Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Brazil seeks feedback on ILS regulatory framework proposal


The South American nation of Brazil is the latest to target the creation of a framework for legislation and a regulatory regime to allow for the issuance of insurance-linked securities (ILS) in the country, as it looks to ILS as a possible avenue to help its growing re/insurance industry further expand.

brazil-flagA consultation process is underway, with the proposal being a set of legislation that would allow insurance or reinsurance companies operating in Brazil to issue ILS such as catastrophe bonds, using capital markets debt issuances linked to the underlying risks as a way to bring in funding and offer an attractive investment opportunity at the same time.

The proposed Resolution would enable the creation of a locally domiciled reinsurance entity (an RPE) whose mandate is to accept risks, through reinsurance or retrocession agreements, but with the financing of its obligations arranged through the issuance of debt securities linked to the underlying re/insurance risks.

This appears to be a proposal for a special purpose reinsurance vehicle that will be able to issue capital markets instruments to third-party investors and fund managers, enabling Brazil’s insurance and reinsurance sector to expand their reach into capital markets for capacity and hedging support.

The RPE will be fully collateralised for all of its reinsurance or retrocession obligations and only needs to have 100,000 Brazilian Reals of capital (around US $18,500).

Brazilian regulator the Superintendência de Seguros Privados (Susep) explained that it hopes the cost of ILS capital will be more efficient than financing through equity means, expecting that the lower-cost of ILS capital can help the Brazilian insurance and reinsurance industry to be more competitive and also provide reduced cost products to customers.

The regulator hopes that ILS could be an effective capital structure to bring into Brazil, to help its re/insurers and also to provide them with new opportunities.

Susep also hopes that a Brazilian ILS market would be attractive to investors as well, especially in the currently very low interest rate environment.

The regulator noted that, on insurance-linked securities (ILS), “This type of risk transfer is gaining more and more traction in international markets.”

ILS would boost Brazil’s capital markets activity and also attract capital from overseas, the regulator believes, while providing a new way of structuring capital for its re/insurance market.

The way ILS can help re/insurers to reduce their risks and lower their costs is ultimately hoped to benefit consumers.

Susep’s superintendent Solange Vieira said, “This will enable better prices for the consumer, favouring the development of the Brazilian market.”

Cedents who want to issue ILS in Brazil will have to have their risks carried in locally domiciled structures, while the ILS investments should only be offered to professional investors, Susep believes.

It’s encouraging to see another country looking to make ILS available to its local insurance and reinsurance market and recognising the potential to attract international investor capital to support the growth and efficiency of its own marketplace.

The proposed legislation is out for public consultation, after which feedback will be taken into consideration and a finalised version be put to lawmakers, we understand.

Brazil’s domestic reinsurers have been looking at ILS for some time, having had a working group in the country that has met over the last few years.

Now it seems progress is being made and it may not be long until Brazil has the necessary legislation and regulatory environment to support issuance of ILS from the country.

Of course, the question then will be how actively used any Brazil ILS legislation will be?

To-date, ILS activity featuring risks from Brazil, or the region, is relatively low, with the most prominent transaction perhaps being the series of three Alpha Terra Validus arrangements between Brazilian reinsurer Terra Brasis Re and ILS fund manager AlphaCat.

As we’d reported back in 2018, the government of the United Kingdom was encouraging other countries to look towards the UK and its own enacted insurance-linked securities (ILS) regulatory and tax framework as a potential avenue for ILS and catastrophe bond issuance, with Brazil among those to be courted.

Now, it seems Brazil is keen to go its own way and develop the ILS framework it needs to allow its re/insurers to sponsor catastrophe bonds, or other ILS, locally instead.

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