution contemplates that the provisions of sections 33, 34, 35 and 36 of Resolução CNSP No. 168/07 are not applicable to reinsurance and retrocession contracts in which the foreign cedents cede reinsurance and retrocession risks to Local Reinsurers or retrocession risks to Local Insurers, such provisions are also literally contemplated in sections 13, 14, 15 and 16 of Supplementary Law No. 126/07, as seen in the table belowo:
In other words, even if the CNSP has expressly determined that sections 33, 34, 35 and 36 of Resolução CNSP No. 168/2007 are not applicable to the Transaction or retrocession contracts entered into with foreign cedents and Local Insurers, such provisions, in practice, do not have the expected effect, since these transactions are also subject to Supplementary Law No. 126/07, including the provisions 13, 14, 15 and 16, as they are included in the generic scope and definition of “reinsurance” and “retrocession” set forth in its section 2, 1st paragraph, items III and IV, quoted below:
“Section 2 (...)
§ 1º For the purpose of this Supplementary Law, the following definitions apply: (…)
III - reinsurance: a risk transfer operation from a cedent to a reinsurer, with exception of the contained in item IV of this paragraph;
IV - retrocession: a reinsurance risk transfer operation from reinsurers to reinsurers, or from reinsurers to local insurers.”
Finally, the Resolution authorises SUSEP to issue supplementary regulation and informs that it became effective on the date of its publication.