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Impacts of SUSEP's Circular nº 545/2017 in the Reinsurance Market


2/7/2017 12:00 AM Demarest News

Impacts of SUSEP's Circular nº 545/2017 in the Reinsurance Market

The Superintendence of Private Insurance (SUSEP) has recently published the Circular nº 545, of 27 January 2017, stablishing additional criteria to the preferential risk offer to local reinsurers. This rule derives from the comments and suggestions of the market to the draft provided on the Public Consultation nº 16/2016, which content we have analysed on the newsletter of January (available here).

Please find here a comparative chart, highlighting the modifications between the original text under Public Consultation, and the final wording of SUSEP's Circular nº 545/2017.

Main modifications brought by Circular nº 545/2017

The final wording of the Circular brought some changes to the draft, however, the questions to reconcile the preferential offer to local reinsurers with the reduced percentage of compulsory retaining in the local market, provided on the sole paragraph of the art. 15 of the National Council of Private Insurance (CNSP) Resolution nº 168/2007, apparently have not been clarified.

  • Consultation proceedings

The procedure to consult local reinsurers had only minimal alterations. The possibility already brought by the draft of proposing to "one or more reinsurers of the ceding company's free choice" (art. 2nd, §1st) was maintained, going to the opposite direction of art. 5th of CNSP's Resolution nº 241/2011, that provides the offer to all companies operating on the line of the risk to be ceded.

In case reinsurers do not reply on the deadlines stablished by CNSP's Resolution nº 241/2011 and maintained by the Circular - five (5) business days in facultative contracts, or ten (10) business days in automatic contracts -, their silence will be regarded as definite refusal of the risk coverage, under any terms or conditions. On the other hand, should reinsures expressly refuse the ceded risk, their availability to accept the risk shall be disclosed upon revaluation of the offer on different conditions (art. 2nd, §2nd).

In both scenarios, the ceding company is not obliged to offer the same contract again, referring to the same risk, to that local reinsurer, even if supervening alterations of its terms or conditions take place (art. 2nd, §3rd).

Still, for the analysis of the offered risk, local reinsurers may request to the ceding company additional documents or information, as longs as properly justified. This shall suspend the consultation deadlines mentioned above until their delivery (art. 2nd, §5th). Such procedure was already presented by art. 7th, §4th, of CNSP's Resolution nº 241/2011.

  • Total Acceptance of the Offer

The main issue pointed out by us as per the Public Consultation regards the binding of the ceding company to its proposal of 40% of the risk as compulsory offer to local reinsurers (art. 15, caput, of CNSP's Resolution nº 168/2007), once the total acceptance of it would overturn the gradual reduction of the retaining percentage brought by the CNSP's Resolution nº 325/2015 (30% in 2017). The question was critical considering the draft did not mention the matter.

Nonetheless, the Circular tried to clarify such issue by means of including art. 3rd. According to it, should the full acceptance by one or more local reinsurers occur, the ceding company is obliged to retain with one or more among them the percentage of the offer (40%), as per the caput of art. 15 of CNSP's Resolution nº 168/2007:

"Art. 3rd. In case of acceptance of the offered conditions by one, or more than one local reinsurer, the ceding company, may freely contract one, or more than one among those local reinsurers, provided that their combined shares fulfil at least the percentage mentioned in the caput of the article 15 of the CNSP Resolution nº 168, of December 17, 2007." (emphasis added)

What we see is that, when referring to the percentage of offer provided in the caput, SUSEP is actually confirming that the acceptance of the local market binds the cedant to contract the preferential offer (40%), and therefore, it cannot operate with the reduced retaining percentages stablished on the sole paragraph of that section:

"Art. 15. The reinsurer will offer preferentially to local reinsurers at least 40% (forty percent) of its reinsurance cession in each automatic or facultative contract.

Sole Paragraph. For the purposes of the percentage provided for in the head of this article, the insurer must contract compulsorily at least the following percentages of reinsurance cession to local reinsurers in each automatic or facultative contract:

I - 40% (forty percent) until 31 December 2016;

II - 30% (thirty percent), from 1 January 2017;

III - 25% (twenty-five percent), from 1 January 2018;

IV - 20% (twenty percent), from 1 January 2019;

V - 15% (fifteen percent), from 1 January 2020." (emphasis added)

Therefore, even if indirectly, the new Circular made clear the binding of the ceding company to the mandatory offer percentage (40%), what apparently makes the gradual reduction of retaining percentages of CNSP's Resolution nº 325/2015 inefficient, once the risk is fully accepted by the local market. According to art. 5th, I, the terms of the Circular shall be complied with when "the minimum percentage of preferential offer defined in the head of article 15 of the Resolution CNSP no. 168, of 17 December 2007 is contracted with local reinsurers". (emphasis added)

  • Total or Partial Refusal of the Offer

Should the offer be fully or partially refused, the ceding company must offer the reinsurance contract to all remaining local reinsurers, in order to attempt to obtain the full acceptance of the preferential offer of 40%. Thus, even if the Circular brings the possibility of the cedant to initially offer the risk only to local reinsurers of its own choice, the consultation of all the local market will be maintained in such hypothesis.

"Art. 4th. In the case of the offer's total or partial refusal, and the minimum percentage of offer determined in the head of the article 15 of CNSP Resolution no. 168, of 17 December 2007 is not fulfilled, the insurance company shall offer the reinsurance contract to all remaining local reinsurers, if necessary, so as to follow the provisions of this Circular." (emphasis added)

Only in the case all local reinsurers have jointly fully or partially refused the minimum percentage of the preferential risk, is that the ceding company may contract with admitted or occasional reinsurers, on the same terms and conditions offered to the local market:

"Art. 5th (...) II – all local reinsurers, having been contacted, jointly refuse in total or partially the preferential offer's minimum percentage defined by the head of article 15 of the CNSP Resolution no. 168, of 17 December 2007, and the remaining reinsurers accept the remaining percentage under the same terms and conditions". (emphasis added)

In addition, even if the retaining with admitted or occasional reinsurers occurs on different conditions, those conditions must have been offered to local reinsurers in order to comply with the preferential offer (art. 5th, III):

"Art. 5th (...) III – admitted and/or occasional reinsurers accept terms and/or conditions differing from those initially offered and totally or partially refused by all local reinsurers, provided that those same terms and/or conditions have been offered to local reinsurers, as determined by this Circular". (emphasis added)

  • International Market

Another point of emphasis back when we analysed the draft was the possibility of contracting with admitted or occasional reinsurers on more favourable price conditions, provided they have been previously offered to and refused by the local market, as per the terms of the draft. In its turn, the Circular supressed that expression, altering it to "terms and/or conditions differing from those initially offered" (art. 5th, III).

The duty, provided by the draft, of including quotations from admitted or occasional reinsurers on the consultation, with indication of the percentage of their risk acceptance, was modified to a simple possibility (art. 2nd, §6th). At the same time, the binding of preference right of local reinsurers to the offered risk over the international market is now mentioned on the caput of art. 2nd.

It seems to us that this alteration does not have any practical effects, considering that not only does it harm the equal treatment ensured to the reinsurers (art. 2nd, §4th), but the contracting with admitted or occasional reinsurers is conditioned to the offer of the same terms and conditions to the local market, meaning that, should foreign reinsurers offer a proposal, it should be disclosed to the local reinsurers.

  • Preferential Offer vs. Compulsory Retaining

The most delicate point, however, refers to the inclusion of the sole paragraph to art. 1st of the Circular, seeking to align the new rule to CNSP's Resolution nº 241/2011, since it already regulated the local cession of risks and the hypothesis of its transference to the international market:

"Art. 1st (...) Sole Paragraph. Notwithstanding the compliance with the procedures established by this Circular for the preferential offer, the insurance company shall adopt all reasonable steps and procedures to comply with the compulsory contracting as established per the sole paragraph of article 15 of Resolution SUSEP no.168, of 17 December 2007, including the replacement of the offered terms and/or conditions, and/or adopting the procedures described by CNSP Resolution no. 241, of 1 December 2011, if necessary." (emphasis added)

Although the whole Circular wording seeks to regulate proceedings to comply with the preferential offer, the provision highlighted is the only one to mention the duty of the ceding company of adopting all the necessary measures and applicable procedures to meet the percentage of compulsory contracting, even though alterations of the terms and/or conditions offered are necessary. The sole paragraph also mentions the procedures provided by CNSP's Resolution nº 241/2011 that addresses, in its chapter IV, the contracting with local reinsurers, having that:

"Art. 6th The insurance companies are authorised to contract with local reinsurers lower percentages to those provided on the art. 15 of CNSP Resolution nº 168, of December 17, 2017, along the alterations promoted by the CNSP Resolution nº 225, of December 6, 2010, exclusively when the insufficiency of offer withstood by the local reinsurers is demonstrated, regardless of price and conditions offered by them, observing the same criteria stablished on the art. 5th of this Resolution.

§1st The insufficiency situation regarding the capacity of offer, which the caput regards, shall be demonstrated when contacted all local reinsurers, they have jointly refused the risk subject to cession, totally or partially"

However, the referred sole paragraph seems not to dialogue with the remaining provisions of the rule, given that art. 5th provides that, in order to meet SUSEP's requirements, the following are necessary: (i) compliance with the offer's minimal percentage; (ii) full refusal of the whole local market in accepting the minimal percentage offered, which may be contracted with the remaining reinsurers; or (iii) having admitted or occasional reinsurers accepted the risk on different conditions, also refused by the local market.

By means of a systematic interpretation, it appears to us that SUSEP's intention is that the ceding company shall seek contracting the percentage of offer (40%) with the local market. Should the risk be fully accepted, the ceding company is bound to retain the offered 40% with local reinsurers, regardless of the reduced percentage of retaining provided on the sole paragraph of art. 15 of CNSP's Resolution nº 168/2007.

Yet, should the market fully or partially refuse the risk, the cedant shall accept its conditions in order to meet, at least, with the compulsory retaining percentage (30% onwards January 2017). In other words, more advantageous prices from the international market, eventually unfeasible to the local market, and for that reason refused, will not suffice to authorise the full transference of the risk outwards, which shall be subject and held on the local market until, at least, the minimal compulsory retaining percentage in force (30%) is complied with.

  • Conclusions

Considering the above, despite the intention of SUSEP may seem in what regards to practicing the reduced compulsory retaining percentages, as provided by CNSP's Resolution nº 325/2015, the Circular is not clear and the matter is still controversial.

Therefore, our previous understanding remains, even after the Circular's edition. Considering the limits of compulsory retaining, which will continue to be reduced according to the refusal by the local market, and that the preferential offer acceptance expressly binds the ceding company to the retaining (according to art. 3rd), the enforcement of the percentages brought by CNSP's Resolution nº 325/2015 are difficult to operationalised.

We will monitor the impacts of the new Circular on the reinsurance market, as well as occasional clarifications made by SUSEP, and we are at your disposal to discuss this matter and assist the market on the dialogue with SUSEP in pursuance of the necessary clarification of the Circular.

Demarest Advogados

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