On March 31, 2021, the National Council of Private Insurance (CNSP) published CNSP Resolution 407, which defines and establishes new principles and general characteristics for the drafting and commercialization of damages insurance contracts to cover large risks.
Submitted to Public Consultation No. 18/2020 for suggestions and comments from the public (more information here), the Resolution was prepared following a long period of studies and important debate between the Superintendency of Private Insurance (SUSEP) and several market players, aimed at alignment with the best international practices and to cut through some of the regulatory red tape, as well as allowing for further development of the sector.
The new Resolution is in line with SUSEP’s plan to make the structure of insurance contracts and the design of coverage by insurers more flexible, as well as to simplify the regulation of the insurance market in Brazil. Similar to what was recently applied in the new Circular applicable to damages insurance (see here), SUSEP’s objective is to grant more freedom to companies in the shaping of products to be offered in the market and to bring innovations to the insurance sector.
The new Resolution classifies damages insurance contracts for coverage of large risks as those that present the following attributes:
- Oil/Petroleum Risks, Named Perils and Operational Risks, Global Banking, Aeronautical, Maritime and Nuclear Risks, as well as Internal Credit and Export Credit in the event that the Insured is a legal entity; or
- All other lines of business, as long as they are contracted by express agreement by legal entities that present, at the time of contracting and of renewal, at least one of the following characteristics:
- Maximum guarantee limit greater than BRL 15,000,000.00;
- Total assets exceeding BRL 27,000,000.00, in the immediately preceding fiscal year; or
- Gross annual revenue exceeding BRL 57,000,000.00, in the immediately preceding fiscal year.
Damages insurances that have been contracted, by means of an individual policy, by more than one policyholder or Insured, can also be considered damages insurance to cover large risks, provided that at least one of the policyholders or Insured presents at least one of the characteristics mentioned in the business lines of abovementioned items “b” or “c”.
Specifically in the case of guarantee insurance, the contract can also be classified under large risks if the policyholder or Insured belongs to an economic group that meets the provisions contained in the business lines of items “b” and “c”.
It is important to emphasize, however, that this scenario is only applicable to the policyholder or Insured that has its own legal personality and is part of an economic group under common administrative control or direction, or even under the same shareholding control.
The main changes in relation to the draft of the Resolution submitted for public consultation refer to the suppression of the Directors and Officers Civil Liability – D&O and Stop Loss lines, the addition of the Internal Credit and Export Credit lines, and the substitution of the Insurance Lines for Port Operators by Maritime Insurance.
In addition, the criterion corresponding to the Maximum Limit of Guarantee, used for the classification of other insurance lines as contracts with coverage for large risks, was reduced from BRL 20,000,000.00 (twenty million reais) to BRL 15,000,000.00 (fifteen million reais).
The new Resolution establishes that large risk insurance contracts may be governed by contractual conditions freely agreed upon between the Insurers and the Insured, policyholders, or their legal representatives, and that the parties must expressly demonstrate their will regarding the agreement. Thus, the Resolution lists the minimum basic principles and values that must be observed, namely: broad negotiating freedom, transparency and objectivity in the information, equal treatment between the contracting parties, and subsidiary and exceptional state intervention in the formatting of products.
Likewise, the Resolution defines the minimum elements that must be expressly included in the clauses, such as the geographic scope of coverage, premium payment, covered and excluded risks, definition of the beginning and end term of obligations, policy competition clause (when applicable), loss of rights, among others.
Regarding the clauses that deal with assets and interests not included in the insurance contract, as well as the excluded risks, the Resolution establishes that such clauses must have highlighted writing and be inserted immediately after the description of the covered risks.
Moreover, it foresees that the contractual conditions and the actuarial technical notes are not subject to the electronic registration of products with SUSEP prior to their commercialization, and must be kept under the custody of the insurance company, which is another differential for the qualification of an insurance policy as being of large risks.
The Resolution also presents a definition and specific conditions for each of the areas classified as insurance of large risks, regardless of the other conditions. On this point, SUSEP has publicly positioned itself in that specific resolutions that already existed for each of the insurance lines dealt with will be repealed.
The new Resolution, by not requiring the registration of information with SUSEP and allowing ample negotiation freedom between the parties, without the need for large risk contracts to be linked to pre-defined products and contractual conditions, promotes the development of the market through less intervention in large risk contracts. Thus, the new rules promote greater flexibility for insurers in structuring and negotiating coverage and contractual conditions, differentiating products in qualitative terms and not only in relation to their pricing, which will certainly stimulate innovation and competitiveness, further benefiting and bolstering the insurance market.
Thus, it is important to observe how the Judiciary will behave when dealing with lawsuits related to flexible contracts negotiated between Insurer and Insured in a free manner and without binding regulations, since the trend for large risk insurance is that the Insured’s lack of sufficient funds will be removed, as well as the most beneficial interpretation derived from a relationship based on an adhesion contract, which will no longer be the model to be used for this type of contract.
Finally, it is important to note that the new Resolution establishes that the specific norms that regulate or will come to regulate the insurance or mandatory coverage established by law, whether from international agreements or not, must be observed and prevail over the provisions of this and other regulations.
The Resolution will come into force on April 1, 2021, and its provisions will apply to policies renewed or issued as of this date.
Demarest’s Insurance and Reinsurance team is available to provide any further clarifications that may be necessary.