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Draft reinsurance regulations released in public hearing

On October 16, 2007, SUSEP, the Brazilian insurance supervisory body, disclosed new draft regulations regarding reinsurance in Brazil and submitted them to a public hearing. Suggestions from the private sector may be received byNovember 16, 2007.

The purpose of the public hearing is to allow the general public to submit suggestions for improvements and adjustments of the rules before their effective release. SUSEP’s intention is to “broaden and improve its communication with the private sector, due to the belief that transparency is one of the main principles for achieving the credibility required to ensure proper functioning of the insurance, open pension fund and capitalization markets”.

The long-awaited regulations follow from the enactment of Supplementary Law Nº 126/2007, enacted in January, which enables private reinsurance companies to operate in Brazil, thus terminating the monopoly held by IRB (the State-controlled reinsurer).

Despite the opening of the Brazilian reinsurance market, the regulations, which lay down the structural basis for the market, protect local reinsurers insofar as Brazilian insurance companies must assign 60% of the risks subject to reinsurance to a local reinsurer.

This percentage is to be reduced as from January 16, 2010, to 40% of insurance companies’ reinsurance assignments. Foreign reinsurers may operate in Brazil as admitted reinsurers (“resseguradores admitidos”), which are those incorporated overseas but with a representative office in Brazil, or as sporadic reinsurers (“resseguradores eventuais”), when they are incorporated overseas, do not have a representative office in Brazil and must observe an annual assignment limit.

Foreign reinsurers must comply with certain requirements when registering with SUSEP to operate in Brazil. For instance, the admitted reinsurer must have a net worth in excess of US$100 million and its solvency rating must be a level above investment grade. Admitted reinsurers must also maintain a bank account in Brazil (connected with SUSEP) with cash deposits of at least US$5 million. The sporadic reinsurer, in turn, must have a net worth greater than US$150 million and a rating three levels above investment grade.

Further, foreign reinsurers will have to provide collateral for potential losses, according to the underwritten risks. Indeed, the regulations establish that the whole provision loss must be permanently secured by collateral. For admitted reinsurers, such collateral corresponds to the previously mentioned US$5 million bank balance in Brazil.

For sporadic reinsurers, such collateral should be in the form of a letter of credit issued by a financial institution authorized to operate in Brazil. Local reinsurers will have to comply with the same rules established for insurance companies, except for solvency rates and minimum capital rules, for which there will be specific figures, also to be submitted to public hearing.

Finally, pursuant to the draft provisions, insurance companies are permitted to assign risks up to a limit of 50% of reinsurance underwritten risks (surety bonds, agricultural insurance and export credit insurance being excluded from such limitation due to their high risks), which prevents insurance companies from allocating all of their underwritten risks to other reinsurance companies.

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