Conditions for issuance of Insurance Risk Securities through a Special Purpose Insurer

The Superintendence of Private Insurance (“SUSEP”) opened Notice No. 012/2022 for public consultation, which introduces the draft Resolution on the issuance of Insurance Risk Securities (“LRS”) through a Special Purpose Insurer (“SSPE”).

The proposed Resolution is grounded on Law No. 14,430/2022 (“Law”), which consolidated the legislation applicable to securitization of credit rights and lays down the issuance of Certificates of Receivables, establishing the Legal Framework of Securitization.

In addition to addressing the issuance of LRS by SSPE, the Law amends important provisions related to the conduct of insurance brokers, through the amendment and repealing of provisions of Law No. 4,594/1964 and Decree – Law No. 73/1966.

The Law came into force on August 04, 2022 and sets a deadline to comply with the new obligations by December 31, 2022.

Among the main topics addressed by the Law, we highlight:

• the creation of SSPEs and details of their operation;
• the competence of the Brazilian National Private Insurance Council (CNSP) regarding the regulation of operations for the issuance of LRS;
• establishment of overall aspects of the LRS;
• independent nature of assets in operations financed by LRS;
• further extension of the responsibilities of insurance brokers; and
• waiver from paying the amount equivalent to the insurance commission to the Insurance Education Development Fund, managed by the Brazilian School of Insurance (FUNENSEG), in the event that there is direct contracting of insurance, without mediation of a broker.

According to the Law and the proposed draft Resolution, SSPEs aim to carry out independent asset operations involving the acceptance of insurance risks, pension plans, supplementary health, reinsurance or retrocession by one or more counterparts, and their financing through the issuance of LRS, a debt instrument linked to insurance and reinsurance risks.

LRS must be issued exclusively by the SSPE, and is defined as a nominative, transferable, and freely negotiable credit security, representing a promise to pay in cash, linked to insurance and reinsurance risks, with a maximum due date of five (5) years.

Among the aspects provided for in the draft Resolution, now open to public consultation, we highlight the following:

• The authorization of the SSPE must comply, as applicable, with the provisions on authorization for operation, initiation of operations, holding positions statutory authorities, paying up capital, transferring of portfolios, and the conditions on the corporate governance structure of the insurers.
• The SSPE must appoint a chief technical actuary, a chief technical officer, and a chief accounting officer.

• The acceptance of risks by the SSPE can be carried out through direct negotiation or through a legal entity insurance broker or reinsurance broker.

• The LRS may offer its investors compensation based on the full return on the independent asset of the operation, or ensure, in accordance with the contract, compensation on the assets that make up the independent asset of the operation.

• Obligation of the SSPE to inform SUSEP of each risk acceptance operation and consequent issuance of LRS, prior to the issuance of the LRS and within a maximum of five days following approval by the board of directors and/or administrative council.

• The acceptance of risks by the SSEP will only be effective after the funds are raised through the issuance of the LRS.

• Provision that the SSPE will not be directly liable to insured, participant, beneficiary or retiree for the accepted amount if the counterpart is an insurance company, reinsurer, private pension entity or supplementary health operator. In this case, the counterparty will be fully responsible for the regulation and settlement of claims and payment of indemnities.

• Assets involved in the securitization of insurance and reinsurance risks and the financing through the issuance of LRS will be independent.

• Proposal that (i) the capital base to be maintained by the SSPE must be the same applicable to insurance companies, in accordance with CNSP regulations, and (ii) the venture capital for the SSPE must equal the sum of the venture capital of the independent asset involved in each securitization operation and to the venture capital of the SSPE itself.

• Provision that SSPE managers, as well as service providers, cannot be linked to the counterparties and the investors holding LRS.

• The SSPEs must implement and maintain a Risk Management Framework, Internal Controls System and carry out Internal Audits, in addition to complying with requirements on the prevention and battle against crimes of money-laundering or concealment of assets, rights and amounts, as well as the prevention and prohibition of terrorist financing, imposed by SUSEP, within specific regulations, to insurers.

• SSPEs must also comply with the cybersecurity and sustainability requirements established by SUSEP.

• The LRS, when (i) issued in Brazil, must be registered in a registration or centralized deposit system, – in all cases – in institutions authorized by the Central Bank of Brazil or by the Securities and Exchange Commission; (ii) issued abroad, must be registered in a registration or centralized deposit system, within central custody, or duly registered, – in all cases –, in institutions authorized by the competent authority of the country where the issuance was carried out.

• The SSPE will be overseen by SUSEP, including its securitization operations, and will be subject to the same administrative sanctions applicable to insurance companies.

• Repeal of CNSP Resolution 396/2020, which provides for a local reinsurer, whose sole purpose is the acceptance of risks, through reinsurance or retrocession operations, and the financing of such operations through debt instruments linked to risks of (re)insurance and other arrangements.

The full draft of the Resolution can be accessed in this link and interested parties can send comments or suggestions to corac.rj@susep.gov.br, according to the duly filled out specific standardized table.

Demarest’s Insurance, Reinsurance, Health and Private Pension and Capital Markets teams will monitor the development of the consultation up to the publication of the final text and is available to provide any further clarifications that may be necessary.