Brazil formalises ILS and special purpose reinsurance vehicle rules

Brazil has now published its awaited rules on insurance-linked securities (ILS) issuance and special purpose reinsurance vehicles, which are due to come into force from January 4th 2021 bringing domestic ILS capabilities to its marketplace.

As we’ve documented previously, the insurance and reinsurance market regulator, the Superintendência de Seguros Privados (Susep), had been seeing feedback on a framework for legislation and a regulatory regime to allow for the issuance of insurance-linked securities (ILS) in Brazil.

As we also previously reported, Brazil’s regulator, Susep, had also called for the local insurance and reinsurance sector to embrace transparency to support these ambitions of enabling ILS to be issued domestically.

Now, the government has published a resolution from the National Council for Private Insurance, part of the Ministry of Economy, which sets out a key part of how Susep will regulate the insurance and reinsurance market’s use of insurance-linked securities (ILS).

Resolution 396, which you can read in full here (you may need the help of a translation tool such as Google), lays out the rules around so-called RPE’s, which are locally domiciled reinsurance entities whose mandate is to accept risks, through reinsurance or retrocession agreements.

The RPE’s will be able to fund their obligations through financing achieved by the issuance of debt securities linked to the underlying re/insurance risks, insurance related instruments as Susep calls them.

These ILS can be in the form of debentures, commercial notes or other debt instruments, the rules explain.

It’s also notable that the regulations will not just allow re/insurers to access the capital markets for reinsurance or retrocessional purposes, but that they will also enable risks from private pension plans, or supplementary health plans, to be reinsured in this way as well.

It’s also assumed that an RPE, or special purpose reinsurance vehicle, could be established on behalf of a corporate risk transfer buyer, enabling them to access the capital markets for reinsurance.

The ILS issued will have a maximum term of maturity of 10 years, the regulations specify, which provides plenty of scope for longer tenure transactions, perhaps also in covering a broader range of risks than just pure catastrophe exposures.

RPE’s, once authorised to undertake reinsurance or retrocession business, will use insurance-linked securities (ILS), of some form, to raise the guarantees necessary to support the risks they assume, with at least the maximum risk exposure expected to be collateralized.

The assets that form the collateral guarantee will have to be registered with Susep and cannot be sold unless approved, which secures the collateral for coverage of the underlying insurance or reinsurance risks.

The securities or bonds sold to guarantee the coverage, which will be a debt like instrument tied to the insurance or reinsurance risk, will be registered or deposited with notice to Susep, again providing another form of guarantee for the collateral and comfort for investors that their capital can only be used to cover the underlying risks, or for payout in the case of losses.

During the term of coverage of the risks assigned to the reinsurance structure, any claims paid will reduce the need for guarantee equivalent to the amount paid out, the regulations explain.

Terms of coverage will be documented in issuance documentation, which will govern certain features of the coverage and the ILS or debt instrument protecting them.

The regulations include protections for the issuers and the investors, to ensure the ILS instruments and reinsurance structure are fully-funded for the risks they bear at any point in time.

The regulations are clear and provide for the majority of eventualities that other domiciles special purpose reinsurance vehicle regulations do.

They don’t contain considerable detail about the ILS instruments themselves, rather leaving that to Brazil’s securitization laws it seems.

Essentially, the resolution published will provide for the framework of a special purpose reinsurer and its ability to fund its risk obligations using securities instruments, while maintaining full collateralization.

Brazil’s goal here, is to make efficient sources of reinsurance capacity more readily available to its re/insurance industry, while keeping this process onshore as well and attracting international capital to its marketplace.

Ultimately, it’s hoped that by leveraging ILS market technology locally to enable lower-cost capital to be brought in to Brazil to support reinsurance and retrocession needs of its carriers, the cost-savings can benefit the market as a whole and trickle down to the insurance consumer.

Which is a noble and important goal. In fact it’s one which we believe other countries will also look to emulate, bringing domestic ILS structures into the market as a way to benefit their own insurance and reinsurance industries and consumers, while keeping ILS business onshore to attract capital.

This resolution comes into effect as of January 4th 2021.

It will be fascinating to see if any Brazilian RPE reinsurers are established soon after the regulations come into effect.