Insurance & Reinsurance 2023

Last Updated December 28, 2022

Brazil

Law and Practice

Authors



Ernesto Tzirulnik Advocacia is an insurance and reinsurance boutique law firm that advises clients on loss-adjustment procedures, legal and regulatory issues, complex insurance, reinsurance, brokerage litigation, contract law, tort law, and corporate conflicts. During its nearly 40 years in practice, the firm has established an excellent reputation in the market, having simultaneously represented almost all Brazilian insurance companies, Brazil’s monopoly reinsurer, and international reinsurers in strategic issues. After decades of advising insurance and reinsurance companies, ETAD has become known for representing or advising large policyholders on contentious and non-contentious complex insurance matters, and is also respected for strategic contractual and corporate litigation. It is part of ETAD’s policy to tailor teams for each case according to its needs, feeding a dynamic work environment that engages young partners in high-profile cases, nurturing exchange within a team of diverse age, gender and background.

Brazil’s main sources of insurance and reinsurance law are as follows.

  • The Brazilian Civil Code (Law No 10.406/2002) Articles 757–802 establishes key rules pertaining to insurance contracts in general, non-life insurance and life insurance.
  • The Brazilian Commercial Code (Law No 556/1850) Articles 666–731 establishes specific rules applicable to maritime insurance.
  • The Brazilian Aeronautical Code (Law No 7.565/1986) Articles 281–286 governs some aspects of aviation insurance. 
  • Decree-Law No 73/1966 establishes Brazil’s National System of Private Insurance (Sistema Nacional de Seguros Privados), whose executive agencies, the National Council of Private Insurance (Conselho Nacional de Seguros Privados – CNSP) and the Superintendency of Private Insurance (Superintendência de Seguros Privados – SUSEP) are tasked with regulating the insurance and reinsurance market for the benefit of policyholders. It also provides some rules on insurance contracts.
  • Complementary Law No 126/2007, which abolished the federal government’s monopoly on reinsurance (formerly exercised through the Instituto de Resseguros do Brasil – IRB), establishes the rules on reinsurance and retrocession contracts.
  • As Brazil’s legal system on insurance is incomplete and outdated, the executive agencies (the CNSP and especially the SUSEP) supplement the law with extensive regulation on insurance and reinsurance. The most relevant rules on prudential supervision and specific insurance branches (property insurance, life insurance, etc) are found in the CNSP’s resoluções (resolutions) and the SUSEP’s circulares (circular letters).
  • For policies taken by consumers (ie, those who do not take insurance for business activities), Brazil’s Consumer Protection Code (Law No 8.079/1990) provides important rules on business practices (eg, tie-in sale is forbidden) and policy content (eg, policy provisions that excessively restrict consumers’ expected rights related to the insurance contract are null and void).
  • Where health insurance is considered a type of insurance, Law No 9.656/1998 establishes detailed rules on health insurance contracts, and Law No 9.961/2000 enacts and defines the legal powers of Brazil’s National Health Agency (Agência Nacional de Saúde – ANS), an independent regulatory agency.
  • Where complementary welfare is considered a type of insurance, Complementary Law No 109/2001 regulates open and closed pension funds. Law No 12.154/2009 establishes two executive agencies responsible for pension funds supervision: the National Council of Complementary Welfare (Conselho Nacional de Previdência Complementar – CNPC) and the Superintendency of Complementary Welfare (Superintendência Nacional de Providencia Complementar – PREVIC).

In the last decade, Brazil has made significant efforts to increase the relevance of precedent in legal practice. Despite these measures, such as the promulgation of a new Civil Procedure Code (Law No 13.105/2015), the courts, especially Brazil’s highest court on federal law (the Superior Court of Justice or Superior Tribunal de Justiça – STJ), have not adopted a stable body of precedent.

Oversight of the insurance and reinsurance sector falls to many different independent and executive regulatory agencies.

  • Decree-Law No 73/1966 – the CNSP and the SUSEP are responsible mainly for supervising insurance and reinsurance companies and open pension funds. The CNSP, mostly through resolutions, is supposed to establish general guidelines and rules on solvency, insurance policy, reinsurance in general, co-insurance and insurance, and reinsurance brokerage. The SUSEP is tasked with complementing and executing CNSP guidelines, which, in practice, results in extensive supervisory activities, due to the vast powers directly attributed to the SUSEP (eg, the agency is charged with setting guidelines for all insurance policies) and to the usually open-ended regulation produced by the CNSP.
  • Law No 9.961/2000 – the ANS, as the only independent agency between all regulatory bodies, is responsible for health insurance regulation. It establishes limits for yearly premium adjustments, defines which procedures must be covered, authorises health insurance writing, and conducts prudential oversight of health insurers.
  • Law No 12.154/2009 – the CNPC and the PREVIC, which mirror the CNSP and the SUSEP (all four of which are likely to be merged to reduce redundancy), supervise closed pension funds in all capacities, focusing mainly on authorisation for new funds.

Only legally authorised entities (which in any case must be corporations) are allowed to write insurance and reinsurance. Insurance and reinsurance companies must comply with legal and regulatory requirements established in Decree-Law No 73/1966 and CNSP Resolution 422/2021.

Legal authorisation for insurers and reinsurers is given in two steps. First, a legal representative of the future shareholders must request formal authorisation to constitute a (re)insurance company from the SUSEP. The request must be accompanied by:

  • a sound business plan;
  • a full description of the corporate group and the shareholders;
  • proof of financial and economic capabilities suitable for the (re)insurance branch(es) in which the corporation intends to operate, especially the minimum partnership capital requirement, set by CNSP Resolution 432/2021;
  • a description of the financial resources to be used in the (re)insurance company; and
  • any other document demanded by the SUSEP to prove the reputation and good character of the future relevant shareholders.

After authorisation is granted, the (re)insurance company must be constituted within 90 days and prove the origin of the resources used. Then, the SUSEP grants authorisation to underwrite (re)insurance in the requested branches. There is no regulatory distinction between excess lawyers and reinsurance and other insurance branches, but there are more flexible rules pertaining to SME insurance and business insurance. Both branches are subject to less regulation, either by having lighter authorisation requirements (SME insurance – SUSEP Circular Letter 439/2012) or less stringent supervision on policy content (a type of business insurance, in particular large or jumbo risks – CNSP Resolution 407/2021).

Regulatory authorities have recently loosened authorisation requirements for certain types of insurance companies, aiming to promote innovation through CSNP Resolutions 381/2020 and 417/2021 and SUSEP Circular Letters 598/2020 and 636/2021. This so-called regulatory sandbox grants a temporary authorisation to operate, which must be converted into permanent authorisation, with all the requirements mentioned above, within three years of active insurance writing.

International reinsurers follow a different procedure, as they are already constituted in their home jurisdiction. They must only be registered with the SUSEP to be allowed to write in Brazil. According to Complementary Law No 126/2007, the reinsurer must:

  • appoint a representative residing in Brazil;
  • present its latest financial statements;
  • prove itself to be regularly constituted in its original jurisdiction;
  • demonstrate to have been writing reinsurance for more than five years in the branch in which it intends to operate;
  • prove to not have any solvency issues;
  • possess more than USD150 million in assets; and
  • have its individual solvency rated at least BBB or equivalent by selected risk-rating agencies.

Where the international reinsurer aspires to be an admitted reinsurer (ie, not just an eventual one), it must also establish a representation office in Brazil and deposit USD5 million (non-life insurance) or USD1 million (life only) in an authorised bank account.

Payment of insurance premiums is considered a financial transaction and is subject to a federal tax on financial transactions (IOF). According to Decree No 6.306/2007, the federal government is allowed to tax most insurance transactions (rural insurance is exempt from taxation) up to a rate of 25% of the premium paid, but the effective rate is very diverse – reinsurance, obligatory insurance, credit insurance, performance bonds and other types of insurance currently have a taxation rate of 0%. Life and health insurance is currently subject to a 2.38% rate, while other insurance branches not specified in the decree are subject to a 7.38% rate. 

Brazilian law relating to overseas-based insurers is different from the rules on international reinsurers.

Overseas Insurance

Under Complementary Law No 126/2007, all policies related to risks located in Brazil must be taken in Brazil. Only if local insurance companies are not willing to write that risk, or if the specific insurance branch is not operated in Brazil, can the insured search for coverage in other jurisdictions. Proof that insurance coverage is not locally available is regulated by Circular Letter No 603/2020: the insured must present the formal refusal to underwrite from at least five insurance companies operating in the Brazilian market.

Nonetheless, global insurance programmes are not forbidden by Complementary Law No 126/2007. Only risks located exclusively in Brazil cannot be insured by international insurers through policies taken by Brazilian residents or companies. International groups often use this restrictive wording to bring their usually more protective policies to their local operation.

Another entirely different matter is applicable law. Recently, the STJ has ruled that international insurance contracts (ie, with international insurers), although concluded in Brazil, can stipulate which law governs the contract. This is a liberal interpretation of Brazilian law (Decree-Law No 4.657/1942) adopted in some STJ rulings which is yet to be confirmed by the Constitutional Court (STF). Mainstream consensus is that Brazil has not yet clearly adopted full party autonomy on this choice-of-law matter.

Overseas Reinsurance

Brazilian law related to reinsurance fully allows international reinsurance contracts and reinsurance companies. Complementary Law No 126/2007 separates authorised reinsurers into three groups:

  • local reinsurers – reinsurance companies incorporated in Brazil (albeit usually as part of an international group) that have the right to preferentially write 40% of the global reinsurance cession from all insurers operating in Brazil and are the only type of reinsurer allowed to cover specific life insurance policies and pension funds;
  • admitted reinsurers – international companies that establish an office in Brazil and deposit a given amount of capital in an authorised financial institution, in addition to fulfilling all registration requirements discussed in 2.2 The Writing of Insurance and Reinsurance;
  • eventual reinsurers – international companies that only fulfil the registration requirements discussed in 2.2 The Writing of Insurance and Reinsurance and are not incorporated in a tax haven (defined by CNSP Resolution 422 as a jurisdiction that does not tax income, has an income tax rate lower than 20% or does not require the company to publicise its shareholder structure).

According to Complementary Law No 126/2007, the federal government can set specific cession limits to eventual and admitted reinsurers to maintain reinsurance contracts tied to Brazil. However, following Decree No 10.167/2019, insurers are allowed to cede 95% of all premiums to eventual and admitted reinsurers, making both types of reinsurers equivalent for the purpose of cession.

Mirroring the insurance system, CNSP Resolution 168/2007 provides that if there is not any authorised reinsurer (local, admitted or eventual) willing to write the risk, the insurer is allowed to cede to non-authorised reinsurance companies after formally consulting all reinsurers.

According to CNSP Resolution 168/2007, any reinsurance contract related to risks in Brazil must be governed by Brazilian law unless the parties elect arbitration as their preferred dispute resolution method. In the prospective regulation on the subject, set to be enacted in 2023, this rule will likely not be changed.

Fronting is allowed in Brazil. Insurers are required to retain 50% of all premiums received in a particular year pursuant to CNSP Resolution 168/2007. However, the mandatory retention is determined globally. It is, therefore, possible for insurance companies to cede all or almost all risk to reinsurers in specific reinsurance treaties or facultative contracts. In large or jumbo risks, and with policies issued by insurers that are part of large reinsurance groups, this is a recurrent practice frequently tied with claims control or co-operation clauses. As the cedant is the only liable party before the insured under Complementary Law No 126/2007, some retention (even if negligible) is typical.

Consulted market agents report no overarching trend in insurance M&A. There were relevant mergers in health insurance, which has seen phenomenal consolidation over the past few years. In large risks and sophisticated insurance, the increasing presence of international reinsurance groups continues to blur the line between insurance and reinsurance.

By contrast, in retail insurance, a market dominated by large Brazilian companies and bancassurances, technological improvements are streamlining internal processes and facilitating insurance distribution. Insurtechs, the expected target of M&A in insurance, are usually grown inside or in close relation to big insurance. They are not currently focused on displacing traditional insurers – most insurtechs in Brazil threaten the insurance brokerage and traditional insurance agency business, such as with the recent growth of manager general agents (MGAs) and the creation of insurance service initiation companies (SISS).

Insurance and reinsurance contracts are distributed in different ways in Brazil.

Reinsurance Distribution

According to Complementary Law No 126/2007, facultative and treaty reinsurance contracts are supposed to be directly concluded between the cedent and reinsurer or by way of a legally authorised intermediary (the reinsurance broker).

The reinsurance broker must be authorised to operate in Brazil by the SUSEP. Under CNSP Resolution 422/2021, reinsurance brokers must comply with regulatory requirements different from those applicable to insurance brokers. The most relevant distinction is that reinsurance brokers are required to have professional liability insurance (E&O) with a minimum BRL10 million global limit.

Insurance Distribution

Insurance is distributed by a myriad of channels, and recently authorities have created new ones through so-called open insurance (CNSP Resolution No 415/2021). Direct sale, insurance brokerage, insurance agents and distribution deals with large financial companies are the most-used venues.

  • Insurance companies are allowed to receive and accept insurance proposals directly from the proponent, waiving any insurance intermediation. In this case, the insurance company must still pay the usual brokerage commission to a fund administered by the National Insurance School Foundation (FUNENSEG) pursuant to Law No 4.594/1964.
  • Insurance brokers are the legally preferred channel for insurance distribution. Insurance brokerage is governed by three main laws:
    1. The Brazilian Civil Code (Law No 10.406/2002) enacts general rules relating to brokerage in Articles 722–729;
    2. Law No 4.594/1964 establishes specific rights and duties for insurance brokers and requires operating authorisation for insurance brokerage. In Brazil, brokers are responsible for counselling the policyholder on which is the best insurance product in the market for its purposes; and
    3. Decree-Law No 73/1966 provides that brokers are part of the National System of Private Insurance and empowers the SUSEP to grant operating authorisation to brokers. The most prominent requirement is a specific professional qualification for working in an insurance branch group (mostly life and non-life insurance).
  • Insurance agencies are generally limited to retail insurance, mainly distributing travel, life and certain types of casualty insurance (eg, extended warranty insurance). Large retailers are typically considered the biggest insurance agents. Agents are subject to the following regulations:
    1. The Brazilian Civil Code (Law No 10.406/2002) enacts general rules relating to agency in Articles 710–721;
    2. Law No 4.886/1965 provides basic rules on commercial agency, focusing mainly on protecting the agent as the economically weaker contractual party; and
    3. CNSP Resolution 431/2021 establishes specific rules on insurance agents (eg, it forbids an agent from underwriting on the insurer’s behalf).
  • Since most retail insurance is operated by bancassurance conglomerates, banks are frequent venues for taking policies. They are not typical insurance agents – thus, the aforementioned rules do not directly apply – as they are usually beneficiaries of the policy taken by the client (eg, in payment protection insurance) or are the policyholder in group insurance. Authorities have tried to curb the latter through CNSP Resolution No 439/2022, which forbids group insurance administration only for financial gain.

According to Article 766 of the Brazilian Civil Code (Law No 10.406/2021), the insured must disclose all relevant information to the insurer when the contract is being negotiated.

Case law and jurisprudence have recently highlighted that the insurance company must at least refer to which kind of information may be relevant to write the risk. Where a questionnaire is provided, the courts have mostly referred to the questions in determining whether the information allegedly omitted was material or not. This is frequently discussed in life or health insurance litigation (therefore, in consumer insurance contracts). Any documents not demanded or questions not asked, unless obviously relevant, cannot be levied against the policyholder or beneficiary to deny coverage.

If any misrepresentation is made, the insurance company may demand additional premium from the insured, who may lose coverage only if the insurance company can prove wilful misconduct or gross negligence in omitting information. Contrary to expectations, case law shows that the gross negligence threshold is easily achieved. Especially in business insurance, courts are rarely impressed with allegations that a misrepresentation was made by mistake, without any intention to hurt insurers.   

Insurance intermediaries can act on behalf of both insurers and policyholders, although in a legal sense none represent either insurance companies or insureds. Brokers, in general, are perceived to be acting on behalf of policyholders, and are thus legally required to aid policyholders in choosing, negotiating, and administering the insurance contract according to Law No 4.594/1964 and longstanding practice. For instance, in large-risks insurance, claims made by the insured to any insurer are frequently handled by brokers, who typically mediate loss-adjusting communications.

Conversely, in retail insurance (such as policies issued by bancassurance conglomerates) brokers are frequently part of the same economic group as the insurers and are incorporated for the sole purpose of raising commissions. “Contingent commissions” agreements with insurance companies are unfortunately common in Brazil, making brokers financially interested in quashing or reducing claims brought by policyholders. Therefore, on whose behalf an intermediary is acting must be determined on a case-by-case basis.

The Brazilian Civil Code (Law No 10.406/2021) Article 757 establishes the five distinguishing features of any insurance contract:

  • guarantee or coverage;
  • insurable interest;
  • risk;
  • premium; and
  • enterprise.

By legal definition, insurers guarantee the legitimate interests of insureds and receive a premium. The insured must, then, have a qualified interest – that is, an economic or otherwise relevant relation to a thing or a person worthy of protection – to be able to insure it. The legitimacy of the interest is typically only called into question to prohibit speculation through insurance. In life insurance, for instance, the Civil Code requires the policyholder to expressly declare its interest in the life of the insured person, and a kinship or likewise worthy link between insured person and policyholder is required for the contract to be valid.

Insurance contracts are consensual, although the Brazilian Civil Code demands that the insured submit an insurance proposal in writing to the insurance company. Policies are seen as having only probatory value of the agreement and it is longstanding practice that insurance contracts can be formed by simple silence of the insured after receiving a proposal.

Recently, and in contravention to the Brazilian Civil Code, the SUSEP has tried to change this through Circular Letter No 642/2021. Under this illegal but still-in-force regulation, proposals must be signed by the insured and acceptances must be given in writing or in other specific way by insurers.

According to the Brazilian Civil Code (which is supplemented by SUSEP Circular Letters No 621/2021 and No 667/2021, and CNSP Resolution No 407/2021), the insurance policy should at least contain, in a clear and direct way:

  • the name of the insured or beneficiary, if applicable;
  • protected interests;
  • covered risks;
  • liability limits;
  • premium owed by the insured; and
  • contract duration.

Parties not named as insureds can be beneficiaries of an insurance contract. This is the rule and not the exception in some branches (eg, Construction All Risks (CAR) insurance). The insured must of course have a legitimate interest threatened by insurable risks in that specific insurance branch to be able to benefit from coverage.

Disclosure obligations fall only on the insured taking the policy if they are the only party involved in negotiations. In certain insurance branches, such as bonds, insurance companies may question policyholders and beneficiaries alike before writing the risk. In that case, both are obliged to disclose what was asked and what is obliviously relevant to risk assessment must be informed to insurers.

The rights and duties of the parties are not inherently different regarding reinsurance and consumer contracts. As with any rules related to good faith and fair dealing, case law adopts a more defensive stance when dealing with consumers and other vulnerable parties, while weakening the influence of many protective statutes on commercial contracts negotiated by experts.

Alternative risk transfer (ART) transactions are not at all common in Brazil, although a recent federal law (Law No 14.430) created an insurance-linked security (the Letra de Risco de Seguro – LRS) and a specific type of insurance company (the Seguradora de Proposito Específico – SSPE) focused on ART. As far as is known, the market has not engaged much with these new tools and there is no regulation classing them as insurance or reinsurance contracts.

International ART transactions are even rarer in Brazil. Local insurance and reinsurance companies do not frequently use them and there is no specific regulation on ART transactions. Considering the broad and economically focused language of CNSP Resolution No 422/2022, which establishes general rules on solvency, ART transactions could be treated as reinsurance for solvency purposes.

Where the insurance policy is drafted only by the insurance company (or by reinsurers), as is the case in almost all situations, the Brazilian Civil Code (Law No 10.406/2002) imposes the so-called contra proferentem interpretation – ie, an ambiguous contract term should be construed against the drafter. Despite clear wording in the law, case law has been somewhat reluctant to broadly interpret insurance policies and frequently defers to the actuarial stability argument. As policies in Brazil are notoriously badly written, resorting frequently to mistranslations from international sources, the contra proferentem rule should not be used sparingly.

In addition to this specific and overstated rule in insurance, Brazil’s rules on interpretation are very similar to those found in other civil law jurisdictions. The aim of any contractual interpretation is to reveal common intent registered in a party’s declarations. To that end, circumstances, “usual practice”, reasonableness and good faith are all tools used in relevelling or reconstructing the common will manifested in the declarations – there are few binding rules on interpretation, such as the above-mentioned contra profentem rule. Four corners clauses, although frequent in commercial contracts, hold little sway.

Although not referred to as such, as a “warranty” is a foreign concept for civil law jurisdictions, most policies impose duties on the insured whose breach entails loss of coverage, or which must be observed to ensure coverage in the case of loss. It is not clear how far insurers can impose these duties on policyholders, as Decree-Law No 73/1966 prohibits any clause that affects coverage not linked to a legally established cause of coverage loss, such as risk aggravation or late-claim notice. Case law typically combines both the policy clauses and the closest legal provision in most rulings, and requires that the warranty breach be directly related to the loss discussed.

As with warranties, “conditions precedent” are a foreign concept for civil law jurisdictions, and are by contrast rare in insurance contracts in Brazil. Insurers usually do not tie the existence of the insurance contract to any specific event. A noteworthy exception are the “open policies” in transport insurance, which require the insured to disclose to the insurer certain facts before coverage is granted to each trip.

Disputes over coverage are usually addressed by ordinary litigation. Arbitration is rare in insurance, even though policies frequently allow arbitration as a dispute resolution method. In consumer contracts, under the Brazilian Consumer Protection Code, compulsory arbitration clauses are forbidden. By contrast, arbitration is commonplace in reinsurance contracts.

Under the Brazilian Civil Code (Law No 10.406/2002), the limitation period for an insurance claim in Brazil is one year. The date on which this period starts is a very disputed subject. The dominant view in case law was that the period starts from the loss discovery and is suspended during loss-adjusting procedures. More recently, the courts have been adopting a different starting point for the limitation period: the moment in which the insurer refuses coverage to the policyholder or beneficiary.

Any beneficiary can enforce an insurance contract, be they named in the policy or not. Injured third parties can also directly enforce an insurance contract against the insurer in civil liability insurance, despite breached warranties by the insured.

According to Decree-Law No 4.657/1942, the law applicable to insurance contracts is the law of the proponent’s residing county, and Brazilian courts have jurisdiction over disputes where the respondent resides in Brazil, or where Brazil is the place in which performance should be rendered.

As discussed in 3.1 Overseas-Based Insurers or Reinsurers, Brazil is one of the last jurisdictions in which party autonomy on choice of law is not clearly established, despite some rulings to this effect by the country’s highest federal court.

According to Brazil’s Civil Procedure Code (Law No 13.105/2015), litigation in Brazil starts with a complaint filed either in a state or federal court. After preliminary analysis, the judge orders the respondent to be served.

Against the claimant’s complaint, the respondent may either recognise the claimant’s enforced right or respond to the complaint, which can lead to a counterclaim.

The judge then enquires of the parties regarding evidence. After all relevant evidence is procured, parties may present final arguments summarising all that has been presented thus far.

The judge subsequently renders their final judgment on the case. The losing party may appeal to the state or regional federal court, which reviews the ruling made by the singular judge in collegiate bodies. After the regional or state court reviews the decision, the losing party can appeal either to the Superior Court of Justice (Superior Tribunal de Justiça – STJ) on grounds of federal law violation by the lower court, or to the Supreme Federal Court (Supremo Tribunal Federal – STF) on grounds of a constitutional violation by the lower court or the STJ.

Pursuant to Brazil’s Civil Procedure Code (Law No 13.105/2015) and Arbitration Law (Law No 9.307/1996), national provisional and definite rulings or arbitration awards can be enforced in Brazil, requiring either a simple request or a specific petition. By contrast, under the Brazilian Constitution, foreign judgments must be previously approved by the STJ, which assesses whether or not the judgment violates Brazil’s public policy or res judicata rule.

Arbitration clauses can be enforced both in commercial insurance and reinsurance contracts under the Brazilian Arbitration Law (Law No 9.307/1996). As insurance contracts are frequently formed by adhesion to already drafted polices, the adhering party must consent either by specifically signing the arbitration clause or by enforcing the arbitration clause themselves.

The Brazilian Arbitration Law (Law No 9.307/1996) treats an arbitration award as having the same legal effect as a court ruling. As such, the same restrictions mentioned in 9.4 The Enforcement of Judgments apply to foreign arbitration awards, but the approval procedure is governed by the Arbitration Law (Law No 9.307/1996), which mirrors the New York Convention (incorporated by Decree No 4.311/2002).

Alternative dispute resolution methods such as mediation play a small role in insurance and reinsurance disputes in general, despite being a growing field in other matters.

Under the Brazilian Civil Code (Law No 10.406/2002), insurers are liable for all damages caused by late payment of claims if the loss-adjustment process is not regularly conducted. According to SUSEP Circular Letter No 621/2021, insurers also have 30 days after receiving all requested documents to settle the claims. If the deadline is not observed, interest must be paid to the insured.        

According to the Brazilian Civil Code (Law No 10.406/2002), insurers have a right of subrogation following the payment of a claim – any act of the insured that diminishes or extinguishes this right is considered void.

In general, case law pertaining to subrogation has been overprotective of insurance companies. Even though they supersede the insured as creditor before the responsible party, insurers are subject to new limitation periods, extending claims almost indefinitely, and some case law frees them even from arbitration clauses that bind the insured.

Insurtechs are generally seen as the latest big change in the Brazilian insurance market and are expected to be as relevant as fintechs have been to the financial services sector. Having such big shoes to fill means that it is very difficult to accurately measure real developments taking in place in the Brazilian insurance market due to insurtechs.

Insurtechs have had an impact on insurance distribution. Most successful Brazilian insurtech enterprises tackle how insurance is processed internally (eg, premiums and claims), promoted to the consumer, and sold to the policyholder – not insurance contracts or economics. In that capacity, there is healthy co-operation between traditional innovation-focused business models and insurance businesses, who feel the impulse to improve provided services. The biggest insurers in Brazil have dedicated teams and investment lines for improving internal processes.

Nevertheless, insurance is a more conservative business than financial services in general (especially banking). It is difficult to affect the core product without financial backing of a large financial conglomerate or international reinsurers. Underwriting, insurance policies wording, loss adjusting and claims settling are, by their nature, very similar between all insurance and reinsurance companies. There is no insurance without a certain degree of standardisation. Hence, in core insurance, insurtechs are yet to have any meaningful impact, particularly on insurance branches that rely heavily on reinsurance (eg, large or jumbo risks), although some marginal change can be seen (eg, in bike insurance).

In the last few years, Brazilian regulatory authorities have been playing a very active role in fostering innovation in the insurance sector. The biggest action taken is the creation of the so-called regulatory sandbox (CSNP Resolutions 381/2020 and 417/2021), in which new insurtechs can be incorporated with less stringent regulatory requirements and oversight for a maximum period of three years. The aim is to allow new ideas to be tested in a friendlier – albeit controlled – environment.

Despite these efforts, it is too early to tell how successful they have been. Insurtechs, although providing new and interesting solutions, are currently very distant from true competitors to the established insurance companies in Brazil, who are mainly branches of the biggest financial conglomerates in the country.

The regulatory authorities have been quick to introduce regulation on new insurance policy types such as cyber-risks insurance (a special liability policy governed by SUSEP Circular Letter 638/2021). The market has not, in return, been so eager to face emerging risks. High deductibles and restrictive underwriting have been the usual answer, as new insurance products are seen as too uncertain or volatile.

This is not an isolated trend in the Brazilian insurance sector. Despite relevant general growth in the last few years, anything other than small retail insurance is facing persistent crises and being left to international groups and reinsurers who are willing to write.

Brazil is not a leading market in developing alternative solutions to address emerging risks. Almost all innovation on insurance comes from more established markets – ie, Europe (in particular the UK) and the United States.

COVID-19 obviously provoked significant change in the insurance sector. Even though infectious diseases or pandemics were an excluded risk in almost all life insurance policies, most life insurers stood ready to cover the deaths caused by COVID-19. This branch of insurance also experienced unprecedented growth in 2022: an almost 18% increase in premiums paid since 2021. In non-life branches, loss ratios plummeted, as most insurance policies (adopting common law countries’ standards) tie coverage to physical damage. As economic activity picked back up at the tail end of the COVID-19 pandemic, loss ratios started to normalise both in life and in non-life insurance.

In terms of legal development, Brazil has experienced unprecedented change in the (re)insurance legal framework. Almost all relevant insurance regulation was either revised or revoked in the past four years. It is not clear yet how the administration will deal with this – ie, whether it will uphold most created rules, revoking only those which the current president’s party have challenged in the Constitutional Court, or whether it will promote another general revision of insurance regulation.

The three final areas for which regulation was drafted but not approved were reinsurance, transport insurance and complementary welfare. It would not be surprising to see these rules enacted even though the new administration favours a substantially different economic policy to that pursued in the last four years by the Ministry of Economy, to which insurance regulators are subordinate.

It remains to be seen whether the Insurance Contract Law Bill will gather steam in Congress (PLC 29/2017) in the following months. If the bill does become law (it only needs to be voted for by the Senate), all rules on insurance policy will be changed to become clearer and more aligned with the practice in other jurisdictions, such as Portugal, Spain, France, Belgium, Switzerland and Germany.

Among the last groups of CNSP resolutions proposed by the former federal government insurance regulators was a broad revision of all rules related to reinsurance contracts (cession limits, formation, etc). One of the most relevant provisions in the drafted resolutions is the increase to global cession limits imposed on all insurance companies from 50% (CNSP Resolution 168/2007) up to 90%, favouring fronting operations in Brazil and reaffirming the consistent trend towards reinsurer empowerment in the country.

Ernesto Tzirulnik Advocacia

São Paulo
Rua Ceará 202
Pacaembú
CEP 01243-010
Brazil

+55 11 3829 0202

etad@etad.com.br https://www.etad.com.br/
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Trends and Developments


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RPZ Advogados has a wide range of experience dealing with matters related to geological episodes, dam ruptures, fires, explosions, machine breakdowns, business interruptions, plane crashes, navigation accidents, cyber-attacks, engineering risks, class actions, judicial and sanctioning administrative proceedings, criminal investigations and inquiries, professional errors, default of contracts in the public and private sectors, and environmental damages, among others. Over the past few years, the firm has worked on some of the most complex claims that have occurred in Brazil and abroad, always acting in the interest of national and foreign insurers and reinsurers. The firm has offices in the cities of Rio de Janeiro and São Paulo and works in accordance with the best market practices in data processing, in compliance with Brazilian and European legislation. Its team comprises 12 lawyers with extensive expertise developed over years of (re)insurance practice at national and international levels.

Brazil – Recent Developments of a Regulatory Nature

The year 2022 has been an eventful year in terms of new norms being passed by regulatory bodies in Brazil, such as by the Superintendency of Private Insurance (SUSEP) and the National Council of Private Insurance (CNSP). In this article, the authors refer with emphasis to SUSEP Circular No 666 of 27 June 2022, as well as CNSP Resolution No 451 of 19 December 2022.

SUSEP Circular No 666/2022

SUSEP Circular No 666/2022 deals with the sustainability requirements to be complied with by insurance companies, open complementary pension fund entities (EAPCs), savings bonds companies, and local reinsurers.

There is a growing number of insurers and reinsurers that are decarbonising their portfolios and incorporating weather events and regulatory transitions into their business decisions. According to this Circular, companies must create processes and controls to identify, evaluate, measure, treat, monitor and report the risks to which they are exposed.

For this, three specific instruments should be adopted: a policy for managing sustainability risks, a sustainability policy and a sustainability report.

Sustainability risk management

The management of sustainability risks policy must be compatible with the size of the supervised company, the nature and complexity of its operations and the materiality of the sustainability risks to which it is exposed.

The supervised company must prepare a materiality study in order to identify, evaluate and classify, by materiality levels, the sustainability risks to which it is exposed, taking into consideration the characteristics of its activities, operations, products, services, clients, suppliers and service providers.

The classification of sustainability risks by levels of materiality must be based on the value resulting from the combination of its estimated probability and impact, and a risk must be considered immaterial only if this value is below the minimum parameter of relevance defined by the supervised company.

Sustainability policy

The sustainability policy (which will not be considered as a complementary policy to the risk management policy) must establish principles and guidelines aimed at ensuring that sustainability aspects, including risks and opportunities, are considered in the conduct of its business and in its relationship with stakeholders.

Sustainability report

The supervised company must elaborate and disclose, by 30 April of each fiscal year, a sustainability report, describing at minimum the actions regarding its effectiveness and explaining the results (if any) obtained in the previous year and those expected for the current year. It must also disclose the most relevant aspects related to the management of the sustainability risks to which it is exposed.

The SUSEP Circular also defined the types of risks that may affect the insurance sector, which is an evolution of the norms in this area since it seeks to define complex concepts such as climatic risks (referring to losses associated with climate change, and transitions to be promoted by supervening regulations and the adoption of new technologies and litigation losses), environmental risks (related to environmental degradation) and social risks (referring to losses due to human rights violations). These are discussed in more detail here.

  • Climatic risks concern the following:
    1. physical climatic risks – the possibility of losses caused by events associated with frequent and severe inclement weather or long-term environmental changes, which can be related to changes in weather patterns;
    2. transition climate risks – the possibility of losses caused by events associated with the process of transition to a low carbon economy, in which the emission of greenhouse gases is reduced or offset and the natural mechanisms for capturing these gases are preserved; and
    3. litigation climate risks – the possibility of losses caused by claims in liability insurance or direct actions against the supervised company, both due to failures in the management of physical or transition climate risks.
  • Environmental risks – the possibility of losses caused by events associated with environmental degradation, including the excessive use of natural resources.
  • Social risks – the possibility of occurrence of losses caused by events associated with the violation of fundamental rights and guarantees, or by acts that are harmful to the common interest.

Thus, the issuance of SUSEP Circular No 666/2022 represents a regulatory benchmark for the insurance sector in Brazil, being in line with the global trend of incorporating climate risks in the financial analyses of companies’ portfolios.

CNSP Resolution No 451/2022

CNSP Resolution No 451/2022 provides specifically for the following operations:

  • cession and acceptance of reinsurance and retrocession operations and their intermediation;
  • co-insurance operations;
  • foreign currency operations; and
  • contracting of insurance abroad.

One of the main provisions of the Resolution deals with preferential offers, which should ensure equal treatment to all reinsurers, and consists of the right of preference that local reinsurers have in relation to other reinsurers, for the purposes of acceptance of reinsurance contracts – whether automatic or facultative – provided that the local reinsurer accepts the respective reinsurance offer under the conditions identical to those offered and/or accepted by the international market.

If unfair practices are identified in the performance of the preferential offer – including, but not limited to, unequal treatment of the reinsurers consulted or any changes to the contractual terms and conditions offered, with the issue of endorsements that distort the final contractual terms and conditions of the placement – the reinsurance contract will be disregarded for prudential purposes, without prejudice to other applicable penalties.

Another main provision is the requirement that a risk transfer policy be developed and implemented by insurance companies and that local reinsurers properly manage their reinsurance and retrocession operations.

The risk transfer policy, unlike the sustainability policy, should complement the risk management policy, under the terms of the specific regulations governing the internal controls system, the risk management system and the internal audit activity, and should be aligned with its underwriting policy.

For the purposes of developing this risk transfer policy, insurance companies and local reinsurers should establish, without prejudice to the requirements determined in the specific regulation that provides for the internal controls systems, the risk management system and the internal audit activity. This should comprise at least the following:

  • the objectives of the risk transfer policy adopted;
  • the technical criteria used in the preparation of reinsurance and/or retrocession programmes, with due grounds for the protection structures adopted;
  • the acceptable risk exposure limits;
  • mechanisms aimed at guaranteeing the compatibility of the limits of exposure to risks with the business strategy of the insurance company or local reinsurer, as the case may be;
  • the criteria for selecting and monitoring counterparties and intermediaries, including the management of credit and liquidity risks;
  • the procedures for the monitoring, analysis and treatment of high levels of concentration with counterparties and intermediaries;
  • the procedures for the monitoring, analysis and treatment of the transfer of risks with linked companies, under the terms of the regulations in force;
  • the management of the accumulation of risks in relation to a determined product, line of business or group of lines of business, geographical region and/or a single insured party;
  • the management of the accumulation of individual losses that may result from catastrophic events and spiralling risks;
  • forms of control and monitoring aimed at mitigating risks inherent to the mismatch of terms and conditions of reinsurance and/or retrocession contracts and the underlying contracts; and
  • the operating procedures and systems aimed at the internal control of operations and risk management, ensuring compliance with the risk transfer policy.

The Resolution also provides for some restrictions, including the fact that local reinsurers may not cede in retrocession more than 70% of the premiums written for the risks they have underwritten, considering the totality of their operations, in each calendar year, except for the following groups of lines of business:

  • financial risks;
  • rural; and
  • nuclear.

If, however, this percentage is higher than 90%, considering the totality of their operations, per calendar year, the insurance companies should submit to SUSEP a technical justification for this percentage of reinsurance cession, which SUSEP may authorise depending on this justification. If the justification is not deemed sufficient by SUSEP, the cedent will be subject to penalties.

Another important restriction is the fact that reinsurance operations concerning life insurance with survival benefit, and complementary pensions, are exclusive to local reinsurers. However, reinsurance operations relating to risk coverages marketed in life insurance plans with survival benefit, or to complementary pension plans – separately or together with survival coverages – are not subject to the restriction provided for in this Resolution.

With regard to reinsurance contracts, the following provisions need to be followed or stipulated:

  • the beginning and end of the rights and obligations of each party, also foreseeing how these responsibilities will cease in cases of cancellation;
  • the criteria for cancellation;
  • the risks covered and the risks excluded;
  • the coverage period, identifying the beginning of the reinsurer’s liability and the exact moment in which the losses are covered by the contract.
  • reinsurance contracts aimed at protecting risks located in Brazil should include a clause determining the submission of any disputes to Brazilian legislation and jurisdiction, except in the case of an arbitration clause, which should comply with the legislation in force;
  • the participation of the reinsurer in the adjustment of claims may be provided for, as well as the provision in reinsurance contracts of a claims control clause, without prejudice to the liability of the insurer towards the insured; and
  • the contractual formalisation of reinsurance operations will take place within 180 days from the beginning of the validity period of the cover, under penalty of it being null and void, for all prudential purposes and effects, from its inception.

Furthermore, an important clause was included in Resolution No 451/2022 which clearly states that risk transfer in reinsurance and retrocession operations, with reinsurers not authorised to operate in Brazil, will be permitted exclusively when the insufficiency of capacity by local and foreign reinsurers is proven, regardless of the prices and conditions offered by all such reinsurers.

For this, the situation of insufficiency of capacity should be proven by means of consultation carried out with all reinsurers authorised to operate in Brazil, in accordance with the criteria established by SUSEP.

With regard to risk transfers in reinsurance by insurance companies and in retrocession by local reinsurers, exclusively related to nuclear risk operations, the insufficiency of capacity referred to in this article is characterised by the lack of registration in Brazil of foreign reinsurers specialised in nuclear risks under the terms of the regulation in force. That is, in the event of partial acceptance of risk by any reinsurers authorised to operate in Brazil, only the remaining portion of the risk not covered may be ceded to reinsurers not authorised to operate in Brazil.

However, the Resolution makes a caveat that SUSEP may, in exceptional circumstances, authorise the transfer of risks with reinsurers not authorised to operate in Brazil (which do not comply with the requirements provided for in the legislation in force nor with the provisions of the Resolution) for technically justifiable reasons which aim to safeguard national interest or security, and may establish additional requirements to those provided for in specific regulations.

Acceptance of reinsurance or retrocession of a cedent abroad by a local reinsurer may be made through direct negotiation with the cedent abroad, through a reinsurance broker headquartered in Brazil, or an intermediary abroad. The acceptance of retrocession by insurance companies is permitted, including that arising from reinsurers headquartered abroad not registered in Brazil, though it is forbidden for insurance companies to accept reinsurance from insurers, whether registered in Brazil or not and headquartered abroad.

It is important to note that local reinsurers may only accept reinsurance or retrocession contracts, and insurance companies may only accept retrocession contracts from foreign cedents related to the groups of lines of business in which they are authorised to operate in Brazil, without prejudice to the observance of the current rules regarding retention limits. Local reinsurers may accept reinsurance or retrocession from cedents abroad in lines of business, or groups of lines of business, with which there is no direct correlation in Brazil, provided that the risks covered have technical characteristics similar to the risks of groups of lines of business in which they are authorised to operate in Brazil.

With regard to foreign currency operations, the contracting of insurance in foreign currency in Brazil – characterised by the establishment of amounts of insured capital/maximum limit of indemnity in foreign currency – may be effected through agreement between the insurance company and the insured, unless otherwise specifically regulated. Reinsurance and retrocession may also be contracted in foreign currency in Brazil.

When the insured capital/maximum limit of indemnity is established in foreign currency, the following is applicable.

  • The corresponding premium may be paid in foreign currency or in Brazilian currency, and converted on the contracting date, as established in the contractual conditions.
  • The payment of indemnification may be made, as established in the contractual conditions, in foreign currency or in Brazilian currency, with the value converted and monetarily restated, under the terms of the specific legislation, based on:
    1. the date of the effective payment made by the insured, in the case of coverage that provides for reimbursement of expenses; or
    2. the date of the occurrence of the event, for the purposes of determining the insured capital/maximum limit of indemnity, in the case of coverage that provides for the payment of indemnification in cash.
  • The insurance contractual documents must stipulate the insured capital/maximum limit of indemnity defined in foreign currency.

Finally, regarding insurance abroad, the contracting by individuals resident in Brazil or by corporate entities domiciled in Brazil is restricted to the following situations:

  • coverage of risks for which there is no insurance offer in Brazil, provided that the contracting thereof does not represent an infringement of the legislation in force;
  • coverage of risks abroad in which the insured is an individual resident in Brazil, for which the validity of the contracted insurance is limited, exclusively, to the period in which the insured is abroad;
  • insurance that is the object of international agreements endorsed by the Brazilian National Congress; or
  • hull, machinery and liability insurance by Brazilian shipping companies for their own or chartered vessels, under the terms set out in Section 2, Article 11 of Law 9.432, 8 January 1997.

In view of this, it can be seen that SUSEP and the CNSP have been working towards defining what can and cannot be done in Brazil to better provide a scope of performance of services for the Brazilian market.

RPZ Advogados

Av. Rio Branco
12 – 9° andar
Centro
Brazil

+55 21 3900 7588

contato@rpzadvogados.com.br www.rpzadvogados.com.br
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Law and Practice

Authors



Ernesto Tzirulnik Advocacia is an insurance and reinsurance boutique law firm that advises clients on loss-adjustment procedures, legal and regulatory issues, complex insurance, reinsurance, brokerage litigation, contract law, tort law, and corporate conflicts. During its nearly 40 years in practice, the firm has established an excellent reputation in the market, having simultaneously represented almost all Brazilian insurance companies, Brazil’s monopoly reinsurer, and international reinsurers in strategic issues. After decades of advising insurance and reinsurance companies, ETAD has become known for representing or advising large policyholders on contentious and non-contentious complex insurance matters, and is also respected for strategic contractual and corporate litigation. It is part of ETAD’s policy to tailor teams for each case according to its needs, feeding a dynamic work environment that engages young partners in high-profile cases, nurturing exchange within a team of diverse age, gender and background.

Trends and Development

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RPZ Advogados has a wide range of experience dealing with matters related to geological episodes, dam ruptures, fires, explosions, machine breakdowns, business interruptions, plane crashes, navigation accidents, cyber-attacks, engineering risks, class actions, judicial and sanctioning administrative proceedings, criminal investigations and inquiries, professional errors, default of contracts in the public and private sectors, and environmental damages, among others. Over the past few years, the firm has worked on some of the most complex claims that have occurred in Brazil and abroad, always acting in the interest of national and foreign insurers and reinsurers. The firm has offices in the cities of Rio de Janeiro and São Paulo and works in accordance with the best market practices in data processing, in compliance with Brazilian and European legislation. Its team comprises 12 lawyers with extensive expertise developed over years of (re)insurance practice at national and international levels.

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