Brazil’s legal system is based on civil law; therefore, its framework is composed of numerous laws and legal codes.
The main sources of insurance and reinsurance law in Brazil are the following:
The interpretation of most insurance policies is also based on the Consumer Protection Code, enacted by Law No 8,078/1990. In addition, most policies are adhesion contracts (ie, there is no arm’s-length negotiation of their terms and conditions). If the terms and conditions of such agreements are not clear, they are interpreted in favour of the adhering party.
Authority for the oversight and regulation of the Brazilian insurance market is fragmented:
CNSP and SUSEP are governmental entities under the Ministry of Economy, responsible for regulating the insurance sector (life and non-life, excluding health). CNSP is the policy board for the markets mentioned above. SUSEP further details the rules enacted by CNSP. SUSEP is the supervisor of the regulated entities, conducting routine inspections and disciplinary proceedings, and is also responsible for ensuring that the entities within those markets are liquid and solvent, and protecting the rights of the insured parties.
CNPC and PREVIC operate in a similar manner, with CNPC acting as the regulatory body, while PREVIC is the supervisor of closed-end complementary pension entities and issues rules detailing CNPC’s regulations. The Brazilian government has made public its intention to merge PREVIC and SUSEP, which would create a single supervisory entity for insurance and pension funds. No concrete actions towards such unification have been taken so far.
The ANS is an agency established by the Brazilian government under the Ministry of Health that operates nationwide to regulate, standardise, control and inspect the private health insurance and plans sector in Brazil, including private health insurance, health management organisation, self-insured plans, medical co-operatives, non-profit health organisations and dental assistance.
Only companies authorised by SUSEP (or ANS for health insurance) can write insurance business in Brazil. The authorisation procedure is divided into two major steps: prior approval and ratification.
The procedure is lengthy and standards for approval are high. During the prior approval review, SUSEP analyses a series of documents presented by the organising group to review:
This request must be made prior to the signature of any organisational corporate act. SUSEP must analyse the documents within 120 days, according to a recently issued normative.
Once the prior approval of the project is granted by SUSEP, applicants must perform the relevant corporate acts for organising the insurance company, which are subsequently submitted to SUSEP for ratification purposes. The ratification phase is generally simpler, as it seeks only to confirm that the organisational structure described in the prior approval phase was duly implemented. Such phase also aims to confirm the legality of the funds used for forming the insurer’s capital. SUSEP has another 120-day deadline for deciding on the ratification.
Although the procedure above is similar for all insurers, starting on 4 January 2021, insurance companies will be divided into four segments (S1, S2, S3 and S4). Companies characterised as S4 are deemed to offer less risk to the market, and, therefore, are subject to reduced capital and prudential requirements. Such requirements gradually become stricter as the company grows and moves to the higher segments.
SUSEP has also created a regulatory sandbox, in which approved insurtechs may create an insurance company with a temporary licence (36 months). Sandbox participants are subject to further reduced regulatory requirements, even when compared to insurers in the S4 segment.
Insurance companies issuing only micro-insurance policies, which target low-income consumers, are also subject to reduced capital requirements.
Consistent with other initiatives, SUSEP is seeking to promote competition through the admission of new players.
It is worth noting that the insurer will also need to file its insurance products with SUSEP and obtain a process number before it issues any policies.
Reinsurance and retrocession activities can be carried out in Brazil by the following types of reinsurers, all of which need to be accredited as such by SUSEP prior to engaging in any related activities.
These must be organised as joint-stock companies headquartered in Brazil. Such entities must engage exclusively in reinsurance and retrocession activities (with exclusive corporate purpose). The proceedings to obtain a prior authorisation to operate are the same as those applicable to local insurers. Since these rules are more stringent, there are fewer local reinsurers than admitted or occasional reinsurers doing business in Brazil. Brazilian insurance companies must give preference (right of first refusal) to local reinsurers to underwrite at least 40% of the reinsured risks in each treaty or facultative agreement.
These may be headquartered abroad, but need to have a representative office in Brazil. The representative office must be organised either as a joint-stock or limited liability company, but must have as its exclusive corporate purpose the representation of the offshore admitted reinsurer in reinsurance and retrocession transactions. There are some eligibility requirements that must be met by this type of reinsurer for purposes of accreditation; in particular, the requirements to open a local bank account and to keep, at all times, a balance of USD5 million in such account. The representative office’s management must follow the same ratification rules applicable to local insurers upon the election, appointment or replacement of an officer or director, or both.
These are, in many ways, very similar to admitted reinsurers, the only difference being that they do not need to have a representative office in Brazil. For this reason, eligibility requirements for purposes of accreditation by SUSEP are more restrictive than those applicable to admitted reinsurers.
Insurance premiums are subject to Tax on Financial Transactions (IOF), according to Articles 18 and following of Decree 6.306/2007. Currently, IOF ranges between 0% and 7.38% depending on the insurance product and its coverage, but the Executive Branch may increase the tax rate up to 25% without the approval of the National Congress. Insurance companies and financial institutions are responsible for levying IOF on behalf of the insured party upon the payment of the premium.
Insurance companies are also subject to particular tax regimes concerning the Contributions on Gross Income (PIS/COFINS), levied at a combined 4.65% rate on financial spread, and increased rates of Corporate Income Tax (40% instead of the regular 34% applicable to other companies).
According to Brazilian law, mandatory insurance and non-mandatory insurance related to risks in Brazil and contracted by individuals or entities residing in Brazil should be exclusively contracted with local insurers.
There are a few exceptions to such rule. For instance, Brazilian residents may contract insurance offshore when coverage for the risk is unavailable in Brazil. The unavailability is evidenced by the refusal of at least five insurers that issue the same type of coverage locally. SUSEP Circular No 603, issued recently in 2020, provides the procedures to be followed by Brazilian residents when taking out insurance offshore and making use of the legal exceptions.
Also, as the restriction is applicable to Brazilian residents and legal entities headquartered in Brazil, Brazilian companies of international groups may still be beneficiaries of global insurance programmes funded by their controlling entity offshore.
Foreign companies underwriting insurance with Brazilian residents where a local insurance is required can be viewed by SUSEP as an insurance company operating in Brazil without the proper authorisation. For such practice, insurance companies are subject to fines of up to BRL3 million, determined by SUSEP. Companies’ shareholders, directors and officers could also be held jointly liable for any fines and, in some situations, may be indicted to criminal prosecution, as operating an insurance company without SUSEP’s authorisation is a financial crime in Brazil.
With regard to reinsurance, as mentioned above, foreign reinsurers may operate in Brazil if accredited by SUSEP.
It is worth noting that Brexit did not impact the scenario above.
Fronting is not a usual Brazilian practice and does not have a specific regulation. Although fronting is not expressly prohibited, Brazilian insurers and local reinsurers are subject to retention obligations.
Although the M&A market was affected in Brazil by the COVID-19 pandemic, an increase in transactions was seen in the second half of the year. The authors have a positive perspective for such field in the near future. Lately, the market has been focused on portfolios, as companies decide to no longer operate in a certain segment. New joint ventures in bancassurance also represent a relevant part of the M&A market, as banks continue to grow their importance in the sector.
Transactions (including M&A and portfolio acquisitions) and corporate reorganisations involving insurers and local reinsurers are, in most cases, subject to prior approval and ratification proceedings before SUSEP, depending on the characteristics of the parties involved and the project. International M&A transactions involving relevant multinational groups are usually also subject to pre or post-closing filings with SUSEP.
Insurance policies may be distributed by the insurance company itself, by insurance agents, by policyholders or by insurance brokers and their agents.
In the case of distribution of certain types of insurance to the public at large, insurance agents represent insurance companies. Such model is usually used by retailers in order to distribute extended warranty insurance, as a consequence of regulatory restrictions.
Policyholders, on the other hand, represent insured groups. For that reason, the policyholder structure is commonly used in bancassurance to distribute group insurance.
According to Brazilian law, the legal intermediaries for the distribution and promotion of insurance contracts are the insurance brokers. Insurance brokers may be individuals or companies. Also, an insurance broker company may intermediate the distribution of policies through its own agents. In order to conduct insurance brokerage activities, insurance brokers are required to be previously accredited.
The accreditation is a procedure before SUSEP in which the insurance broker will have to provide evidence that it has duly complied with the eligibility requirements necessary for accreditation purposes, such as the following:
After being accredited as a brokerage company, insurance brokers must update SUSEP regarding any changes relating to corporate documents and governance or its organisational structure.
In 2020, CNSP issued, in Resolution No 382, rules to be followed by insurers and intermediaries when distributing insurance. The Resolution aims to provide better standards for transparency and clarity to clients. Most notably, this Resolution provided that insurance intermediaries, such as insurance agents and insurance brokers, must disclose to their clients their compensation for intermediating the insurance contract. This measure was very controversial amongst the insurance market.
Brazil does not have a specific figure in regulation for the managing general agent (MGA) model, although other models may be used in similar manners. SUSEP is currently studying the issuance of specific regulation for this model in Brazil.
The insured parties must comply with the duty of utmost good faith, disclosing all material facts and acting honestly towards the insurance companies, in such a way that the insurance company has sufficient information about the circumstances involving the risk and coverage. According to the Civil Code, the insured must disclose all of the relevant information upon contracting the policy and notify the insurer if the risk is aggravated. However, the courts generally charge the insurers with the obligation to ask all of the relevant information from the insured, considering that insured parties, in many cases, do not have the specialised knowledge of what would aggravate the insurers’ risks.
In addition, in consumer contracts, the insurer must provide clear and adequate information to the consumer (Article 6, Consumer Protection Code). Failure to provide adequate information (ie, omission, or false or misleading information) gives the insured the right to terminate the agreement and, in some cases, claim reimbursement of some of the payments made.
Should the insured party fail to provide the requested information (or omit relevant data), the insurance company may (i) increase the premium or terminate the policy, if the omission was not in bad faith; or (ii) refuse to cover any claims that would otherwise be covered under the terms and conditions of the policy issued to the insured party, which may implicate in the partial or total refusal of the coverage, if the omission was in bad faith. Brazilian courts require more than a showing of mere negligence to support a bad faith claim – as a general rule, the insured party must have engaged in intentional wrongdoing.
Brazilian courts also generally require a direct connection between the cause of the loss and the missing relevant information to the insurer, although such causal relation is not expressly provided in Brazilian law.
Should the insured intentionally aggravate the risk, the insurer will have the right to deny coverage to claim or cancel coverage and retain the premium(s) paid with no proportional reimbursement.
As indicated in 5.1 Distribution of Insurance and Reinsurance Products, in Brazil, the broker has the legal role of approximating the interests of the parties in order to foster insurance agreements (Decree-Law No 73/66), acting as a mere intermediary. Besides that, Brazilian law provides that brokers may also handle communication between the insurer and the insured, and submit documents to the insurer should the broker receive a claim from the insured under the insurance policy.
The law does not qualify the broker as a representative of any of the parties. Notwithstanding this, insurance authorities and public prosecutors located at SUSEP understand that brokers should act on behalf of, and to the benefit of, those interested in taking out insurance coverage; ie, the potential or effective insured parties. In order to maintain the independence and autonomy of the brokerage, Law 4594/64 prohibits the employment of brokers in legal person under public law and in insurance companies.
For collective polices, such as life policies of a company’s employees, Brazilian regulation provides for the figure of Estipulante (policyholder), which is the entity that, on behalf of other parties, takes out a collective insurance coverage to the benefit or interest of those parties.
There is also the figure of Representante, which is similar to the American figure of an "Agent", which is considered as acting on behalf of the insurer as a sales force for insurance to individuals (eg, extended warranty insurance coverage).
The formation of an insurance agreement is preceded by a written proposal sent by an insured person or an insurance broker. Local regulation, however, allows the contracting of policies through digital channels, provided that certain conditions are met.
At a minimum, insurance agreements should contain the identification of the parties (insurance company, policyholder, insured parties, beneficiaries), term of effectiveness, covered risks, liability limit, applicable premium and specifics of the duty to indemnify (claim notification and regulation rules), among other data.
The insurer must give clear and specific information to the insurer regarding specific terms of the coverage being taken out, especially the events that are not included in coverage, restriction to the right of indemnification (maximum indemnification limits, deductibles, etc) and the regulation procedure of eventual claims to be carried out if a covered claim occurs.
At the time of the placement, an exchange of specific data between the insurer and insured is required by the applicable law and regulations.
In Brazil, it is possible to establish expressly a beneficiary to the indemnification different from the insured. However, only persons with a legitimate interest in the covered risk can benefit from the coverage.
In a collective insurance policy, a policyholder contracts insurance on behalf of a group (Resolution CNSP 107/2004). In order to be included in the policy as an insured party, individual beneficiaries receive an individual certificate of the coverage. This structure is common for life insurance.
In collective insurance, the duty of utmost good faith, disclosing all material facts and acting honestly towards the insurance company remains.
There are also some types of insurance policies in which, because of their nature, the beneficiary is different from the insured; for example, rental insurance, in which the beneficiary is not the tenant, but the landlord.
The existence of a reinsurance policy does not interfere drastically in the duties and obligations of the parties involved.
As for consumer contracts, as mentioned above, consumers have the right to clear and adequate information on the products commercialised and the specification regarding quantity, characteristics, composition, quality, taxes and price, as well as the risks involved in contracting such products. Therefore, the insurer should take extra caution while indicating the conditions and clauses of the policy.
ART transactions are not common in Brazil.
Industry loss warranty contracts are not yet on the market.
Insurance-linked securities (ILS) do not have a local market, either.
SUSEP has been proactively seeking innovation in the Brazilian market. The authority has recently issued Public Consultation No 20/2020, which aims to create a special type of reinsurer that finances its operation solely with ILS. However, the definitive resolution has not been issued yet.
ART transactions are not regulated in Brazil or used commonly by local reinsurers and insurers.
As the definition of insurance in Brazil is broad and applied in a general manner by SUSEP, it is likely such transactions would be viewed as reinsurance. The lack of regulation on the subject by SUSEP could be viewed as an impediment for conducting such transactions locally.
Despite the specifics and proper characteristics of insurance policies, the interpreting of insurance contracts must abide by the general rules for interpretation of private contracts under Brazilian law.
The Civil Code establishes the general rules for interpretation of private transactions. In this sense, the interpretation of any contract between private parties should seek and comply with:
In addition to this general rule, the interpretation of insurance contracts may also be subject to the rules of interpretation of the adhesive nature of contracts (set forth by the Civil Code and Consumer Protection Code, as the case may be), which determines that in the event that any provisions are ambiguous or contradictory, the contract must be interpreted in favour of the party who adhered to such contract.
Considering the above, extraneous evidence, related to negotiation of the agreement and the usual market practices, is also used by courts to confirm the parties acted with good faith.
According to the Declaration of Economic Freedom Rights (Law No 13.874/2019), when the insurance is a civil/corporate contract – in other words, a contract signed between equal parties – the interpretation rules are softened. In such cases, there is a presumption of parity, resulting in the (i) observance of the risks allocation established and (ii) exception and limitation of the contractual revision.
In Brazil, the specific and restricted concept of warranty does not exist in the same manner as the one used in countries that have a common law system. In such sense, the duty of disclosure and good faith, and the insurance policy wording and clauses regarding the coverage and loss adjustment claim process are extremely important to comprehend its proceedings and necessary conditions to the indemnification.
In Brazil, the specific and restricted concept of conditions precedent does not exist in the same manner as the one used in countries that have a common law system. As mentioned above, the duty to act in good faith, the duty of disclosure and the policy wording are therefore essential to the interpretation of the insurance contract.
In Brazil, disputes regarding insurance coverage can be addressed in national litigation proceedings, in an ordinary lawsuit and arbitration, when there is a complex relation sub judice.
The parties may agree to submit insurance disputes to arbitration. Court decisions have solidly recognised the validity of clauses providing for mandatory arbitration for civil and commercial matters; however, courts have decided that such clauses shall only bind consumers if they expressly agree to them.
However, under a consumer contract, it is important to comply with some requirements for the validity of an arbitration clause. The arbitration clause should be in bold type and have a specific signature on it, or be contained in a separate document to the main agreement. Accordingly to the Brazilian Arbitration Law (Federal Law No 9,307 of 23 September 1996, or BAL), in adhesive contracts the arbitration clause must be accompanied with the consumer’s specific signature on the clause, which needs to be in bold type, or be contained in a separate document to the main agreement. Besides that, the arbitration clause will be effective should the consumer initiate the arbitration or expressly agree with the institution of its proceeding.
Brazil has seen a continuous increase in the popularity of arbitration as an alternative dispute resolution method for the following reasons:
The mentioned characteristics make arbitrations more attractive in some cases than ordinary court procedures, even more so considering that insurance disputes are usually highly complex and specific. In fact, SUSEP has encouraged entities belonging to CNSP and that operate big risk portfolios to add arbitration clauses in their contracts.
Brazilian law has established a limitation period of one year from the loss to file a dispute regarding an insurance claim.
According to the Law of Introduction to the Norms of Brazilian Law, the law applicable to agreements between parties is the law of the proponent’s residing country. The freedom of the parties to choose the applicable law is a debated issue in Brazil, as the Law of Introduction to the Norms of Brazilian Law only provides the above rule in relation to applicable law.
Insurance between Brazilian parties is interpreted according to Brazilian law.
As for the Brazilian jurisdiction, it is competent when the respondent is domiciled in Brazil or should the obligation be fulfilled.
Therefore, national insurance policies disputes will usually be resolved in Brazil. The territorial competence in Brazil can be negotiated by the parties in a choice of exclusive forum clause. This type of clause cannot be negotiated in an abusive manner to the detriment of the consumer, under penalty of being invalid. For consumer contracts, the jurisdiction is mandatorily the place of residence of the consumer, according to the Consumer Protection Code.
As for reinsurance policies, Resolution CNSP 168/2007, as stated in 6.2 Failure to Comply with Obligations of an Insurance Contract, establishes the obligation of the submission of the contract to Brazilian law, although such provision in a regulatory rule is highly debated.
The Brazilian litigation system has three instances:
The first instance is characterised by the development of the phase of cognition, which has the evidentiary stage and different manifestations of the parties in order to convince the judge. The other instances are usually related to appeals filed against the decisions of the first instance and therefore they are not designed for the production of evidence, but for the re-examination of the main arguments of the case. The Superior Court of Justice and the Supreme Court have another particularity: they are designed to decide appeals based on federal law violations or constitutional law violations. In other words, it is not possible to reassess the evidences already discussed in the instances below.
Insurance disputes may be time consuming if the parties refuse to accept the first-instance judgment because of the appeal system.
The New Civil Procedure Code came into force on 18 March 2016 and pursued a briefer litigation by promoting and enhancing the rules of alternative dispute resolution mechanisms (especially arbitration and mediation), rendering certain decisions by the superior courts binding and creating a model decision from a single case that can be applicable to similar cases and, therefore, similar court decisions (comparable with precedents in the USA). The New Civil Procedure Code’s stimulus for conciliation and mediation is clear, considering that judges, once they have received a petition, shall provide a conciliation or mediation hearing that will be carried out by experts in the matter who will try to resolve the situation by consensus.
In Brazil, the enforcement of a national judgment (which includes a national arbitration sentence) can be made in a definitive or provisional manner, depending on the existence of res judicata. In both cases, the enforcement is initiated by the filing of a simple motion requesting the beginning of the enforcement phase and enables the use of constrictive measures against the debtor in order to secure the debit enforced.
However, before a foreign judgment (judicial or arbitral), it is necessary to hold a recognition proceeding before the Superior Court of Justice (SCJ) prior to enforcement proceedings, which is regulated by the New Civil Procedure Code (ratification of the foreign decision – Articles 960 to 965) and the SCJ’s internal regulation (Articles 216-A to 216-N). In such analysis, the SCJ will evaluate whether the decision:
Besides such proceeding, in the case of letters of request determining an order to be enforced in Brazilian territory, the grant of exequatur by the SCJ is necessary to authorise the enforcement. This proceeding is regulated under the same articles of the ratification of the foreign decision.
Only after such proceedings is the decision enforceable in Brazil.
The rights under commercial insurance and reinsurance contracts are generally arbitrable under Brazilian Law (ie, constitute freely disposable property rights). The Brazilian Arbitration Law, Law No 9.307/199, has incorporated the competence-competence principle, according to which, arbitrators should issue a decision on their own jurisdiction before the courts.
However, in insurance and reinsurance contracts, parties should pay attention to specific formalities in the arbitration clauses, applicable by the BAL by virtue of insurance and reinsurance agreements' adhesive legal nature and by SUSEP regulations, as indicated in 9.1 Insurance Disputes over Coverage. Moreover, the arbitration clause should mention that:
Failure to comply with said requirements may lead a court to declare an arbitration clause null prima facie, as evidenced by decisions, including cases related to insurance agreements.
Arbitration awards in Brazil have the same legal effects as court judgments and are therefore enforceable. Awards granted outside the Brazilian territory must be through recognition proceedings before the SCJ, the country’s highest court for non-constitutional matters, prior to enforcement proceedings (although a provisional enforcement and precautionary measures are admissible). The recognition is granted by the Presiding Justice of the SCJ, observing the same criteria indicated in 9.4 The Enforcement of Judgments. If the request is contested, the recognition will be judged by the 15 most senior Justices of the SCJ.
Studies show that recognition proceedings in Brazil take three years on average.
Brazil has ratified the New York Convention (Decree No 4,311 of 23 June 2002) and the grounds set out in Article V to deny recognition are mirrored in Articles 38 and 39 of the BAL. Following the recognition of the award by the SCJ, enforcement proceedings may be initiated before lower federal courts.
Alternative dispute resolution has an ever-growing relevance in Brazil, whether it be combined with litigation or arbitration. The main characteristics of mediation are informality, good faith and confidentiality. The mediation seeks to resolve conflicts in a consensual manner, without resorting to any court or arbitration proceedings (but not prejudicing the right to resort to said dispute resolution mechanisms).
The 2015 Brazilian Code of Civil Procedure and the Judiciary (CNJ Resolution No 125 of 29 November 2010) have made relevant developments in the use of alternative dispute resolution methods, such as mediation and conciliation. Pursuant to the Civil Procedure Code, a mandatory conciliation/mediation hearing shall be scheduled prior to the presentation of the defendant’s answer. Consensual extrajudicial mediation may also be agreed by the parties, and specific legislation has been enacted on the subject (Federal Law No 13,140 of 26 June 2015).
For these reasons, mediation is equally relevant for commercial and consumer insurance and reinsurance contracts, although the approach to these methods changes from case to case. The use of mediation procedures has also grown recently because of the mandatory conciliation and mediation hearing required by the New Civil Procedure Code. Judges are incentivised to try to make the parties reach an agreement, and additional mediation/conciliation hearings may be held during the course of proceedings, including on appeal.
If the parties agree to be subject to extrajudicial mediation, the agreement will be valid regardless of any arbitration or court procedure. When such procedures have already begun, they will be suspended until the end of the negotiations. On the other hand, if there is no ongoing procedure, the limitation period will be suspended until the end of the negotiations. It is also possible for the parties to determine the scheme of the mediation, such as its date, the place of any meetings and the mediator.
Brazilian regulation establishes that the settlement of a claim must finish in 30 days after the delivery of the necessary documents by the insured. However, there is no provision regarding damages for this delay.
Brazilian law does not accept the condemnation of the debtor in punitive damages as a consequence of late payment. Nonetheless, after the enforcement of judgment has been initiated and before the default, monetary correction and default interest are imposed on the amount enforced as a result of application of the law.
Damages can be included whether there is a violation of SUSEP’s rule and a punitive administrative proceeding.
Insurers in Brazil have a legal right of subrogation following the payment of a claim, as established in the Civil Code. This means the transfer to the new creditor of all rights, claims, benefits and guarantees of the prior creditor regarding the debt against the main debtor and potential guarantor. The new creditor acts as if it was the prior creditor.
During the past two years, SUSEP has been taking an active role in implementing regulation with the purpose of promoting innovation in the insurance market. The authority has been issuing rules to foster the market, incentivising the creation of new business models.
Brazil has seen a blooming of start-ups that are trying to disrupt the market and come up with new solutions to modernise traditional products.
Bancassurance channels have also turned their attention to the insurance sector and are implementing new products through the use of technology and new models.
Specifically regarding regulations aligned with the new agenda and in a joint effort with the Brazilian Central Bank and the Brazilian Securities Exchange Commission, SUSEP issued, on March 2020, new regulations for a regulatory sandbox. Innovative and disruptive companies wishing to underwrite risks could obtain, through the sandbox programme, a temporary limited licence from SUSEP to issue insurance products under reduced entry barriers. The first sandbox programme was initiated in 2020 by SUSEP and approved 11 participants in December 2020, most of which are currently undergoing a final authorisation process. Operation will likely start in 2021 for most participants. This programme allowed basically a 10% entrance of new players in the insurer market.
SUSEP was the first authority to conclude a sandbox initiative and is working fast on promoting the modernisation of the sector.
The intention of the programme is to foster innovation and competition, with the ultimate goal of enhancing customer experience, increasing market penetration and reducing insurance prices. Such resolution was welcomed by the burgeoning insurtech start-ups that face high costs and strict regulation challenges associated with risk underwriting activities in Brazil. The regulations subject to public consultation were inspired by the sandbox initiatives of other countries, such as the United Kingdom’s Financial Conduct Authority initiative.
Other initiatives by SUSEP, such as the simplification of the registration process for new insurance products and the segmentation of insurers for a risk-based approach to regulation, are also fostering the growth of the insurtech sector in Brazil.
Segmentation is especially essential to insurtechs as it will allow smaller insurers to comply with simpler capital and reporting requirements.
SUSEP has also issued new rules for disciplinary proceedings that aim to educate the market first and focus punishment on serious and/or recurrent infractions.
In addition to the sandbox and segmentation initiative, SUSEP is investing in the deregulation of insurance products, so as to expand access to the insurance market to different economic players and consumers, and to increase the freedom to contract, in accordance with the Law of Economic Liberty and presumption of parity and equality between the contracting parties.
SUSEP aims to have a simpler registration process for products. Pursuant to Public Consultations issued in 2020, SUSEP also aims to create different regulations for mass insurance and the insurance of big risks. The idea is to create further contractual freedom for equal parties in a, currently, heavily regulated product.
Financial protection is offered against civil liability arising from data privacy breaches (either by hackers or due to a company’s errors and dereliction), including defence costs in investigations and lawsuits – cyber insurance. The following items are examples of covered risks:
Parametric insurance is being developed and commercialised to attend to the market’s need to address losses derived from climate change, especially in the agricultural area. In such insurance, the coverage is based on the definition of parameters of the occurrence of a natural event. In other words, the coverage is related not to a natural catastrophe, such as a hurricane, but to regular events performed in extreme/specific conditions; for example, the claim depends on an excessive amount or absence of rain.
Intermittent insurance is also gaining force in the insurance market. Although such type of insurance covers risks already covered by other policies, it is innovative since it accommodates the needs of constant and rapid changes in everyday life and mitigates the risks underwritten for specific times. Also, it promotes the insertion of consumers from lower economic income layers in the insurance market, making the products more accessible and cheaper.
Brazil still has an insurance market in development. Although there are initiatives for implementing innovative products such as intermittent and parametric insurance, the market still heavily relies on “importing” new products and ideas from foreign, developed markets.
However, SUSEP has been active in its promotion of innovation through several initiatives. The authors expect a new wave of redesigned insurance products to reach Brazil in the next couple of years, generated by SUSEP's deregulation of products.
The Brazilian insurance market is underdeveloped in comparison to other insurance markets such as the United Kingdom.
The COVID-19 pandemic may not have a great impact in the analysis of insurance coverage under business interruption claims, because the Brazilian damages insurance products are designed to cover events based on material/physical damages verified in the insured proprieties/sites. In the context of losses related to COVID-19, the prior material/physical damage to the property is not the cause of the closure of commercial facilities.
It is worth noting that most life insurance in Brazil considers pandemics an excluded risk. However, many insurance companies proactively announced they would not deny coverage for COVID-19 deaths.
The COVID-19 pandemic has also caused a hard market for certain segments that were indirectly affected by the crisis, such as directors' and officers' insurance, credit insurance and renters’ insurance. Premium prices are up and negotiation of different coverages and conditions has been difficult.
As mentioned above, SUSEP is conducting several initiatives for promoting the growth, competitiveness and innovation of the insurance market.
SUSEP’s regulatory agenda for 2020 was focused on:
SUSEP and CNSP issued this year rules about the electronic registration of insurance policies, the segmentation of regulated entities, the regulatory sandbox and the issuance of subordinated debt securities (an additional financing instrument for complying with capital requirements), the disciplinary proceedings and the principles related to the intermediation of insurance policies.
As of 10 December 2020, SUSEP has already issued 24 public consultations on various themes. One of the main agendas is to deregulate the registration of insurance products, promoting different regulations for mass insurance versus insurance for big risks (mainly through Public Consultations No 16/2020, 18/2020 and 19/2020).
Of the several issues that have arisen in the Brazilian insurance market as a result of the financial devastation wreaked by COVID-19, there are two questions, in particular, that merit special attention: (i) can performance bonds be relied on to cover losses incurred as a result of non-performance of a contract due to a force majeure, and (ii) does business interruption insurance cover losses suffered as a result of the pandemic?
Can Performance Bonds Cover Losses Caused by Non-fulfilment of a Contract Due to COVID-19?
The issue with regard to performance bonds is especially pressing given that this type of insurance is the principal means relied on as a guarantee for the obligations of private entities under contracts entered into with the public administration. But that is not the only cause for concern.
The scenario of widespread panic and evident crisis provides fertile ground for fresh legal theories that offer solutions or legal formulae that are custom made for pandemic-related matters. That is a perfectly natural and, in many cases, welcome response. It is, however, necessary to comprehend and to take into account the legal and contractual mechanisms that already exist for the allocation of contractual risks between the parties, in order to ensure that the rush towards new solutions does not generate legal insecurity.
The COVID-19 pandemic is clearly force majeure, being an external, inevitable and unforeseeable event. In situations in which its effects prevent, even temporarily, the fulfilment of the obligation, the general rule under Brazilian law is that the debtor of the obligation is exonerated from liability for the losses caused as a result of the non-performance. The issue of impossibility of performance of contractual obligations as a result of the pandemic is therefore closely related to the question of allocation of risks in the contracts.
The public administration takes on risk because of force majeure
In the case of administrative contracts, the risk arising out of force majeure is allocated, by force of law (Law 8.666/93, Article 65, II, d), to the public administration. Consequently, the negative impacts of the pandemic on such contracts, including loss of revenue suffered by private entities that provide services to the public administration, or the increased costs incurred in performing the contracts require that the administration provide financial and economic compensation to its contractors.
If, due to the significant impact of the pandemic on a public law contract, it becomes hard for the state to bear those costs, there may be an enormous problem for the administration. However, that does not trigger any coverage under the insurance contract, for the simple reason that there is no change in the allocation of risk (which remains with the public administration) or in the legal nature of the pandemic as an event of force majeure. If it proves impossible to recalibrate or restructure the primary contract to deal with existing and future impacts of the pandemic, the parties can extinguish the contract on the grounds of force majeure with compensation by the public authority for the non-amortised investment by the contractor (Law 8.666/93, Article 78, XVII). The parties can also negotiate an alternative way of restructuring the public contract to ensure its performance.
Private law contracts
In relation to private law contracts, for which guarantee insurance policies may also be furnished as performance bonds, the general rule is that the obligation debtor is exempt from liability for losses arising out of force majeure (Civil Code, Article 393, headnote). Given that the obligation debtor is exempt from paying for such losses, there is then no claim against the insurer under the guarantee insurance policy.
Insurance guarantee contracts are, in effect, accessory to the principal (guaranteed) contract. The existence, efficacy and need for the guarantee insurance are tied into the destiny of the principal contract. If, for whatever reason, the obligation debtor (the policyholder of the insurance contract) is exempt from paying for loss suffered by the obligation creditor (the insured party), then there is no claim that can be made against the insurer. The reason for that is clear: an obligation that is unenforceable against the policyholder is beyond the scope of cover under the insurance contract.
Possibility of shifting risk of force majeure
There is, however, nothing to prevent the parties to a contract from apportioning the risk of impossibility of performance of the contract due to force majeure. That applies both to private law contracts and public-private agreements. The parties may, if they see fit, agree to shift the riskof force majeure onto the obligation debtor, who can then be held liable for non-performance of the contract even if the default is caused by an unavoidable and unforeseeable external event (Civil Code, Article 393, headnote, 2nd part (for private law contracts) and Law No 11.079/04, Article 5º III (for public-private contracts). Then, the issue becomes a bit more complicated under insurance law.
Standard insurance clauses provide no cover for force majeure
The Brazilian insurance regulator, SUSEP, regularly publishes binding norms and guidance to the insurance market, in the form of circulars. Insurance policies issued in Brazil generally incorporate standard clauses that are set out in the annexes to SUSEP Circular 477/13. Said clauses stipulate that the insured party loses the right to insurance cover in the event of there being force majeure.
The authors can therefore envisage the following hypothetical situation: the parties agree in the principal contract (the guaranteed contract) that the obligation debtor will be liable to pay charges for delayed performance, even if said party’s failure to comply with the obligation was due to force majeure. During the contractual term, government requirements or restrictions imposed to combat the pandemic prevent the obligation debtor from complying with the obligation within the originally agreed timeframe. The delay causes loss to the obligation creditor, who then files an insurance claim based on the performance bond guarantee insurance. Is there insurance cover? Assuming the relevant facts are duly proven, the answer is no. The reason for that is clear: whilst in accordance with the principal contract, liability rests with the obligation debtor; the insurance contract stipulates loss of right to insurance cover in the event of non-performance of the contract due to force majeure.
Therefore, in circumstances in which, under the terms of the principal contract, the obligation debtor is not liable for losses caused by the pandemic, there is no claim that can be asserted against the insurer. If, on the other hand, the obligation debtor has assumed the risk of losses caused by force majeure, it will then be necessary to analyse the terms of the insurance policy in order to ascertain whether the standard SUSEP clauses have been incorporated. If so, the insured party will not be entitled to cover. It is important to bear in mind that it is open to the parties entering into a guarantee insurance contract to agree that there will be cover for losses that arise from force majeure, provided that the guaranteed contract places on the obligation debtor the liability for such losses.
Does Business Interruption Insurance Cover Losses Caused by COVID-19?
The second question (whether business interruption insurance covers losses suffered as a result of the COVID-19 pandemic) is also of urgent relevance.
The anti-COVID lockdown measures imposed by central government and local authorities brought economic activity to a virtual standstill for at least three months of 2020. No area of business or commerce has been left unscathed and very few companies have avoided a severe drop in turnover. That has led, as in other countries, to a significant rise in insurance claims under business insurance policies for loss of future earnings caused by the official measures to combat the pandemic.
Loss of earnings protection is usually additional and accessory to comprehensive business insurance. Cover is provided for the profits that the company would have made (based on a reasonable assessment) had it not been for the total or partial stoppage of its activities. The stoppage must, in turn, have been the result of "material" (ie, physical) damage resulting from an accidental event. This form of cover, in the Brazilian market, is almost always part of the range of insurance protection provided against physical damage to property.
In SUSEP Circular 560, dated 7 November 2017, the regulator defined the purpose of loss of earnings insurance as follows (Article 2): “the purpose of Loss of Earnings insurance is to guarantee compensation for the losses that result from interruption or disruption to the insured’s business caused by the occurrence of events detailed in the policy”.
Further in accordance with the provisions of SUSEP Circular No 560/17, loss of earnings insurance has the following sub-modalities:
The Circular provides that it is open to insurance companies to offer additional forms of cover provided that the risks in question are directly related to the business activities from which the earnings are expected.
The stoppages that resulted from COVID-19 are not, in principle, subject to the guarantee for loss of future earnings, because they arise directly from the acts of a government authority in a context of extraordinary risk, for which cover is generally excluded in insurance policies. Furthermore, given that cover for loss of future earnings is accessory to the principal cover, it requires the occurrence of an event that is covered in the basic cover of a business insurance policy, which is for physical damage to property.
The exclusion of the so-called extraordinary risks is based on operational considerations, given that mutual funds are generally not in a position to adequately cover massive risks that have the potential for widespread and very serious losses that cannot be adequately planned for in actuarial forecasts.
With that in mind, the market is closely monitoring legislative developments. The Brazilian Senate has recently approved Law 13.979 of 2020, which determinates mandatory cover for all COVID-19-related deaths in life insurance policies, prohibiting any restriction in insurance contracts in terms of cover for illness or injury arising out of a public health emergency. Similarly, the Chamber of Deputies has recently approved a Draft Law (PL No 1179/2020), governing Emergency and Transitional Provisions during the COVID-19 pandemic.
UK Supreme Court judgment on FCA’s business interruption test case arouses interest in Brazil
In that context, the September 15th ruling of the High Court in London onFinancial Conduct Authority v Arch and Others has attracted considerable interest.
The FCA, the UK’s insurance and financial regulator, filed the test case on behalf of around 370,000 policyholders and asked the court to examine 21 model clauses from the policies of eight insurers, in order to establish whether COVID-19 could be considered to have caused physical damage giving rise to cover for loss of future earnings.
The High Court held that loss of future earnings could be considered a covered risk in the context of a pandemic, without a finding of direct physical damage being necessary, as is already the case in circumstances in which an asset is rendered unusable due to contamination.
The test case was not intended to encompass all possible disputes, but, rather, to resolve certain significant contractual uncertainties and “causation” issues in order to provide clarity for policyholders and insurers. The judgment does not determine how much is payable under individual policies, but sets out the basis for doing so.
The ruling on the test case will have a merely persuasive effect on future rulings and is binding only on the insurers that are defendants in the proceedings. The case has been appealed to the UK Supreme Court and was pending judgment at the time of writing.
This ruling is of considerable interest to the Brazilian insurance market, in that it reflects an underlying approach towards a worldwide health emergency that, if followed by Brazilian courts, will have a major impact on insurers and reinsurers.
To date, no similar case has reached one of the Brazilian Superior Courts (the Superior Court of Justice or the Federal Supreme Court) and there is therefore no clear indication of the approach that will be adopted. The current thinking seems to be that the Brazilian courts may not have as much room for manoeuvre in that, in general, policies in Brazil clearly stipulate that loss of future earnings is only covered if it arises directly out of physical damage to property that is covered in the policy. Cover for loss resulting from an “order issued by an authority" is generally excluded, on the basis that it is an “extraordinary risk”. But these are uncertain times and there may be further legislative and judicial developments in the near future.