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>> BRAZIL
Brazilian Reinsurance Market: After one year, nothing changed



Roberto Castro, P/C underwriter with IRB-Brasil Re, offers an updated view of the Brazilian insurance market.


The largest insurance market in Latin America still attracts the presence of international insurance groups, which have interest in expanding their business. However, reinsurance operations remain unchanged, reflecting the same condition mentioned in the last year article written for issue #250, for the Montecarlo Rendez-Vous .
The Direct Action of Unconstitutionality presented by Workers' Party, the interim equitable relief of which was granted on July 14, 2000, stopped the reinsurance market opening and IRB'S privatization process until the Supreme Court decides on the merits, which has not occurred up to date. The decision is related to the regulation of coinsurance and reinsurance to be transferred from IRB- Brasil Re to Superintendencia de Seguros Privados (SUSEP) through a supplementary constitutional law and not by an ordinary law.
This decision delay produced results. Some reinsurers, which established their representation offices in Brazil preparing themselves for the opening, closed their doors and returned already. A direct consequence of this attitude was the loss of work positions in a market which was growing up. There were around 200 professionals working at the offices of the reinsurers and reinsurance brokers established in Brazil. Now they are around 130 employees. Reinsurers that have not finished their activities in Brazil reduced their people dramatically, and were brought to a standstill segment. This process goes against the tendency of labor market with strong reduction.
There was a temporary reduction on the Brazilian market retention capacity during the second semester of 2000. By means of a resolution issued by Conselho Nacional de Seguros Privados (CNSP) in respect of Law 9.932 -now outstanding- domestic retrocession mechanism was extincted. This resolution forced IRB-Brasil Re review its own retentions and negotiate treaties with international market in order to maintain the same level of retention within the country. This procedure succeeded and could be seen by total amount of premium written by IRB Brazil Re. Its premium income increased around 4% in relation to 1999 figures and the total premium retroceded to international market increased only 8% in relation to the previous year. This shows that the Brazilian reinsurer fulfilled its role - enpowering risk retention in the domestic market.
The huge loss ratio reached for the second year forced IRB Brasil Re take some measures in order to improve results, especially in property insurance, keeping pace with international market by increasing premium rates, restraining coverages, adapting deductibles and reinforcing recommendations demanded in its loss control reports.
Hard market procedures ratified the importance of fire branch in IRB's portfolio. This branch raised 15% in relation to 1999, which represented more than 20% of the IRB's total premium income in 2000. However, branches that presented high increases were bonds (increase of 73%), because of privatization on railroad and telecommunications companies; agricultural risks (140%) because an expertise insurer began operation on this branch; personal accident (57%) and Group Life (29%). The combined ratio raised from 101,2% in 1999 to 118,8% in 2000 mainly due to loss ratio above mentioned. Because there was no change in respect to opening reinsurance market, the migration of coinsurance premiums to reinsurance did not happen. A huge part of premiums written in Brazilian market comprises coinsurance transactions to the detriment of reinsurance. Certainly, after market disclosure, a majority of these operations will migrate to reinsurance. Coinsurance should be restricted amongst insurers belonging to an insurance group or some of the huge risks in the market. In the administrative field, IRB-Brasil Re is taking vital measures to be competitive in an open market scenario. There has been a substantial technological improvement and the number of employees was reduced to around 500 people, they were 1230 in 1995. Step by step, IRB's profile is being shaped to reflect a nationwide professional reinsurer profile.
There is no definition regarding the procedures for the in Brazilian reinsurance market opening. We hope for a Supreme Court's decision on merits but, unfortunately, it hasn't happened yet. On turn, Brazilian government did not submit a supplementary constitutional bill to solve the question, perhaps because assuming that the Government would recognize the mistake of passing an ordinary law in order to regulate the market opening. Another reason would be the problem of presenting a bill an year before general elections, which could postpone any decision on this matter in the Congress. The National Insurers Association (FENASEG), on its turn, does lobby in order to hurry up this resolution but without results until now.
There is a strong feeling in the market that sustains as a solution to transform IRB-Brasil Re in a wholly-owned state company in order to facilitate the opening. They argue that IRB's privatization is the real problem for this opening. There are many doubts whether this hypothesis can be materialized.
At this moment no one knows if the reinsurance market opening will take place but that matter is outstanding in the Supreme Court.
We hope to having a definition soonest regarding this matter in order to develop the major Latin American insurance market, leading it to a deserved position in the international scenario.

Brazilian Insurance Market In 2000 Brazilian insurance market confirmed an increasing tendency. Total written premium income amounted R$ 22,989,012 (aprox. U$S 11.8 millions) around 13% more in relation to 1999 when it reached R$ 20,324,676,000 (aprox. U$S 11.3 millions). The main branches remain being Automobile, Life and Health. They collected 73.62% of the total written premium income. Automobile is the most important branch in the market with almost 1/3 of the total. Health and Life insurance still takes advantage due to the huge problem with public health assistance in Brazil and to its economy presenting low inflation rates in the last years. There were no substantial changes in other branches.

(SEE ATTACHED TABLE)
(SEE ATTACHED FIGURE)

As we can notice, composition of insurance branches in Brazil is one that dispense reinsurance support in large scale, demanding it only for huge risks and catastrophe exposures. This explains, partially, the fact that reinsurance comprised only 5.17% of the total written premium income of the market.
Regarding market loss ratio, this remained basically with no change, lowering from 68.92% in 1999 to 67.98% in 2000. Health and Automobile branches presented the highest loss ratios, both above 70%.
Expense ratio has an average of 20%. This leads to a combined ratio of 88%, an excellent level when compared to other insurance markets around the world.
Another matter to be considered is the increasing participation of foreign capital in the Brazilian insurance market. In 1994, this participation amounted 4.16% of the premium income. After three years, in 1997, this participation had already reached 17.94% . In 1999, 29.54% of the premium income belonged to insurers which are total or partially owned by foreign capital. A first glance in the 2000 figures shows us that this participation reached around 32%, i.e., 1/3 of the premium income. This situation ratifies the foreign insurers point of view that they have an excellent opportunity to increase their operations in Brazil. That is an ever growing market, with no catastrophic risks like earthquakes, hurricanes, and tornadoes that could impact property and liability policies with the perspective of better business opportunities, while topics like reinsurance and workers compensation can be dealed with no restrictions both by private insurers and reinsurers. Let's wait and see.

(SEE ATTACHED TABLE)

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