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• 7 October 2022

SUSEP opens public consultation notice on draft Resolution regulating the issuance of Insurance Risk Letter (ILS)

On September 29th, the Superintendence of Private Insurance (SUSEP) Public Consultation Notice No. 12/2022 was published. This invites all interested parties to submit within 30 (thirty) calendar days comments and suggestions to the draft CNSP Resolution on the issuance of Letter of Insurance Risk (LRS) through a Special Purpose Insurance Company (SSPE).

The draft aims to regulate the provisions of Law No. 14,430/2022, which was instigated by the international ILS (Insurance Linked Securities) market. This brings to Brazil the Insurance Risk Letter (LRS), through which the SSPE may issue and trade in the financial market a nominative, transferable and freely negotiated credit instrument linked to insurance and reinsurance risks and representing a promise of payment in cash.

In its explanatory note, SUSEP pointed out the need to regulate the process of constitution and operation of SSPEs, as well as the issuance of the LRS based on international models and observing the provisions of Law No. 14,430/2022.

The main highlights of the new regulation proposal are:

• Definition of counterparty: the draft defines as counterparty to the SSPE any insurer, reinsurer, supplementary pension entity, supplementary health operator, or legal entity of a public or private nature – either based in the country or not – that assigns insurance risks and reinsurance. In practical terms, the SSPE may appear both as a kind of ‘atypical insurer’, when underwriting risks directly from the policyholders for issuing the LRS and as an ‘atypical reinsurer’;
• Securitization operation: the rule recognizes the SSPE as an effective securitization entity as it defines a securitization operation as the ‘operation and acceptance of insurance and reinsurance risks by the SSPE’;
• Securitization guarantee: defines that the funds raised in the operation are its guarantors;
• Governance:

1. the SSPE shall appoint the responsible technical actuary, responsible technical director and director responsible for accounting;
2. administrators and service providers must be independent from the counterparty and investors;
3. The SSPE must establish a structure for Internal Controls, Risk Management, money laundering prevention, cyber security and ESG in accordance with the rules established for the other supervised bodies.

• Performance and Risk Transfer: The SSPE must have a specific corporate purpose as an SSPE, with risk transfer being allowed provided that:

1. the SSPE that receives the transferred risk is previously authorized by SUSEP;
2. assets and liabilities of each of the securitization operations are included individually;
3. the transfer agreement includes a clause providing that all rights and obligations arising from the original insurance and reinsurance risk acceptance agreement entered into between the counterparty and the SSPE will be preserved;
4. the investors holding the LRS have expressed their agreement with the transfer of insurance or reinsurance risk;
5. the counterparty has expressed its agreement with the transfer of insurance or reinsurance risk.

• Operation:

1. there will be no need for prior approval by SUSEP for the issuances;
2. the funds raised are guarantors of the securitization transaction;
3. forecast of the possibility of the insurance broker’s participation in the risk acceptance operation;
4. the LRS will only guarantee an SSPE risk acceptance agreement and said agreement and LRS must be associated with a single type of risk. That is, it will not be possible for an LRS to cover insurance, reinsurance, pension and health risks of conjugated form in the same LRS;
5. LRS may offer to holders, investors remuneration based on the full profitability of the equity independent of the operation or guarantee under the terms defined contractually, remuneration on the assets that make up the equity independent of the operation and may generate a redemption value lower than the value of its issuance based on any covered claim;
6. the draft Resolution restricted the acquisition of LRS to the professional investor, which must be verified by the SSPE at the time of negotiation;
7. the LRS must contain minimum and mandatory terms and clauses as detailed in the draft, and must have an expiration date of at most 5 years;
8. SUSEP must be notified of the approval of each issue within 5 days of approval by the competent management body;
9. the assumption of risk by the SSPE will only become effective after raising the funds through the issuance of LRS and coverage may be adjusted to the Maximum Risk Exposure if the funding is lower;
10. a complementary LRS may be issued in case of necessary funding for the reintegration of coverage;
11. it was reinforced that the SSPE is not directly liable to the policyholders in the event of acceptance of risks from insurers, insurance companies, pension entities or health operators; and
12. the risk acceptance agreement must provide for a maximum date for reporting claims by the counterparty, which must be equal to the lesser date of the LRS due date.

• Equity Independence: the precepts of the Law were reinforced. But the draft also provides that if at the time of redemption the independent equity of the operation is not sufficient to ensure the remuneration guaranteed by the SSPE to the holders of investors, the SSPE must complement this equity under the terms agreed in the LRS. The securitization operation will be an entity with equity independent of the other operations of the SSPE including its own accounting;
• Provisions: in addition to the creation and maintenance of standard provisions of the supervised bodies, the draft creates the need to establish two new technical provisions. Firstly, the provision for profitability guarantee (PGR), which covers the present value of the commitments assumed by the SSPE related to the guarantee of profitability determined in the LRS. Secondly, the technical insufficiency provision (PTI) with an amount equal to the sum of the equity insufficiency values ​​of each securitization operation. For the PGR and PTI, an actuarial technical note signed by the responsible actuary must be kept at SUSEP’s disposal. This presupposes that at each issuance, the supervised body must adjust its actuarial technical note;
• Assets: the draft contains two categories of provisions intended to guarantee the technical provisions of each securitization operation and the technical provision of the SSPE itself. This is to be done with the application of assets from both being applied in accordance with the rules of the Monetary Council (CMN) already in force and applicable to the other supervised bodies;
• Capital and Adjusted Shareholders’ Equity (PLA):

1. the minimum capital required for the SSPE to operate will be, as in the other supervised entities, the greater of the base capital and the risk capital;
2. the base capital will be the same applicable to other insurance companies in the market, and the composition of the risk capital will take into account each of the issues (in addition to other criteria), which means that a considerable investment will be necessary for those who intend to act as an SSPE;
3. as for the other supervised bodies, the PLA must always be equal to or greater than the CRM. The innovation in the draft is that the calculation of the SSPE’s PLA must not consider the assets independent of operations.

• Reporting and Ancillary Obligations: the SSPE must prepare audited financial statements for each securitization transaction.
• Registration: the LRS, when issued in Brazil, must be (i) registered in registration systems or a centralized deposit object authorized by the BCB or the CVM and (ii) when issued abroad, be registered in a centralized registration and deposit system, in a custody center, or regularly registered in institutions authorized by the competent authority in the country where the issuance takes place.

Interested parties may submit comments and suggestions to the draft proposed by SUSEP until 10/28/2022 at the regulatory agency’s site.

Lefosse’s Insurance, Reinsurance and Private Pension Plan practice will continue to follow the news on the subject and in particular any changes made to the draft prepared by SUSEP after the Public Consultation is concluded. For more information about this subject, or others that may be of interest to you, please contact our Insurance, Reinsurance and Private Pension practice professionals.

Luciana Prado
luciana.prado@lefosse.com
Tel.: (+55) 11 3024 6371

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