Brazil follows the civil law system. According to the Civil Procedural Code currently in force, in some circumstances precedents from the Supreme and Superior Courts can be binding; however, as a rule, court precedents are not binding, but considered an important interpretation guideline for the law and argument of authority.
The primary source for insurance law is the Civil Code (Federal Law 10,402/2002). Chapter XV of the Code is dedicated to insurance and covers General Provisions (Section I, articles 757 to 777), Property Insurance (Section II, articles 778 to 788) and Personal Insurance (Section III, articles 789 to 802).
In addition to the Civil Code, Decree-Law 73/1966 regulates the Brazilian System of Private Insurance. Complementary Law 126, enacted in 2007, regulates reinsurance and has been responsible for “opening” the market to international reinsurers, ending IRB’s monopoly.
Marine insurance is regulated by the Commercial Code (Federal Law 556/1850), under articles 666 to 730. The Commercial Code was partially revoked when the Civil Code was enacted, although the provisions relating to maritime trade remain in force.
Depending on the party contracting the insurance, the provisions of the Consumer Act (Federal Law 8,078/1990) may apply, especially when it comes to personal lines. The Act grants broader defence rights to consumers, such as the inversion of the burden of proof and a longer limitation period for claims, in an attempt to re-balance the power relationship between consumers and service providers.
In addition to the abovementioned laws, insurance and reinsurance in Brazil are regulated by the National Council for Private Insurance (CNSP), which is responsible for:
The Superintendence of Private Insurance (SUSEP), a quasi-governmental entity controlled by the Ministry of Industry and Commerce, endowed with a Public Law legal personality with administrative and financial autonomy, is responsible for executing the policy designed by CNSP, as the supervising entity of the creation, organisation, operation and transactions of insurance companies. SUSEP is also responsible for supervising the operations of the insurance companies and imposing administrative sanctions.
CNSP and SUSEP regulate the insurance and reinsurance market by means of Resolutions and Circulars, respectively.
According to article 72, sole paragraph of the Decree-Law 73/1966 and article 25 of Law 4,595/1964, insurance companies must be constituted in the form of corporations in order to operate in Brazil. CNSP’s Resolution 330 and SUSEP’s Circular 529 are the main normative instruments governing the constitution of insurance companies in Brazil.
As for reinsurance companies, Complementary Law 126/2007 provides that reinsurers are required to obtain one of the following licenses in order to do business in Brazil:
Each license is subject to different entry and operational requirements and restrictions, which are regulated by Resolution 168 of CNSP and SUSEP’s Circular 359.
Taxation of premium is a controverted matter before the Brazilian courts and, therefore, it is not possible to provide a straight answer to the question. Therefore, we suggest that the topic is excluded from the Q&A.
In general terms, there are no additional requirements imposed on foreign insurers seeking authorisation to operate in Brazil. Foreign reinsurers can also operate as admitted or occasional reinsurers.
As regards restrictions to contracting foreign policies, the Complementary Law 126/2007, article 19, provides that natural persons residing in Brazil or legal entities of any form domiciled in Brazil can only contract insurance in Brazil to protect against risks within the country. Contracting of insurance abroad, as per article 20 of the mentioned Law, is restricted to:
CNSP’s Resolution 197/2008 and SUSEP’s Circular 392/2009 also regulate the contracting of insurance abroad.
Until the enactment of Complementary Law 126/2007, there was a State monopoly – represented by IRB – over reinsurance operations in Brazil. After the opening of the market, an environment of partial liberalization was established; however, there is a market reserve in favour of local reinsurers.
In December 2017, CNSP’s Resolution 353/2017 revoked the market reserve on behalf of local reinsurers, assuring them, on the other hand, only a preferential offer, as long as the conditions offered by the international market are met. This measure unequivocally stimulates competition and, consequently will challenge the national market to improve itself.
Fronting in Brazil is subject to minimum retention standards, with some flexibility.
According to article 16 of CNSP’s Resolution 168/2007, insurance companies and local reinsurers may not cede in reinsurance and retrocession, respectively, more than 50% of premiums written, related to risks underwritten, considering the whole of their operations in each calendar year. However, section 2 of the mentioned provision eases the restriction, allowing SUSEP to authorise cessions in higher percentages, as long as technical justification is provided.
In the last few years, an increase in M&A transactions and sales of portfolios has been noted worldwide, including in Brazil. According to recent research, 350 mergers and acquisitions were completed in the global insurance sector in 2017, 50% of which were in the Americas. It is expected that deal-making in the insurance industry will continue to rise in the coming years.
In Brazil, negotiations are generally influenced by transactions occurring abroad. As to highlights, Zurich has entered into an agreement to acquire the operations of Australian insurer QBE in Latin America, adding incremental scale and capabilities in Brazil. AXA completed the acquisition of XL Group, creating the #1 global P&C commercial lines insurance. Although the transaction is still officially under analysis before SUSEP, the integration between XL and AXA Brazil was initiated in September 2018.
Locally, a joint venture between Santander Brazil and HDI recently created “Santander Auto,” a 100% digital car insurance company. Swiss Re and the Brazilian bank Bradesco also joined their operations in big risks. On the opposite end of the scale, American Travelers reorganised its joint venture with JMalucelli, adopting a more independent position in the market.
Another movement worth mentioning is the advance of local companies, such as IRB, Terra Brasis and AGCS, in Latin America.
The profession of insurance broker is regulated in Brazil by Federal Law 4,594/64 and by Chapter XI of Decree-Law 73/1966. SUSEP’s Circular 510/2015 provides for the registration of the broker and regulates activity.
Direct sales are not prevented in Brazil. However, in case of a direct sale, article 19 of Federal Law 4,594/64 provides that the fees that would otherwise be paid to brokers must be paid to the National School of Insurance (FENANSEG).
In 2013, CNSP’s Resolution 297 regulated the role of the insurance agent, as the legal entity that assumes the obligation to promote the execution of insurance contracts to the account and in the name of the insurance company, not to be confused with the insurance broker. Contracts executed through insurance agents are considered as direct sales.
Bancassurance is very common in Brazil, especially in mass risks.
Reinsurance brokerage is regulated by Section V of CNSP’s Resolution 330/2015, which allows the operation of foreign reinsurance brokers in the country.
Article 765 of the Brazilian Civil Code provides that both the insurer and insured must act according to the principle of utmost good faith regarding the veracity of information, before, during and after the execution of an insurance contract.
The questionnaire prepared by the insurer to assess the risk of the prospective insured should be carefully drafted to avoid doubt and subjective questions, because any unclear aspects may be interpreted in a dispute in favour of the insured, especially when it comes to consumer contracts. In this respect, article 46 of the Brazilian Consumer Act provides that contractual provisions must be interpreted more favourably to the consumer.
In case the insured or its representative makes an inexact declaration or fails to provide information that could influence the acceptance of the insurance by the insurer or the premium rate, it will lose its right to the guarantee, as per article 766 of the Brazilian Civil Code.
The rules applied to brokers do not formally position them as a representative of the insured or the insurer, but as an intermediate who approximates the interested parties of the insurance company. However, in practice, the insurance broker usually acts on behalf of the insured, representing its interests before the insurer.
However, both Federal Law 4,594/64 and SUSEP’s Circular 510/2015 hold the broker liable towards the insurer and/or the insured for any damages caused by omission, malpractice or negligence in the exercise of their profession, therefore strengthening its independence.
Accordance to articles 758 to 760 of the Civil Code, the issuance of an insurance policy must be preceded by a written proposal indicating the essential elements of the interest to be guaranteed and of the risk. The insurance policy evidences the contract of insurance and it, as a rule, can be nominative, in order or in bearer form, indicating the risks covered, the beginning and end of their validity, the limit of the guarantee and the premium due, and, when applicable, the name of the insured person and the name of the beneficiary. In case of personal insurance, the policy cannot be issued in bearer form.
In practice, however, it is possible to contract insurance – mostly consumer contracts – regardless of previous formal proposal, such as affinities.
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With reinsurance contracts, formal requirements are less strict. Although article 37 of Resolution CNSP 168/2007 provides that reinsurance transactions shall be formalised contractually (within 180 days of the start of cover), the third paragraph of the mentioned article deems the reinsurer’s or reinsurers’ acceptance in the reinsurance proposal as proof of the agreed coverage.
Reinsurance contracts (slips) are freely negotiated between the parties, not requiring prior approval from SUSEP. Nevertheless, articles 33 to 41 of Chapter VII of the mentioned Resolution provide for the dispositions which must be included in the reinsurance agreement, such as:
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No information is available.
The rules applicable for contracts in general in Brazil provide that they should be interpreted based on the standards of good faith and as per its social function. Should the contract be of adhesion, the most favourable interpretation to the adhering party must be adopted in case of contradictory or ambiguous clauses. The contra proferentem applies.
In addition, extraneous evidence is permitted for the construction and interpretation of contracts. Article 427 of the Civil Code states that proposal and pre-contracts bind the proponent.
As to insurance contracts, they are subject to a restrictive interpretation, as article 757 of the Civil Code makes clear that the insurer’s obligation is to guarantee legitimate interests of the insured against predetermined risks.
When a consumer relation is involved, the contractual provisions must be interpreted on behalf of the consumer and the latter will not be obliged to a contract if opportunity to gain prior knowledge of its content has not been granted, or if its instruments are drafted in such a way as to make it difficult to understand its meaning and scope.
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Even though the expressions “conditions, conditions precedent or warranties” are not recognised by Brazilian law, the insured is obliged by law to provide clear information and act with the utmost good faith – the same applies to the insurer. If the insured does not comply with the obligation to inform clearly about its personal data (life insurance, for example) and business-relevant information (financial lines policies) etc, the insurer will be authorised to deny coverage.
Article 766 of the Civil Code establishes the loss of the right to the guarantee if the insured or its representative makes an inexact declaration or omits information that could influence the acceptance of the proposal or the premium rate.
If the inaccuracy or omission in the statements does not result from the insured’s bad faith, the insurer shall have the right to dissolve the contract or to collect, even after occurrence of the insured event, the difference in the premium. The burden of proving the misstatement or omission of information rests with the insurer.
In addition, article 768 of the Civil Code also punishes the insured with the loss of the guarantee in case he intentionally aggravates the risk covered by the contract.
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For insurance contracts executed in Brazil, between Brazilian parties, the applicable law and jurisdiction will be Brazilian, unless the parties choose arbitration, in which case they are free to choose the applicable law and the forum for the dispute.
The same applies to reinsurance contracts. Article 38 of CNSP’s Resolution 168/2007 provides that, for risks located in Brazil, a clause stipulating that any disputes arising in relation thereto shall be subject to the laws and jurisdiction of Brazil must be included in the contract, with the exception of the arbitration clause, which shall conform to prevailing legislation.
The Civil Procedural Code, currently in force, guarantees the enforceability of the foreign jurisdiction clause agreed on international contracts, as per article 25.
In Brazil, disputes between private litigants are heard in the local state justice system, following procedures established by the Civil Procedural Code. The federal courts are only able to rule on certain issues, such as when there is interest of a federal public entity involved.
The judicial system is organised on different levels. In the first instance the claims are decided by a single judge. The Courts of Appeal act as courts of second instance, where appeals are judged by a panel of three judges, as a rule (which can be extended to a panel of five judges in case of judgment for majority overturning the first instance decision at stake).
In case the judgment rendered by the Court of Appeal is contrary to the Federal Law or the Constitution, it may be subject to a subsequent appeal to the Superior Court of Justice (STJ) or the Supreme Court (STF), respectively. The Superior and Supreme Courts are prevented from reviewing facts or the interpretation of contractual clauses, being only able to rule on matters of law and their interpretation.
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According to the Arbitration Act, the parties’ option to refer their disputes to arbitration must be done in writing. Only patrimonial disposable rights can be subject to arbitration.
The Consumer Act deems as null and void any contractual provision that makes arbitration compulsory. However, even in a consumer relationship, parties are free to agree on arbitration, as long as the consumer has unequivocally and voluntarily agreed to do so.
According to article 31 of the Arbitration Act and article 515, VII of the Civil Procedural Code, the arbitral award is considered as final adjudication and it can be enforced before the judiciary, as the arbitrator lacks the imperium, ie the power to enforce the award.
Brazil is party to the New York Convention and, therefore, foreign arbitral awards are enforceable in Brazil as long as previously ratified before the Superior Court of Justice. The same applies to foreign judgments.
The proceedings for ratification of foreign judgments and award are governed by the Civil Procedural Code and the Internal Rules of the Superior Court of Justice.
Although the debtor will have the opportunity to challenge the request for ratification, such challenge is limited to the formal requirements for the homologation, ie, that the award/judgment was rendered and issued by a competent judge, is final and not contrary to public policy, national sovereignty or the dignity of the human person and that defendant was duly summoned or its default legally ascertained. The Superior Court of Justice is prevented from reviewing the facts and merits of the foreign award/judgment. If all formal requirements are present, the exequatur must be granted, and the proceedings will be forwarded to the federal court of the state in which the debtor is domiciled for enforcement procedures.
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According to Circular SUSEP 256/2004, the settlement of claims shall be made within a period not exceeding 30 days from the delivery of all basic documents submitted by the insured or beneficiary. The period may be suspended when, in the case of justified and justifiable doubt, new documents are requested by the insurer, returning to run from the business day following that on which the requirements are fully met by the insured or beneficiary.
In case of non-payment within the above-mentioned deadline, compensation will entail the application of default interest from that date and indexation for inflation. In addition, the insurer is subject to administrative penalties.
Brazilian law does not provide for punitive damages. However, Brazilian courts are known to be very condescending when analysing claims for moral damages. Civil liability in Brazil, as per the Federal Constitution, is based on the full reparation of damages.
The right to claim moral damages and the protection of honor and personal dignity are ultimately grounded in article 5 of the Brazilian Federal Constitution.
Articles 186 and 187 of the Brazilian Civil Code state that any person who, by a voluntary act or omission, negligence or imprudence, violates rights, or exceeds the limits when exercising a right, causes damages to another person, even if exclusively moral, commits an illicit act. Should this act rebound in the person’s dignity, it would be able to claim reparation from the offender.
Therefore, should the insured prove that the insurer delays settling the claim, and delaying the due payment under the insurance policy offended its dignity/morale, the first would be able to present a claim for reparation at court. Such claims are indeed common before Brazilian Courts, especially in consumer relations.
SUSEP has been attentive to the insurtech market and created, in 2017, a special commission for the study of innovation and insurtechs, with the participation of bodies representative of the market, such as the National Confederation of General Insurance Companies, Private Pension and Life, Supplementary Health and Capitalisation (CNSeg) and the National Academy of Insurance and Private Pension (ANSP).
In January 2018, CNSP’s Resolution 359/2017 came into force, allowing the use of digital platforms for the execution of insurance and private pension contracts and for after-sale activities. Following the regulation, Youse, from Caixa Seguradora, and Santander Auto (a joint venture between Santander Brasil and HDI) – 100% digital insurance companies – were authorised by SUSEP to operate.
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The bill of law No. 3555/2004 is currently being processed at the Brazilian Parliament. This bill of law establishes general rules for private insurance contracts and repeals provisions of the Civil Code, the Brazilian Commercial Code and Law-Decree No. 73 of 1966. It is not possible to foresee if it will or will not be enacted.
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Although Brazil is still recovering from its deepest ever economic recession, resulting from a mixture of huge public deficits, corruption scandals and political turmoil, the market for insurance and reinsurance maintains successive rates of annual growth thanks to a strong local market of insurance products providers and considerable untapped demand.
This strong (and challenging) market continues to go through new developments, witnessing new trends that do not go unnoticed by local and foreign players.
Below we briefly describe some recent developments in the local market, such as a new law on data protection, the lift of certain reinsurance cession restrictions and new rules on the acceptance of foreign risks in reinsurance and retrocession. We also pinpoint some recent trends, namely the increasing importance of multidisciplinary local expertise on claims works and potential new legislation on insurance-linked securities.
IMPACT OF DATA PROTECTION RULES ON THE INSURANCE AND REINSURANCE MARKETS
Inspired by the EU General Data Protection Regulation, the Brazilian Data Protection Law (Law no. 13,709 of 2018 or “LGPD”) was enacted in August 2018. The new law regulates the use of personal data by individuals and legal entities, establishing detailed rules for the collection, use, processing and storage of personal data. It affects all economic sectors, including the relationship between customers and suppliers of goods and services, employees and employers and other relationships in which personal data is collected, both in the digital and physical environment.
The LGPD comes into force in February 2020 and will have great impact on insurers and reinsurers that operate within the Brazilian territory or provide services in Brazil. It is important to note, however, that the new legislation does not replace or preclude the application of sectorial regulation related to personal data, such as those issued by the Superintendence of Private Insurance (SUSEP). A National Data Protection Authority (ANPD) is expected to be set up before the law comes into force and will be responsible for issuing guidelines, overseeing compliance with the rules set forth by the LGPD, and imposing penalties.
Because of its wide scope of application, the LGPD will be a major focus point for organisations. Its provisions will apply to any data-treatment activities carried out by private or governmental entities, regardless of the country in which they are headquartered, provided that (i) the processing operation occurs in Brazil; (ii) the goal of the processing operation is to offer or provide goods or services in Brazil; or (iii) the personal data is collected in Brazil.
Under the LGPD, personal data is defined as “information related to an identified or identifiable natural person” and any processing activity shall be made based on one or more of the legal bases provided for in the law and in accordance with the principles set forth therein. Moreover, the law requires more rigorous control regarding so-called “sensitive personal data,” which includes information on race, ethnicity, religious belief, health conditions and sexual orientation. The LGPD also grants several rights to data subjects, such as the right to obtain information regarding the processing of data, as well as the right to access, rectify and erase it.
To ensure compliance with the LGPD, insurers and reinsurers that process or collect personal data within the Brazilian territory or offer services in Brazil must understand the impact of such rules on their activities and review their internal policies and procedures, adapting them as required. In short, these organisations will need to assess whether the personal data they gather is actually necessary from a legal, contractual and business perspective. Administrative sanctions range from a formal warning issued by the to-be-created ANPD to fines of up to 2% of net turnover of the infringing conglomerate in Brazil, limited to BRL50 million per violation.
NEW REINSURANCE CEDING RULES
A recent development pertaining to Brazilian rules for risk cession from insurers to reinsurers, Resolução no. 353, issued by the Brazilian National Council of Private Insurance (CNSP) in December 2017, modified specific provisions of Resolução CNSP no. 168 of 2007, which regulates reinsurance activities in Brazil.
Under the previous rules, it was mandatory for Brazilian insurers to offer at least 30% of each reinsurance cession in treaties or facultative reinsurance to local reinsurers. In addition, in cross-border operations between insurers and reinsurers belonging to the same economic group, no more than 30% of the premium of each contracted coverage could be ceded. After Resolução CNSP no. 353, the mandatory offer to local reinsurers was abolished, maintaining the 40% preferential offer provided by Complementary Law no. 126 of 2007. The same new rule eliminated the limitation for intragroup cross-border reinsurance cessions. Intragroup transactions must, in any event, observe fair competitive conditions.
Almost at the same time, SUSEP issued Circular no. 562, effective as of 1 January 2018, which granted more flexibility to local insurers with regards to the 50% minimum retention rule imposed by Brazilian regulation, especially in lines of business that are more reinsurance sensitive. According to said Circular, this limitation is no longer applicable to premiums received by local insurers in relation to policies in lines of business such as named and operational risks, aviation-hull, aviation-casualty and oil & gas. This same restriction continues, however, for local reinsurers.
NEW RULES ON ACCEPTANCE OF FOREIGN RISKS IN REINSURANCE AND RETROCESSION
Issued on 17 October 2018, Resolução CNSP no. 363 is the result of a recent willingness of the Brazilian insurance regulator to hear the demands of the insurance and reinsurance market.
As per Resolução CNSP no. 363, Brazilian local reinsurers were authorised to offer reinsurance and retrocession coverage not only to foreign insurers or reinsurers, but to any legal entity authorised to purchase reinsurance according to local laws, with no need for any of them to register with SUSEP.
Local reinsurers may only accept risks in the lines of business they are authorised to operate. They may, however, accept risks that do not exist in Brazil, as long as such lines of business have similar technical characteristics to the ones the reinsurer is authorised to operate locally. Moreover, Resolução CNSP no. 363 allows free negotiation of contractual provisions between insurers and reinsurers, imposing no mandatory provisions. Notwithstanding the above, local reinsurers must set up mechanisms to adequately monitor risk accumulation.
IMPORTANCE OF MULTIDISCIPLINARY LOCAL EXPERTISE ON CLAIMS
When adjusting claims arising from events of minor complexity, insurers and reinsurers usually rely on a straightforward approach, as adjusters with a single expertise may satisfactorily solve the matter. Furthermore, when a denial leads to a lawsuit to seek payment under the policy, courts will normally be able to reach a final decision without unexpected complications. Nevertheless, using the same type of approach for complex claims may prove to be not only inefficient, but also harmful to the interests of insurers and reinsurers.
This is particularly important for risks such as marine transportation, infrastructure and onshore/offshore energy, among others. In such cases, the complexity of the underlying risks will typically require painstaking analysis, covering every possible angle and taking into consideration various points of view in order to provide ready responses and, whenever possible, anticipate future steps. Additionally, when such claims involve the public administration, directly or through state-controlled companies, an extra layer of complexity is added to the equation, since public contracts are subject to specific laws conceived to protect the public interest, leaving insurers and reinsurers with reduced bargaining powers.
When faced with complex claims, a local multidisciplinary approach on claims adjustment and settlement proceedings will provide a better and more comprehensive understanding of the possible developments, increasing the chances of a successful outcome. Failure to do that may jeopardise the capacity to safely deny or pay a claim and, in the latter scenario, the ability to recover such amounts in coinsurance, in reinsurance, or against whoever has caused the loss, on a subrogation basis. In a litigation scenario, an improper claim adjustment could result in further losses for insurers and reinsurers due to high litigation costs in Brazil.
POTENTIAL NEW LEGISLATION ON INSURANCE-LINKED SECURITIES
Even though insurance-linked securities or “ILS” have been around for quite a while, they are still not regulated in Brazil and, therefore, Brazilian entities are not allowed to issue them. So far, the only publicly disclosed transaction of this type involves risks originally insured in Brazil, which were subsequently reinsured abroad and securitized through an international vehicle.
Presently, there are ongoing discussions on the passing of local legislation and subsequent regulation that would permit the transfer of insurance risks to capital markets. This legislation would create the security – ILS – to be issued, as required by Brazilian law, and allow its issuer to ring-fence the assets that would back the securities.
One important topic regarding pending legislation concerns the legal entities that would be allowed to receive the underlying risks and issue the corresponding ILS. The initial proposition is based on the creation of an especial reinsurance vehicle, to be supervised by SUSEP, that would have as its sole purpose the acceptance of certain risks in reinsurance and the issuance of the corresponding ILS. However, allowing securitization companies that are not regulated by SUSEP to issue ILS is not yet fully ruled out.
Securitization is not unprecedented in Brazil, as local laws and regulations already allow the issuance of securities linked to real estate and agribusiness – so-called CRIs and CRAs, respectively – so ILS appears as a concrete possibility for the near future as an additional alternative to increase the local offer of (re)insurance.