Expert Commentary

The Brazilian Insurance Market

May 2001

Brazil has been undergoing a political and economic process of change since the early 1990s, which is reflected in its insurance market. Learn about its insurance market -- its structure, regulatory environment, how various coverage lines are handled, and its profitability.

by George R. Keller
Winterthur International America Insurance Company
and
Juan Pablo Bragadin
Winterthur International Argentina

The recent performance and the structure of the Brazilian insurance market reflect the political and economical process of change, which the country has been undergoing since the early 1990s. An increasingly stable and vivid democracy, fiscal policies with the necessary rigor, combined with only a gradual market opening of the economy, have brought a new feeling of stability to important parts of the population. This new economic perspective, along with several reforms and privatization initiatives from the government, has made the insurance market grow (with an estimated premium volume of BRL 32 billion/US $17 billion). For the year 2000 (15 percent growth), the gross written insurance premium (GWP) today represents more than 3 percent of the Gross Domestic Product (GDP), up from only 1.3 percent in 1990.

Structure of the Market

The Brazilian insurance market is usually divided into three different segments:

  • Pension (1999 GWP approximately US $2.2 billion or 13 percent of the total market): Privately contracted pension insurance complementary to the compulsory publicly managed old age/jobless/disability insurance schemes;
  • Capitalization (US $2.4 billion; 14 percent of the total market): Temporary bonds issued with two return components; on the one hand a fixed interest rate and on the other hand a so called game rate, which promises special returns for the winners of periodical lotteries; and
  • General Insurance (US $12.4 billion; 73 percent of the total market): All types of classical insurance, including property, casualty, life, and health.

In the near future, a fourth important segment could open up: "work accident insurance."

General Insurance Per Line of Business. Compared to other major world markets, the General Insurance market (as identified above and the subject of the remainder of this article) shows a strong bias in favor of non-life insurance (including health), which represents 81 percent of the total GWP. This means that Brazil is among the 10 largest non-life markets in the world. As a market with a historically poor inflation record, life insurance has only recently picked up. Brazil is number 27 in this segment. The following two charts illustrate the distribution of GWP among lines of business.

Graph 1

General Insurance per Type of Insurer. There are 135 insurers active in the market. Considering the fact that some are owned by the same holding interests, we come to a total of 92 players.

Similar to other recently opened insurance markets, there are two trends to observe. On the one hand, the concentration of premium within a small group of big, often bank-related insurance companies and on the other hand a growing participation of the companies with foreign capital. As of the end of the first half 2000, the 5 biggest companies (Sul América, Bradesco, Porto Seguro, AIG/Unibanco, and Itau) represented 57.33 percent of all GWP in the General Insurance market. Taking all insurance companies with foreign interests together (more than 30), they achieved a market share of 29.54 percent as of the end of 1999. This is a real change in the market structure. In 1996 when the market was opened and allowed foreign ownership, foreign interests at that time only controlled 6.33 percent of the market.

Graph 2

Besides these bigger players, the following international companies are also developing significant activities in the Brazilian market: Ace, Axa, BBV, CCF, CGU, Chubb, Cigna, Generali, Gerling, Hannover, Kyoei, Met Life, Mitsui, Nationwide, Principal, Prudential, Reliance, Royal & Sun Alliance, Santander, Winterthur International, Yasuda, and Zurich. Most of these companies are working in a niche market or are looking for strategic options to grow to a reasonable market share in order to survive successfully in the commercial/personal lines business.

Regulatory Environment

The "Decreto-Lei 73/66" and thereof-derived regulations are the centerpiece of insurance market regulation, which established the following important rules:

  • That the regulation and supervision of the insurance market is a central government privilege (no state government involvement).
  • Non-admitted insurance is not allowed.
  • Broker involvement is mandatory for all insurance contracts. The only admitted reinsurance company is the "IRB Brasil Resseguros, S.A." (IRB).
  • The main compulsory insurance contracts are fire insurance, inland transit insurance, inland transit carrier liability insurance, and motor liability insurance (low limits).
  • The regulatory body of the insurance market is the "Superintendência de Seguros Privados (SUSEP)," which is assisted in its operational/technical controlling functions by the IRB.

The Question of the Future of the IRB. It is widely known that the Brazilian reinsurance market shall be opened. To enable opening of the reinsurance market, the IRB will have to be privatized. Nevertheless, the sale of the IRB has not been easy and, above all, has not been concluded at this time for several reasons.

First, there are still legal battles about the constitutionality of the envisaged changes of the functions and character of the IRB between the workers union and the existing central government (since July 2000 at the Brazilian Supreme Court). Second, it has turned out very difficult to know how much the IRB is really worth, which is said to be one of the reasons why the bidding process was called off twice during 2000. And third, and maybe most important, a general lack of political will might exist. In times with growing skepticism toward globalization and undifferentiated markets opening among wide parts of the population, decreasing fiscal deficits and presidential elections ever closer, the political calculation of risk and opportunity of a privatization and reinsurance market opening may not be as positive anymore as back in 1996 when the process was started.

Meanwhile, attracted by the potential of Brazil as the largest insurance market of Latin America, 18 reinsurance companies have opened representative offices in Brazil (Allianz, American, Copenhagen, Employers, General & Cologne, Gerling Global, Hannover, Latin American, Mapfre, Muenchener, Scor, Secura, Sorema, Swiss, Tela, The Toa, Transatlantic, and Zurich Re). The companies pre-qualified to participate in the bid for the IRB were Bradesco, Munich Re, Opportunity, Swiss Re, and Transatlantic-Re.

Underwriting Property and Casualty Insurance

Besides the fact of a closed, monopolistic reinsurance market, underwriting in Brazil is not very different from the underwriting in other countries. In terms of coverages, the local market is highly developed and provides a range of products similar to that available in most other developed countries.

Main Perils. The main peril in property insurance today is theft. Frequency and severity are very high—from the theft of a laptop computer in a parked car to the well organized assault on a supermarket during daytime—everything is possible. Theft of goods in transit has seen an enormous increase during the past years; a trend which has only recently slowed down, mainly due to increasing risk consciousness and prevention by the involved industries. According to estimates by one of the main brokers in this line of business, approximately 5,200 insured thefts in transit will occur in 2000 with a total payout by the insurance companies of approximately BRL 400 million.

When talking about theft in Brazil, the criminal element is highly organized. Gangs are often composed of one to two dozen individuals equipped with high firepower and modern communication equipment.

Other important property exposures are wind and flood but both reduced to specific locations and periods during the year. As a rule, Brazil is not exposed to massive natural hazard events.

Casualty has not been a big headache to the insurance industry so far, perhaps with the exception of transport liability. In Brazil the transport company is responsible for the delivery of goods, which it accepted to transport and insure up to the full shipment value. If there is an accident on the road or damage due to errors when the goods were packed by the transport company, the law determines that the transport company and not the shipment owner has to absorb the corresponding losses, except for cases where the losses were due to force majeur or, of course, due to negligence of any other party, e.g., the shipment owner.

It is thereby still an open issue, if losses due to hijacking—given the high frequency—are still to be considered as an unforeseeable event and therefore not subject to the liability of the transport company. The outcome of the many pending lawsuits about this issue will finally determine if the theft exposure will continue to be covered in the transport liability coverage in the first place or if the shipment owner will need to contract and use the theft coverage themselves as part of his inland/marine insurance.

Coverages. As mentioned in former paragraphs, all typical coverages and even tailor-made wordings are available in the local market. Nevertheless, depending on the reinsurance treaties available, not all wordings may be applicable to all risks.

In property insurance, for minor risks (up to a Total Insured Value (TIV) per single risk of US $40 million and a policy loss limit below US $40 million), there are typically only named perils wordings available. As the named perils other than fire, lightning, and explosion are rated with a fixed rate times the insured limit, these additional perils are usually not insured up to full value/loss limit. Also, the business interruption exposure is very often not covered for a full 12-month period but is sometimes limited to the necessary time period, according to the foregoing risk analysis.

While package policies, which include coverage for almost all property and even basic casualty exposures are available, most of the crime, engineering and casualty exposures can only be written up to a certain sublimit within such policies. If they exceed those limits, they have to be placed within the corresponding line portfolio as separate policies (e.g., theft, construction risks, etc.). Inland transit sublimits within property policies are extremely rare and would usually only cover very specific exposures such as transport of equipment between two business locations but would, for example, almost never cover the theft exposure for industrial operations. Marine coverage is almost never granted as part of a property policy. As a specific feature, fidelity limits of a few hundred thousand U.S dollars are not uncommon in local property policies.

Casualty insurance offers a surprisingly wide range of coverages even for smaller clients. Beside the specific exposures of the aeronautic, nuclear, and petroleum industries, which are managed as separate lines of business, general liability policies from most insurance companies may grant, without further complications, coverage for special liabilities such as those related to sports activities, port management, product recall, employers liability, etc.

This wide-ranging availability of specific coverages has its roots with the position of the IRB, which in the past developed and distributed the corresponding tariffs on the basis of nationwide statistics. On the other hand, most of these coverages are limited in their extent, e.g., a standard products recall coverage only covers communication and warehousing costs related to a product recall action, and this usually only up to 10 percent of the products liability coverage of the same policy, applying typically a 20 percent deductible on each and every loss. Therefore, a good analysis of the exposure and the offered coverage are crucial in order to cover exactly the exposure which is intended to be transferred to an insurance company.

Is Brazil a "Tariff Market"? It is often said that Brazil is a "tariff country," meaning that there is a fixed price for a fixed set of risk/limit/coverage combinations. Does this still hold true?

According to the above mentioned "Decreto Lei 73/66," the IRB was in charge of the operational regulation of the local insurance market. The only admitted reinsurer was at the same time the governmental body, which ensured that the insurance companies were applying insurance conditions and tariffs in line with the national interest. This control was highly effective, as nobody wanted to/or could afford putting at risk his reinsurance coverage, because the officially approved tariffs were not fully respected.

In this sense until late 1999, there was no doubt that Brazil was a tariff country. For each and every risk on which the IRB participated (e.g., general liability on every policy with at least 1 percent; inland/marine on every policy by means of excess of loss coverage with calculated reinsurance premiums on each and every insured transport, etc.) the tariff conditions had to be respected.

In December 1999 another piece was added to the reinsurance market opening process, as the parliament approved the law 9.932/99, which transferred the former regulation authorities from the IRB to the SUSEP. With this move, the insurance companies were no longer forced to use the insurance conditions and rates approved by the IRB. In the new spirit of the IRB being one reinsurer among many, the products and tariff elaboration were no longer in the hands of the IRB, but each and every insurance company could now file its own products (it became mandatory to do so), including rate structures, and would then negotiate the "best reinsurance available."

Of course, the position of the IRB is still very strong, as the monopoly has not been broken up yet. But in the light of being potentially exposed to an open market, recent reinsurance treaty negotiations have become easier. Above all, whatever risk lies within a company's retention (maximum 3 percent on net worth per line) does not need any approval from the IRB anymore, as long as it is in line with the company's product and has been filed with the SUSEP. It may be added that the SUSEP is not actively approving the filed products but may only veto formal errors in the policy wordings or, for example, rate structures that are not sustainable from an actuarial point of view.

Unfortunately, it is exactly this same new law, 9.932/99, which is subject to the aforementioned legal battles around the privatization of the IRB; therefore, at least in theory, the new procedures have been suspended since July 2000. Nevertheless, the market works in reality, at least for the moment, according to the rules stipulated by the IRB privatization legislation. In this sense, a valid answer to the question asked in the above paragraph could be as follows.

Brazil is de facto a (IRB) tariff country for risks with loss limits which exceed substantially the maximum retention of a line of business of a company. But theoretically for all risks and de facto for risks with low loss limits, companies are only bound to the products and tariffs that they created themselves. In such cases, even the pricing of their own tariff could be avoided by giving so-called commercial discounts. Although, the insurance company must set up unearned premium reserves based on the tariff price, which puts certain limits on that procedure. In conclusion, we would say that in Brazil the tariff market is diminishing, and there is a movement more to a file-and-prior-approval method of rate and form regulatory system.

Reinsurance Cessions to Reinsurers Outside Brazil. The rule is that retrocessions of premiums out of Brazil can only be negotiated on a case-to-case basis and are, from a decision-making point of view, fully dependent on the IRB. In such cases, the insurer with the contact to the local broker and client, as well as to the foreign reinsurance company, acts as a kind of reinsurance broker at the same time as being the insurer. As soon as it has all underwriting information available, discussions with the IRB begin. Usually if the policy loss limit is very high or when the insurance conditions or the characteristics of the local risk are very special, then the IRB supports efforts to place risks partly with reinsurers of the choice of the ceding insurance company. In these cases, reinsurance retrocessions are arranged on a policy basis (the ceding reinsurer cedes 100 percent to the IRB, which then retrocedes to the foreign reinsurer), usually subject to an overrider of 10 percent for the IRB plus 2 percent tax on premiums retroceded to reinsurers located outside Brazil.

Currently, there is no clear rule about the loss limit threshold that triggers the willingness of the IRB to retrocede to foreign reinsurers on a policy basis. Nevertheless, we would dare to say that it is extremely unlikely that directed retrocessions can be arranged for property risks with a loss limit below US $100 million and for casualty and inland marine risks with limits below US $10 million.

Profitability of the Market

Last but not least, a word about the profitability of the insurance business in Brazil. The combined ratio of the market during the past 4 years has moved between 104 and 109, which might be no surprise to global insurance market watchers. Thanks to relatively high interest rates, this result could be turned around on a net after-tax income basis; market returns on equity of 13 to 15 percent have been the rule. Given the country and currency risk and inflation rates, which are still moving substantially above the rates in Europe or the United States, that level of return may not have fully satisfied the expectation of all investors.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author’s employer or IRMI. This article does not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.