On 12/16/2020, after the offer of suggestions and comments made through Public Consultation No. 14/2020 to the draft Resolution prepared by the Superintendence of Private Insurance – SUSEP, Resolution CNSP No. 396 of December 11, 2020 was published, which provides for a local reinsurer whose sole purpose is the acceptance of risks, through reinsurance or retrocession operations, and its financing through (re)insurance risk-linked debt, in addition to other provisions (“RPE”).
In principle, it is noticeable that the rule defined some terms that were not yet clear, such as (i) the Insurance-Linked Instrument – ILS, related to (re)insurance risk-linked debt instruments and (ii) the Maximum Exposure to Risk – EMR, that is, the total nominal value of the maximum possible loss arising from the reinsurance or retrocession contract. In addition, the concepts of “slip” and RPE were maintained in relation to the public consultation draft.
In addition, the RPE will capture the necessary resources as guarantees for (re)insurance risks through the issuance of ILS, and maintain a one-to-one relationship with risks assigned to the RPE, with provision for additional remuneration, limited to the total remuneration of guarantor assets.
It should be noted that, given the considerations and requests of the market, the maturity term of ILS will be 10 years, unlike the initial draft of the rule, whose term was 3 years.
For its regular operation, the new Resolution establishes that the RPE must, besides meeting all the requirements of the current regulation to obtain authorization to operate, keep the guarantor assets in an amount equivalent to the EMR, which will be used to cover the risks and fulfill the obligations described in the ILS, and the registration of such assets in SUSEP will be essential.
Giving more autonomy to the parties involved, it is possible to include a forecast for the maximum term in the reinsurance or retrocession contract, so that the notice of claims communicated by the grantor is in accordance with the deadline set and, consequently, that the claims informed after the agreed term will not be recognized by the RPE.
Regarding the minimum requirements that must be present in the ILS, the following provisions were included: (i) no payment will be made to ILS acquirers if it results in a situation of guarantor assets lower than EMR; (ii) ILS acquirers have no rights over the assets of the risk transferor(s) to the RPE; (iii) ILS acquirers may not request liquidation of the RPE; and (iv) ILS acquirers’ rights are subordinated to the obligations arising from the risk transfer agreement to the RPE.
In the event that the raising of funds through the issuance of ILS does not reach the amount required for coverage originally provided for in the reinsurance or retrocession contract, the Resolution authorizes the amendment of the contract so that its terms are appropriate to the amount actually raised.
Also, the operations or the bookkeeping of the reinsurance and retrocession operation must be registered by the RPE in systems previously ratified by SUSEP and managed by duly accredited registering entities, and there may be the co-validation made by the RPE in the registration of the reinsurance or retrocession operation made by the assignor.
A novelty consists in the provision that only risks accepted on an optional basis or by virtue of the regulations may be subject to ILS.
Moreover, there is express mention in the sense that the reinsurance and retrocession contract may be based on foreign currency, as long as an exchange variation of EMR is the object of hedge by the RPE. If the contract is issued in national currency, the RPE will be exempt from some requirements described in CNSP Resolution no. 321, of July 15, 2015.
On the other hand, regarding the ILS, it must be registered by the RPE in registration systems authorized to operate by the BCB or CVM, and must contain, at least, the requirements established by the Resolution, which must also be transmitted to SUSEP.
The ILS issuance document must be clear and transparent on the terms and aspects of the security, including, as a minimum, the conditions of (re)insurance coverage, characterization of the claim, amount of the maximum possible loss and the related expense, if any, separately, and a maximum term for claim notice, if applicable.
Regarding the governance, the basic structure presented by the draft public consultation was maintained, and should be proportional to its exposure and compatible with the nature, scale and complexity of the operations of the RPE, with the obligation to maintain a Risk Management Policy and the appointment of a director responsible for governance, controls and risk management. Furthermore, the RPE’s administrators, as well as the service rendering companies eventually hired, must be independent from the assignor and the ILS acquirers.
The minimum capital necessary for the RPE to operate was also maintained, and is able to have as base capital the minimum amount of R$ 100,000.00. The risk capital may vary in case the reinsurance or retrocession contract is based on national currency and the RPE maintains an investment policy with the totality of the guarantor assets invested exclusively in federal public securities linked to SELIC .
In addition, besides the prohibitions contained in the initial draft, the RPE may not perform short sale operations, invest in quotas of investment funds whose direct or indirect operation in derivative markets generates the possibility of loss greater than the value of the net worth of the investment fund or that oblige the shareholder to contribute additional resources to cover the loss of the fund and invest resources abroad, except exceptions, among others.
Finally, it was maintained that (i) the RPE may only proceed with a new debt issue when the previous one is fully liquidated, that is, with no risks to be run, no claims to be paid and no resources to be eventually returned to buyers of ILS debt securities (ii) portfolio transfers can only occur between RPE’s and must be submitted to SUSEP for analysis and approval.
The new Resolution will come into force on January 4, 2021 and can be accessed in full at this link.
As we have already pointed out in previous client alerts on the subject, this is an important step of the insurance market towards an alignment with the capital market, creating a new option for investors and a new line of reinsurance capacity to the market.
Demarest’s Insurance and Reinsurance and Capital Markets teams are available to provide any additional clarifications that may be necessary.