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The impact of Covid-19 on the Brazil’s (re)insurance sector

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Bárbara Bassani de Souza
TozziniFreire, São Paulo
bbassani@tozzinifreire.com.br

Introduction

This article highlights the impact of Covid-19 on Brazil’s (re)insurance sector and the challenges ahead. In spite of the pandemic, the economic situation has been improving during the second half of 2020, and Brazil’s insurance regulator, the Superintendence of Private Insurance (SUSEP), has been more active than ever, with the publication of new rules which will contribute to the growth of the sector.

Overview of the current economic climate

The year has been tough for Brazil’s insurance sector with a drop in net profit for insurance companies compared to last year, due to a reduction in sales during the pandemic.

The Covid-19 pandemic has given rise to discussions about premiums as the reduction of insured risk in the policies in force derived from the significant reduction of the insured activities, and the lack of payment premiums. Many insurers have negotiated better payment terms with the insured, for instance by postponing premium maturity dates.

The good news is that there are already signs of recovery of the (re)insurance sector, with a growth in August in the number of premiums issued, because product sales have been increasing.

Insurance lines in evidence

Some insurance lines have seen an impact on their claims, while others have tended to grow due to an increased need for contracting by the insured. Some of the insurance lines are highlighted below.

SUSEP has been monitoring claims related to Covid-19, but has guaranteed autonomy to insurers with respect to coverage decisions.

Life

Most life insurance policies in Brazil contain express exclusion for pandemics declared by competent bodies, as in the case of Covid-19. However, after many requests from policyholders and insurance brokers (regarding policies already purchased), insurers have decided to release this exclusion and provide coverage in case of death related to Covid-19. Regarding new policies, insurers have decided to cover risks relating to Covid-19, through a 30-90 day grace period from the time of contracting the policy.

Business interruption

In general, business interruption related to Covid-19 is considered an excluded risk, as the majority of the Brazilian policies only cover business interruption related to an event that causes material damage to the insured property. Some policies also expressly exclude substances that pose a real threat to human health.

Judicial disputes involving business interruption have not yet reached Brazil, but the outcome of litigation abroad may influence those in Brazil.

D&O

Directors and officers (D&O) insurance has been an important instrument for protection. However, during the current Covid-19 scenario, it became more essential than ever, considering the concern of the increase of the demands involving liability in the context of the pandemic.

Liability

There is still no significant increase in the purchasing of employer liability insurance, considering the difficulty in proving where the individual may have acquired Covid-19 and the causal link. However, employers can be held responsible for the failure to adopt the necessary care to contain the contagion, such as the compulsory use of face masks, the supplying of hand sanitiser, and so on.

Errors and omission (E&O) insurance to cover damages caused to third parties as a result of negligent acts performed in the exercise of insured professional functions are in evidence because Covid-19 brought challenges in terms of the exposing of professional risks in some categories, such as clinical trials, hospitals, accountings, technology and press.

Guarantee insurance

Usually, guarantee insurance policies (performance) cover the fulfilment of the obligations assumed by the debtor (principal) under a guaranteed contract signed with the creditor (insured). The wording of the policies establishes that ‘acts of god’ or force majeure are situations in which the insured may lose the right to receive the insurance amount and many discussions have stemmed from this point.

Cyber

As the Brazilian General Data Protection Law (LGPD) has recently come into force, companies have also been adopting remote work measures to tackle Covid-19. This has increased exposure to cyber risks, stimulating the cyber risk insurance sector.

Intermittent coverage

Intermittent coverage is allowed in several lines and since the pandemic began, there has been an increase in the procurement for this type of insurance, especially, for the car industry, as people have been driving much less than before. Additionally, pay per use insurance has already arrived in Brazil, although it is still not widespread.

Health

SUSEP is not responsible for health insurance regulation. There is a specific agency that deals with health, called the National Supplementary Health Agency (ANS). Several interventions were made by ANS regarding the coverage of tests to detect Covid-19, as well as regarding the impossibility of the applications of readjustments by insurers in certain healthcare plans and insurance.

Litigation

Disputes deliberating on insurance coverage due to Covid-19 are not yet in significant numbers in Brazil or about significant matters. During the pandemic, Brazil’s courts have ruled several judicial decisions relating to the possibility of replacing the number in judicial accounts by insurance, especially in labour and tax proceedings.

Claims adjustment has been adapted throughout the year to implement remote working methods.

Regulatory opportunities

SUSEP has been extremely active in producing new rules and has remained committed to the modernisation of the sector even during the pandemic.

Brazil’s insurance regulator has approved a new rule, establishing the segmentation of the supervised entities (insurers and local reinsurers) into four types. As a result, the minimum capital rules for setting up supervised companies and for prudential regulation vary according to size of company and line of business. For instance, the fixed portion of the capital base to conduct business in Brazil is only BRL 3m (approximately USD 536,000) for supervised companies operating exclusively in micro insurance.

Another important change in the (re)insurance market is the introduction of new limits for reinsurance cessions benefiting occasional reinsurers, ie, the reinsurer without an office or a bank account in Brazil. According to this new rule insurers may assign reinsurance to occasional reinsurers up to 95 per cent of the total premiums issued in reinsurance on an annual basis (the previous limit was ten per cent). Local reinsurers may also assign reinsurance to occasional reinsurers of up to 95 per cent of the total premiums on the risks they have underwritten, on an annual basis (the previous limit was 50 per cent).

A new rule also authorises the admitted reinsurer (the reinsurer with a local office) to convert its registration to occasional reinsurer, provided that the necessary requirements are fulfilled.

In terms of reinsurance, it is a good moment to do business in Brazil, both because of these new rules and as SUSEP has recently allowed the purchasing of reinsurance directly by private pensions and healthcare entities.

A regulatory sandbox is already in effect and there is a study underway for the implementation of the Open Insurance initiative.

Future regulatory developments

SUSEP has been planning to split the market into large risks and consumer risks in order to create more transparency and a better understanding of the wording of the policies by the insured. As a result, it is expected that insurance products will be more aligned to reinsurance ones and insurance products sold abroad.

Furthermore, SUSEP has been planning to introduce a Brazilian framework of Insurance-Linked Securities (ILS), allowing the creation of a locally domiciled reinsurer. Its exclusive purpose is to accept risks through reinsurance or retrocession agreements, but with the financing of its obligations arranged through the issuance of debt securities linked to the underlying re/insurance risks, similar to entities operating in other jurisdictions.

Conclusion

In view of the above, despite the crisis caused by the Covid-19 pandemic, and the challenges regarding coverage and exclusions, SUSEP’s recent moves, aimed at modernising the regulatory framework will bring benefits to the (re)insurance sector, with an expectation of growth over the next few years.

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