Southern hospitality: Brazil cracks open its reinsurance market.

Over the years the Brazilian reinsurance market has rather resembled an armadillo, constantly hinting at opening itself up to cautious movement, only to retreat back into an unmoving protectionist shell.

Now, after years of equivocation, the Brazilian government has decided to relax the reinsurance rules. At the start of January, Vice President Jose Alencar signed into law a bill that established regulatory norms for Brazilian and foreign reinsurers to enter the market, though with a number of big caveats, such as limits on foreign participation and the exclusion of reinsurers based in "tax havens," possibly including Bermuda.

All reinsurance in the country had been monopolized by the Instituto de Resseguros do Brasil, which is 51% owned by the state, with private investors holding the remaining shares. Privatization of IRB was promised in 1997, but again progress was slow, before finally grinding to a halt in 2000 due to a series of legal challenges, as IRB was protected by the country's constitution.

Political Delay

In mid-2006 the opening of the market was rumored to be around the corner, only to be postponed yet again due to the approaching presidential election, with the country's left-wing president, Lula da Silva, expressing reservations about the privatization of IRB.

The government has now been able to maneuver its way around these obstacles to open up the reinsurance market--but only to a point. According to Aidan Pope, head of Latin America and the Caribbean at London-based broker Benfield Group, Brazil is now finally moving to cautiously liberalize the market.

Pope said the bill signed by Alencar will take effect 120 days after the country's regulatory board finalizes the laws around it. The bill will set out three different levels of reinsurance participation. The first will be local reinsurers, or local companies who are guaranteed by Brazilian reinsurance law. At present there is only one company which qualifies at this level: IRB.

Local reinsurers will be obliged to have first refusal on 60% of reinsurance cession in the market, at open market terms. After three years this will be lowered to 40%, and then three years after it could potentially be lowered again to an as-yet undetermined level, but this would require another law.

"It would be quite interesting if a key global player, like Munich Re, Swiss Re or XL Re, set up as a local player in Brazil, said Pope." This would give IRB a run for its money. However, having been in the market for the past 60-odd years, IRB has a huge database of information on the market, which will give it an advantage against any competitors. The key will be leveraging this information. After years of practicing as a monopoly, IRB will need to fight any complacency."

The second level will be that of admitted reinsurers, those companies that are based elsewhere in the world, but which have local representation in Brazil. These will have to pay a deposit to do business in the country, based on criteria that have yet to be unveiled.

The third level will be that of occasional reinsurers. These will be reinsurers that are based outside the country, which have an "acceptable" rating, something else that has not yet been defined by the Brazilian regulators. They will be limited to a certain set maximum amount of business in Brazil, again as yet undefined.

Two key exclusions stand out. Reinsurers based in known tax havens will be ruled out, especially captives. And reinsurers from countries where the level of corporation tax is less that 20% will also be excluded.