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Brazil, Argentina Hit Insurance Markets

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Brazil's new insurance rules could adversily affect the 2014 World Cup and 2016 Rio Olympics.

 

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

 

Foreign insurance companies are putting pressure on the Brazilian and Argentine governments to reverse policies that restrict them from reinsuring risks abroad, the Financial Times reported last month. New rules in Brazil require companies to place at least 40 percent of their reinsurance business with Brazilian companies while Argentina has imposed tighter restrictions to control foreign placement of reinsurance. How will the new policies affect insurers operating in the two countries? Who will be the winners and losers with the changes? Will insurance companies succeed in persuading the countries to reverse the rules?

 

Rolf Steiner, regional head for the Brazil office and Southern Cone countries at Swiss Re: We have noted in Latin American countries such as Brazil and Argentina that there is an overall trend toward restrictive executive measures which have hindered liberalization of the reinsurance market. The focus should not be specifically on the status of individual companies but more on the effects of the regulation on the end user, which would help keep access to innovative and price-attractive products; and to the country, which would help maintain the flexibility to share national risk exposures with a wider international community. Myriad insurance organizations such as the Federation of European Risk Management Associations (FERMA) and the American Council of Life Insurers (ACLI) as well as private reinsurance companies have been working with the local Latin American authorities in Brazil and Argentina to understand their concerns, examine the unintended consequences of these regulations and determine a way forward that allows for a healthy and robust insurance market. These regulations would dramatically restrict the ability of private insurers and reinsurers-both local and international-to conduct business in these countries. These regulations stand to restrict insurance and reinsurance capacity and drive up costs for policyholders. For Brazil, these regulations have the potential to jeopardize global investment in Brazilian insurance and reinsurance operations and may even adversely affect Brazil's ability to provide adequate insurance and reinsurance for the important investment plans in infrastructure over the next years, including the Olympic Games and the World Cup. For Argentina, given the relatively recent publication of the new regulation, Swiss Re is in the process of obtaining a more detailed overview of the effects of this regulation. The capacity issue could, in theory, lead to greater economic volatility. The reality is that if the market isn't open, prices will rise and capacity will be diminished.

 

Antonio Penteado Mendonça, partner at Penteado Mendonça Advocacia in São Paulo: The reinsurance business in Brazil was strongly affected by two resolutions, one from the end of last year and the other from the beginning of this year. Some months after them, we can say that the government is the big winner. The insurance companies' confederation more or less blew up. On one hand, it remains with the loyalty of the biggest companies of the country. On the other hand, international companies with subsidiaries in Brazil created an association to support their position, in what they call opposition to the confederation. We can see for the first time in history a confrontation between insurance companies inside the official establishment. And there is a third group of insurance companies that stay neutral, because for their business the resolutions are ineffective. The reinsurance companies are trying to pressure the government, but are doing so much more from abroad than from within the country. All that puts the Brazilian government in a comfortable position, and it can control the whole situation doing more or less what it wants. But the government knows that Brazil will need insurance coverage for hundreds of billions of dollars in new risks in the next five years. So, a Brazilian official involved directly with insurance and reinsurance strategies for Brazil told me it is possible there will be changes to give more flexibility for the insurance market to provide insurance and reinsurance capacity for these risks. How it will be done depends first on the way the insurance and reinsurance companies negotiate with the government, and second on the solutions for some points that affect development of the insurance industry in the country. So the rules will probably change, but not all at once.

 Luis Maurette, chief executive officer of
Liberty Seguros in São Paulo: The recent Brazilian government decisions concerning the local reinsurance rules was astonishing not only to the local community and stakeholders, but also to the global ones. Since the early 1990s, Brazil has initiated a process to engage in the globalization process by opening up its economy and engaging in market opening consultation, in accordance with international standards. Unfortunately, this recent event is a step backwards in regulations, legal transparency and stability. The recent change will bring more damage than benefits to the local insurance industry, Brazil's economy and society. Since the opening of the reinsurance market in 2007, the country has experienced the entrance of important players achieving as of today six local, 25 admitted and 64 occasional reinsurers. Therefore, it is clear that rules have succeeded in moving Brazil from an inefficient monopoly to a competitive market that provides all insurance players with access to the global reinsurance market, larger capacity to support investments and at a reduced cost to Brazilian society. Furthermore, the fact that foreign insurers' assets in Brazil grew 113 percent since the market opening proves that the argument of capital flight due to the usage of affiliate reinsurance is flawed. Additionally, the new rules affect the development of a strong local insurance market and the consolidation of Brazil as a reinsurance hub for Latin America and damage the Brazilian government's reputation for future international trade negotiations. Many international associations, local entities and the U.S. trade representative are pressuring Brazil to review its decision and to re-engage in market opening consultations. If international pressure continues, there are chances that the government will review its decision.

 

Brad Smith, chief international officer of the American Council of Life Insurers: An open and competitive insurance marketplace is one of the pillars of economic growth. Insurance provides the economic backstop for construction projects and financial investments for companies large or small, global or local. When countries place excessive restrictions on the insurance marketplace, lending slows, workers are idled and the economy suffers. Despite this, the two largest economies in South America-Brazil and Argentina-recently adopted new insurance marketplace restrictions that threaten to undermine economic growth and job creation in both nations. Moreover, the restrictions could expose both countries to excessive concentration of financial risk. In Brazil, the Finance Ministry in March implemented changes in regulation that undermine the intent of the 2007 law opening the reinsurance marketplace to global capacity and products. The regulations would, among other things, require insurance companies to concentrate 40 percent of their reinsurance protection within Brazil. The implications can't be overstated. Reinsurance is sometimes described as 'insurance for insurers.' It is a vital tool in helping insurance companies underwrite and spread risk. The objective is to assure that a single catastrophic loss will not undermine the nation's economy. By requiring insurers to reinsure 40 percent of their business with local reinsurers, the new rules in Brazil mandate excessive concentration of risk, which will hamper commercial and infrastructure development and raise costs for industry and consumers. Argentina is following a similar path. The proposed restrictions require Argentine insurance companies to place all of their reinsurance coverage within the relatively small Argentine market, where no professional reinsurers have existed since the early 1990s. ACLI urges the governments of Brazil and Argentina to each conduct an open, transparent dialogue on their regulations, including discussions with global insurance and reinsurance providers.


Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

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