Far beyond the Insurance Risk Letter: What the Law no. 14.430/2022 brings to the insurance market
On 08/04/2022, Law No. 14.430, of August 3, 2022, conversion of Provisional Measure no. 1,103, of March 15, 2022 (MP), was published.
For the insurance and reinsurance market, the new Law addresses two issues of significant impact:
- The creation and basic rules for issuing the Letter of Insurance Risk (LRS), defined as a nominative, transferable and freely negotiated credit instrument, representing a promise of payment in cash linked to insurance and reinsurance risks; and
- The amendment of provisions related to the insurance broker activities by amending provisions of Law no. 4,594 of 1964 and Decree-Law no. 73 of November 21, 1966.
1) Insurance Risk Letter (LRS)
The provisions of the new Law mostly followed the entirety of what was already in the MP but with the inclusion of the following new items:
- provision on the inspection fee applicable to the Special Purpose Insurance Company (SSPE) (article 11)
- provision providing that the National Council of Private Insurance (CNSP) may define requirements for the risk transfer agreements for the SSPE to provide a deadline for the risks to be considered covered and
- provision determining that the allocation or separation of assets produces effects in relation to any other debts of the SSPE, including those of a tax, social security or labor nature and in particular regarding the guarantees and privileges attributed to them. This brings even more robustness and legal certainty to the institution of patrimonial independence between the SSPE businesses and the operation whose financing took place through the issuance of the LRS.
In general, the new Law ratifies the MP concepts and brings to the Brazilian insurance market an instrument already known in the international market as insurance linked security or ILS.
The idea behind the ILS is simple: to enable financial market investors to participate in insurance, reinsurance, health and pension risks that were originally restricted to funding by insurance and reinsurance companies.
This move brings advantages for everyone involved. On the insured’s side, there may be a greater offer of capacity to cover a certain risk – whether portfolio or individual risks. For the SSPE there is an additional possibility of placing the risk on the market with one more capacity resource and risk sharing in addition to coinsurance and reinsurance. Finally, the financial market investor will have at their disposal another option for diversification.
The asset allocation brought in by the law was the last major obstacle to be overcome in preventing the market from putting into practice the regulation of the Superintendence of Private Insurance (SUSEP) already issued by CNSP Resolution No. 396, of December 11, 2020, which have already regulated the ILS in Brazil.
With the process introduced by the Law, the investor has the security that the equity raised in the market – through the issuance of the LRS to face a certain risk -will not be affected by the SSPE’s liabilities or by the other operations backing the various LRSs to be issued by the insurer.
It is now up to the CNSP and SUSEP to regulate the changes and enable the first LRS issuance. In this regard, regulators will face challenges to make the text of the Law compatible with the provisions already in force in Decree-Law no. 73/1966 and Complementary Law no. 126, of January 15, 2007. This is because these rules make it impossible for an insurer to operate with reinsurance or health risks as the SSPE intends to do.
In summary, the Law represents major progress both for the insurance market and for the Brazilian capital market and should lead investors to a better understanding of the idea and the insurance system behind it.
2) Insurance Brokers
In the Law, there are provisions that have almost gone unnoticed but bring significant changes in relation to the role of the insurance broker and remuneration. This changes ideas that have guided businesses in the insurance market for decades.
The amendment of article 1 of Law no. 4,594, of December 29, 1964, expands the role of the insurance broker professional. This changes the role from ‘independent intermediary’ that simply brought the parties together to carry out their business; to that of an effective representative and service provider of the insured. Therefore, the role affects responsibility concerning (i) identifying the risk and interest that is intended to be guaranteed, (ii) recommending measures that allow obtaining the insurance guarantee, (iii) identifying and recommending the type of insurance that best meets the needs of the insured and the beneficiary, (iv) the identification and recommendation of the insurer, (v) assistance to the insured during the execution and duration of the contract, as well as duties to the beneficiary when the claim is settled and (vi) assistance to the insured in the renewal and preservation of the guarantee of his interest.
Such provision will profoundly change how the broker-insurer-insured relationship is understood including for the purposes of payment and treatment of the remuneration due to the broker.
Another major change is the determination that the insurance broker must transfer ‘incontinenti’ the amount of premiums collected to the insurer. Despite the pending regulation, there is room for interpretation of what is meant by ‘incontinenti’. It would appear that the broker will be forbidden to remain with the premium collected from the insured for long periods and therefore obtain financial income.
But the main big change will come in on December 31, 2022, with the repeal of article 19 of Law no. 4,594/1964. This determined the payment of the amount equivalent to the insurance commission to the Insurance Educational Development Fund (managed by the Fundação Escola Nacional de Seguros (FUNENSEG)) when insurance is contracting directly between the insured and the insurance company without the intermediation of a broker.
Insurance broker intermediation in Brazil was never mandatory, but the payment of commission was mandatory. So, the rule was: brokerage commission should be paid either to the broker (when an intermediation took place) or to FUNENSEG (in a direct sale scenario) which means that insurance premium to be paid by the insurance would always be impacted by such additional amount.
Now, with this upcoming radical change, neither intermediation nor commission payment is mandatory. This represents a new milestone for the market as insurers will have to reinvent themselves in terms of distribution and brokers will have to demonstrate to policyholders the real value of intermediation – regarding their services both in the placement of risk and in the administration and assistance – to the insured during the term of the policy.
Lefosse’s Insurance, Reinsurance and Private Pension practice will continue to monitor these developments and other market topics to provide our clients with information relevant to their businesses.
For further clarification on the matter, please contact: