SUSEP Publishes New Public Consultation Notice Regarding ILS

Following the publication of the Public Consultation Notice No. 14/2020 and receipt of several suggestions about the regulation of the activities of local reinsurers with the exclusive purpose of accepting risks through reinsurance or retrocession operations (RPE), as well as their financing through the issuance of debt linked to (re)insurance risks, the Superintendence of Private Insurance (SUSEP) has published a new notice to be opened for public consultation.

Public Notice No. 20/2020, which presents certain innovations on the subject, gives general consideration to the solutions and recommendations proposed by the market. In summary, the new Notice presents the creation of the LRS (Insurance Risk Note), which will be the designation of the (re)insurance risk debt security issued by RPE.

Another innovation proposed by the draft is that the new debt security have its term extended to 10 years. Also, the Public Consultation establishes the possibility of delivering the “slip” (which refers to the document containing minimum information on the terms of the reinsurance or retrocession contract, such as its validity, its risks covered and excluded, geographical scope, capacity, limits of coverage and premium), to the investor, or alternatively making available the reinsurance or retrocession contract itself.

Regarding the guarantor assets, in line with the provisions of Article 92 in the CNSP Resolution 321/2015, the proposed rule includes express prohibition on the disposal of such assets, if they are linked to LRS, in order to reinforce the investor protection measure. However, the RPE may require authorization from the regulator to freely move the guarantor assets in the event that (i) such assets are registered in an account linked to SUSEP and (ii) the remaining assets are sufficient to cover the EMR (Maximum Exposure to Risk) related to the risk underlying the LRS, either due to excess of assets or due to the simultaneous replacement of assets.

Also in relation to LRS, there is the inclusion of the minimum elements that the security must have, such as the conditions for the coverage of (re)insurance risks, characterization of the claim, value of the maximum possible loss and the related expense (if it exists, separately), in addition to the maximum notice period for the claim.

Another innovation is the provision, in the normative proposal, that in the cases in which the previous raising of funds for the issuance of the security does not reach the expected EMR, there will be the readjustment of the reinsurance contract or retrocession with the intention of reducing the exposed risk and, consequently, allow the issuance of LRS, which demonstrates the flexibility introduced into the new Resolution.

However, the prohibition from issuing a new LRS, only to be carried out after the expiration and liquidation of the previous one, remains. On the other hand, there is the inclusion of the possibility of the premiums being passed on to the RPE after the commencement of the risk coverage period, as long as the maximum LRS maturity limit or the payment of the claim is observed, whichever occurs first, and that the guarantor assets and minimum provisions to cover the EMR must be maintained. In this way, the possibility of deferring the amounts to be contributed by investors is opened, which emerges as being another attraction of the product.

Besides the registration of the reinsurance or retrocession operation, the RPE must also register the issuance of LRS and a system authorized to operate by the Central Bank of Brazil or the Securities Commission (CVM), observing the minimum elements described in the Resolution proposal.

Finally, there is also express mention of both the obligation to make available the risk management policy to investors, as well as the possibility of the reinsurance or retrocession contract being issued in foreign currency, as long as the RPE hedges the foreign exchange risk, as well as the expansion of the list of operations prohibited from being carried out by the RPE, in line with what is already available in the CNSP Resolution 321/2015.

Interested parties can send their suggestions to SUSEP until the deadline of October 30, 2020.

The new Resolution will come into force on January 4, 2021, and the entire draft can be accessed at this link.

Demarest’s Insurance and Reinsurance and Capital Markets teams are available to provide any additional clarifications that may be necessary.