Editor’s note: Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados maintains a leading insurance department in Brazil. The firm was involved in many of the most significant and regulation-innovative insurance matters, following closely the latest developments of this industry. Insurance in Brazil is evolving rapidly and has enormous potential yet to be explored, as partner Cassio Gama Amaral, who is a member of this Band 1 firm and also features in our rankings, and his associate André Hermont Jahara, explain in the article below. In his 15-year career, Amaral advised on several high-stakes insurance matters and helped companies like iFood, Quinto Andar and Airbnb enter the insurance market in Brazil.
Insurance in Brazil
In Brazil, insurance contracts have always been strictly regulated and poorly standardized.
Institutionally organized by Decree-Law No. 73/66 (enacted during the military dictatorship and still in force) the Brazilian insurance industry had always been severely restricted due to the state monopoly (which ended in 2007) of the Brazilian Reinsurance Institute – IRB (i.e. Instituto de Resseguro do Brasil).
The commoditization of coverages and products prevailed during the state monopoly, with standardized contractual terms and conditions, premiums imposed by the monopolist reinsurer and part of the stakeholders conveniently immobilized by the State. The insured, in this context, was obliged to abide by anachronistic schemes of allocation and dispersion of risks, and even upon eventual influxes of international know-how, the Brazilian market used to simply translate, word-by-word, the relevant terms and conditions.
The data demonstrate the Brazilian market’s historic stunting.
According to the World Bank, in Brazil, the ratio between the volume of life insurance premiums and GDP in 2019 was 0.37%, way behind the other Latin American countries, such as Chile (2.84%), Colombia (1.17%) and Mexico (1%), and even further behind developed countries, such as France (5.87%), USA (3.35%) and Germany (3.06%).Brazil possesses an insurance density of USD281, much lower than other developing countries such as Chile (USD673) and Uruguay (USD449), and (once again) even lower than developing countries from other regions (for example, South Africa and Malaysia amount to USD840 and USD518, respectively).
In our country, insurance is far from fulfilling its role as an important driver of growth and development. According to the data released by Swiss Re in 'Sigma Report No. 4 - World insurance: riding out the 2020 pandemic storm', the insurance penetration in Brazil, i.e. the ratio between the total amount of premiums and the GDP, is only 4.03%, when the average penetration in the world is 7.23%.The data show that Brazil is far from achieving the optimal potential of insurance penetration in society, opposed to what we see in developed countries such as the United Kingdom (10.3%) and France (9.21%), and even in developing countries like South Africa (13.4%), Namibia (10.44%), Taiwan (19.97%) and South Korea (10.78%).
If we remove life insurance under the capitalization and supplementary health regime from the equation, the insurance penetration in Brazil decreases to just 1.9% of the GDP.
In light of that, the National Council of Private Insurance – CNSP (Conselho Nacional de Seguros Privados) and the Brazilian Private Insurance Authority – SUSEP (Superintendência de Seguros Privados) have been the biggest innovation vectors for the Brazilian market over the past few years, stimulating and encouraging the insurance market to think in the context of a fluid, agile and challenging world, whose main contributions are highlighted below:
1. the creation of segments for regulated entities to reduce regulatory requirements for smaller/less complex companies (CNSP Resolution No. 388/2020);
2. permitted insurtechs to operate temporarily in a simplified regulatory environment, the so-called regulatory sandbox (CNSP Resolution No. 381/2020);
3. the creation of a regulatory framework that permitted the issuance of Insurance Linked Securities – ILS and the creation of reinsurers with specific purpose – RPE, revealing Brazil as a possible debt market hub (CNSP Resolution No. 396/2020);
4. permitted on-demand or on-off insurance (SUSEP Circular Letter No. 592/2019);
5. allowed pension entities and health insurance operators to cede risks in reinsurance (CNSP Resolution No. 380/2020);
6. the creation of ethical and transparency rules and principles applicable to insurance intermediaries (CNSP Resolution No. 382/2020);
7. the creation of the so-called Operation Registration System (CNSP Resolution No. 383/2020);
8. the definition of the rules for the issuance of subordinated debt and feasibility of ordinary debt, allowing a better structuring of the capital by regulated entities (CNSP Resolution No. 391/2020);
9. updated the sanctioning framework prioritizing prevention over penalization (CNSP Resolution No. 393/2020);
10. simplified the contracting of insurance abroad (SUSEP Circular Letter No. 603/2020);
11. finally, the flexibilization and simplification of P&C insurance rules and, consequently, the extinction of standardized products, both regarding large risks and massive insurance (CNSP Resolution No. 407/2021, SUSEP Circular Letter No. 620/2020 and SUSEP Circular Letter No. 621/2021).
CNSP Resolution No. 407, dated March 29, 2021, which creates principles for the elaboration and negotiation of P&C large risks, and SUSEP Circular Letter No. 621, dated February 12, 2021, which provides the operating rules of the coverages of P&C massive insurance, are yet another important milestone towards regulatory flexibilization of insurance contracts in Brazil.
The CNSP has adopted a liberal stance by creating segments in the market and dividing what would be considered “large risks” (i.e. where technical and economic bargaining power is deemed to be equivalent between the parties) from what would be considered massive insurance (i.e. involving a party that is usually technically and economically less sophisticated and, therefore, vulnerable).
For large risks, as stated in CNSP Resolution No. 407/2021, CNSP has abandoned the micro regulation and standardization of insurance contracts’ wording on behalf of a principles-driven approach by highlighting (a) full negotiation freedom; (b) good faith; (c) transparency and straightforwardness of information; (d) equal treatment between the contracting parties; (e) encouragement for alternative dispute resolution; and (f) subsidiary and exceptional state intervention in products design.
On the other hand, the resolution indicates the subjects that must be necessarily ruled by the parties under the insurance contracts, standing out, among the twelve specific listed items, the covered and excluded risks, the insurer’s maximum indemnification limit, the scenarios of loss of right to indemnification and the proceeding for the renewal of the policy. It is also important to bear in mind that the contractual conditions of the policy and actuarial technical notes no longer need be presented to SUSEP.
As for the massive insurance (SUSEP Circular Letter No. 621/2021), SUSEP has followed the same approach towards flexibilization by extinguishing standardized products and providing large flexibility so that the market players can create and combine P&C insurance products, as long as the players follow minimal mandatory requirements for the contractual conditions.
These changes introduced by CNSP and by SUSEP are supported by the protection of the freedom of initiative and the pursuit of economic activities, as set forth in Article 1, item IV and Article 170, Sole Paragraph of the Federal Constitution, which are compatible with the State’s role as a regulating and normative agent, as set forth in Article 174 of the Federal Constitution.
The Economic Freedom Act also reinforces capitalism’s basic pillars and delivers a clear message to market players and particularly to regulators by determining that provisions of a public order nature must be interpreted in favour of economic freedom, good faith, the contractual conditions set forth by private parties, investments and private property (Article 1, Second Paragraph), as well as to establish the principle of “subsidiary and exceptional state intervention over exercise of economic activities” (Article 2, item III).
In this context, also as a guarantee of freedom of initiative, the Economic Freedom Act sets forth in Article 4 other parameters in order to prevent regulatory abuses by the regulating bodies of the federation, such as “demanding technical specification that is not necessary to reach the aimed result”, “increasing the transactions costs without demonstration of the resulting benefits”, and “drafting rules that prevent or retard innovation and new technologies, business or process models, except for situations considered of high risk by applicable regulation”.
Finally, the prevalence of individual autonomy over state interference has been expressly reinforced with the introduction, by the Economic Freedom Act, of a Sole Paragraph to Article 421 of the Civil Code, which provides that “in private contractual relations, the principles of minimal state intervention and exceptional contractual revision shall prevail” in the context of the principle of social function of the contract.
In view of the above, it seems that CNSP and SUSEP, as regulators of the national private insurance system, could not deviate from the Brazilian State’s political choice to prioritize innovation and soften the obligations of the insurance contract, providing freedom to the players to design new products, combine coverages and transform the experience of the client, who is used to a standoffish relation and to the mindset of “set it and forget it”.
By carrying out the necessary analysis of proportionality and reasonability for the establishment of the liberal approach described above, CNSP and SUSEP turn to the macroeconomic variables which indicate the small insurance penetration and dispersion in the country and its timid role in contributing to economic growth vis-à-vis what is seen in other developing countries.
The question that they raise or should reasonably raise would be: Should we, the regulating bodies, maintain the status quo of decades regarding state interference, based on a dictatorial decree that forged the national private insurance system, or, considering the technological developments of the last few years and the current liberal influx we live in, generate an environment of flexibility and monitored autonomy by the players, with direct stimulus towards innovation and to attract new entrants?
The answer seems obvious.