Brazil’s SUSEP proposes LRS reforms, cat bonds, parametrics for catastrophe protection

Brazil’s regulator the Superintendence of Private Insurance (SUSEP) has published a range of proposals designed to bolster the country’s financial and insurance protection against natural catastrophes, with reforms and further developments in insurance-linked securities (ILS) set to be part of the continuing discussions.

Having convened a working group of industry, regulatory bodies and experts to look at how Brazil can enhance its financial protection against natural catastrophe risks, SUSEP has published the outcome of that work, with a document that details numerous proposals and avenues for continued exploration.

Proposals range from natural disaster funds for Brazil, to both local and sovereign level catastrophe risk transfer, alongside parametric insurance, broader use of the Brazilian Letra de Risco de Seguro (Insurance Risk Letters) regulations, which are the country’s own-brand of insurance-linked securities (ILS), as well as the potential for broader use of capital markets backed reinsurance support through catastrophe bonds.

Having set the stage for its own insurance industry to tap the capital markets for reinsurance risk transfer and support through the development of its Letra de Risco de Seguro (LRS) regulatory regime, Brazil now sees that the regulations can be further enhanced to increase the usefulness of LRS in relation to natural catastrophe risks.

Brazil’s SUSEP details an ambition to put in place a tiered and layers natural catastrophe and disaster risk financing system in the country, with the goal of more risk being transferred to insurance, reinsurance and capital markets, to reduce the evident protection gap that is faced.

Currently, only a very small proportion of the economic losses suffered from natural disasters are typically covered by insurance in Brazil, on average as low as 9% compared to a global average of closer to 45%, a SUSEP presentation explains.

As a result, post-disaster public and government resources tend to be the main financial source used for catastrophe response and recovery, putting the population, businesses and state on the hook for losses.

The goal is to create a catastrophe risk financial architecture to shift that paradigm, with public-private coordination and tapping into local insurance, global reinsurance and international capital markets, alongside mitigation and adaptation efforts.

The risk-layering approach suggests different risk transfer and financing instruments for each level of risk, with broad use of responsive insurance and risk transfer mechanisms including parametric triggers.

As well as insurance and capital markets risk transfer tools, Brazil also needs to look at catastrophe contingent credit arrangements, SUSEP’s working group suggests.

The approach suggests a journey from pilot programmes focused on parametric insurance, through a sandbox to encourage risk transfer innovation, on to sovereign risk transfer. Alongside this, regulatory work will be required to enhance the LRS regime and bring use of catastrophe bonds to Brazil to better connect insurance and capital markets.

Longer-term, the working group envisages a Brazilian catastrophe risk pool, risk sharing across South America, sovereign catastrophe bonds similar to World Bank issuances, tax inducements to encourage uptake of catastrophe insurance, alongside resilience efforts.

Among the proposals, SUSEP suggests the Letra de Risco de Seguro (Insurance Risk Letter) structure could be further enhanced to enable transfer of natural disaster risks to the capital markets, for which additional regulatory changes may be considered and required.

Further on in the journey to construct this catastrophe risk architecture for the country, the Brazilian government could itself become a beneficiary of a permanent program to issue sovereign catastrophe bonds, to transfer the peak exposures and provide financing support for risks that are retained on the government or public balance-sheet.

Having benefitted from its experience with the LRS regulatory regime, Brazil clearly recognises how insurance-linked securities can play a fundamental role in providing reinsurance and risk capital to better protect the country against natural catastrophe exposures.

That already growing local ILS regime is one area that can bring in institutional capital to support Brazil’s insurance industry, while sovereign catastrophe bonds could provide funding for the government and public’s own exposure to disasters.

It’s encouraging to see the approach being suggested, as Brazil has clearly learned from the example set by other countries that have embraced a risk layered approach to disaster risk financing, such as Jamaica.

You can find all our coverage of Brazil’s ILS regime under this archive.