New Limits to Retaining Local Reinsurers and Its Effects
As of January 1st, new reinsurance operation limits came into force as established by the National Council of Private Insurance (CNSP) Rules no. 322/2015 and 325/2015, which amend Articles 14 and 15 of CNSP Rule no. 168/2007.
Onwards this date, there will be an increase in the limit of transferring risk either by an insurer or a local reinsurer to companies under the same financial conglomerate headquartered abroad and, simultaneously, the decrease of the minimal compulsory retaining of local reinsurers. In the year of 2017 the rate will be 30%.
Considering the new limits, the Superintendence of Private Insurance (SUSEP) recently issued the SUSEP Rule no. 542 of December 6th, 2016, which defines the calculation criteria for intragroup premium cessions for each contract.
This rule presents the exact content already provided by the SUSEP Rule no. 537/2016, except for the signature of the current Superintendent and which content we already explained in June newsletter (available here).
SUSEP also opened a public consultation for a draft rule regarding the additional criteria to the preferential risk offer to local reinsurers, available to comments and suggestions until the last day of December 26th.
Draft of Rule on Public Consultation no. 16/2016
The procedure with regards to the mandatory offer to local reinsurers was already regulated by the CNSP Rule no. 241/2011, in its 5th Article:
Art. 5. The demonstration of the situation of insufficiency of capacity offer of local, admitted and occasional reinsurers, whatever be its price and conditions, shall be made through the denial of risk coverage, obtained upon formal consultation to all local, admitted and occasional reinsurers that operate in the line of business to which belongs the risk.
The draft no. 16/2016 seeks to establish additional criteria to this offer and, thus, defines the preferential offer as:
the right of preference which the local reinsurer has, in detriment of the international market, for retaining automatic or facultative reinsurance, provided that the local reinsurer accepts the respective reinsurance offer on identical conditions as the ones accepted by the international market (art. 2).
The project also brings formal criteria to the risk offer and formalisation of the acceptance, besides the terms and conditions that shall be provided on the consultation, including cases of more favourable conditions by occasional or admitted reinsurers (Art. 2, §§ 1st to 4th).
In this context, the draft is more specific regarding the consultation procedure, once it allows the insurer to formally consult one or more local reinsurer of its own free choice. And, only in the case of denial, total or partial, is that the insurer must offer the exceeding risk to other local reinsurers.
The draft also enables the retaining of admitted and occasional reinsurers in cases where, once offered the risk in the same conditions as the local market (Art. 2, §4), they present quotations with more favourable prices, according to the Article 4, III. However, being the prices equivalent, the local reinsurers will have the preference for the minimal offer.
In addition to this hypothesis, Article 4 also establishes that the preferential offer shall be complied with either in cases where the minimal percentage is accepted by local reinsurers or, after consulting all local reinsurers, they have, jointly, refused total or partially the risk.
Lastly, a relevant issue that could have been clarified by the draft refers to the difference between the requirement for the preferential offer of 40% (Article 15, caput, CNSP Rule 168/2007) and for the compulsory retaining, which percentage were reduced onwards January.
Even though the sole paragraph of Article 15 of CNSP Rule no. 168/2007 seeks gradually to ease the minimal retaining by the local market, there is no change regarding the preferential offer of at least 40% of the risk to local reinsurers, considering that this is already provided by the Complementary Law no. 126/2007.
Therefore, when 40% of the risk is offered to the local market and awarded full acceptance, the proponent is still bound to the proposal (art. 4, I of the draft c/c art. 427, of the Civil Code), which turns ineffective the authorisation to retain in lower percentage. This means it is unfeasible retaining any percentage lower than 40% without meeting the requirements of the preferential offer.
Accordingly, in the hypothesis where the local reinsurers accept the totality of the preferential offer of 40%, the cedant is bound to the retaining of 40% and not 30% in 2017. In other words, it seems that the CNSP Rule no. 325/2015 does not alter the rule already imposed by the CNSP Rule no. 241/2011, considering that the limits of compulsory retaining will only be reduced as the refusal of the local market occurs, regardless of the new retaining percentage in force onwards 2017.
For this reason, we understand that the retaining of reduced percentage established by the CNSP Rule 325/2015 will always depend on the refusal, even if it is partial, of the local market, considering that the mandatory offer of 40% always binds the retaining in case of acceptance.
Whereas the intention of the CNSP Rule 325/2015 seems to be of easing the retaining, in a way that even occurring the acceptance of 40% of the risk by the local reinsurer, the cedant would only be obliged to retain 30% and negotiate price and conditions of the remaining 10%, the rule is not clear and the draft of the new rule also does not face this issue.
We shall monitor the development of the edition of the draft of Rule no. 16 and remain at your disposal to discuss this matter.