SUSEP publishes Resolution CNSP nº 453/2022 on the Insurance Risk Letter (LRS) after public consultation
The Superintendence of Private Insurance (SUSEP) has published CNSP Resolution No. 453, of December 19, 2022, after analyzing suggestions sent to the body through Public Consultation No. 12/2022 on the issuance of Letter Insurance Risk (LRS) through a Specific Purpose Insurance Company (SSPE).
The Resolution regulates the provisions of Law No. 14,430/2022, revoking CNSP Resolution No. 396/2020 and was inspired by the international ILS (Insurance Linked Securities) market. The Resolution allows an SSPE to trade a nominative, transferable credit instrument in the financial market and freely negotiate when linked to insurance and reinsurance risks that represent a promise to pay in cash.
After publication of the Public Consultation Notice, Lefosse’s Insurance, Reinsurance and Private Pension practice submitted suggestions and comments to the draft Resolution consulted. However, the consolidated regulations did not produce major changes to the draft.
After analyzing the suggestions, SUSEP changed (i) the nomenclature of the operation from risk acceptance to risk transfer (ii) the minimum content of the provisions of the LRS (iii) increased the maximum maturity of the LRS (iv) the possibility of changing the risk transfer agreement, upon agreement between the counterparty, SSPE and titleholders (v) the minimum base capital of SSPEs (vi) amendments to CNSP Resolution No. 388/2020 regarding technical provisions and segmentation rules.
Below we highlight the main points of the Resolution, which enable the issuance of the LRS.
Definitions (article 2):
- SSPE: company with the sole purpose of carrying out operation(s) for the transfer of insurance risks, supplementary pension, supplementary health, reinsurance, or retrocession of counterparty(ies) and its financing via issuance of LRS with equity independence. In other words, the SSPE may appear both as a type of atypical insurer – when underwriting risks directly from policyholders to issue the LRS – and as an atypical reinsurer.
- LRS: nominative, transferable and freely negotiated credit instrument representing a promise to pay in cash linked to insurance and reinsurance risks
- Counterparty: any insurer, reinsurer, supplementary pension entity, supplementary health operator, or legal entity, whether public or private, headquartered in Brazil or not, that assigns insurance and reinsurance risks.
- Securitization operation (Operation): transfer of insurance and reinsurance risks to the SSPE, which raises the necessary funds as collateral through the LRS with equity independence
- Securitization guarantee: defines that the resources raised in the Operation are its guarantors
- Maximum Risk Exposure (EMR): nominal value of the maximum possible loss of the risk transfer contract plus expenses that SSPE may incur for possible claims.
SSPE performance and governance (articles 3 and 4):
- Appoint technically responsible actuary, technically responsible director and director responsible for accounting
- Administrators and service providers must be independent from the counterparty and investors
- The SSPE must have a specific corporate purpose as an SSPE and must comply with the general structuring and alteration rules applicable to supervised bodies. This is in addition to the obligation to establish a structure for Internal Controls, Risk Management, prevention and combat of money laundering, cyber security and ESG
- Transfer of Risk: is allowed provided that:
- the SSPE receiving the transferred risk is previously authorized by SUSEP
- assets and liabilities of each of the securitization operations are included individually
- a clause is included in the transfer agreement stating that all rights and obligations arising from the original agreement entered into between the counterparty and SSPE will be preserved
- there is agreement between the investors holding the LRS and the counterparty
- SUSEP regulations are observed, which must previously approve the transfer.
Operation (articles 5 to 19):
- May be mediated by an insurance broker or broker (individual or legal entity) or be carried out through direct negotiation
- There is no need for prior approval by SUSEP for emissions
- The LRS will guarantee only one transfer contract, which together with the 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 in a combined manner
- LRS may offer titleholder investors (i) remuneration related to the profitability of equity regardless of the operation or (ii) guarantee, under contractually defined terms, remuneration on the assets that make up this equity. In both cases, it may generate a redemption value lower than the issue value due to a possible covered claim
- Mandatory acquisition of LRS only for professional investors, which must be verified by the SSPE at the time of negotiation
- The LRS must have a maximum maturity of 10 (ten) years
- The LRS issuance document must contain minimum and mandatory terms and clauses as detailed in the Resolution (article 12)
- SUSEP must be notified of the approval of each issue within 5 days of approval by the relevant management body
- The assumption of risk by the SSPE will become effective only after raising the funds through the issuance of LRS, which must be sufficient to cover the EMR. But there may be an adjustment of the coverage to the EMR if the raising is lower
- SSPE will not respond directly to the insured, participant, beneficiary or beneficiary. However, in the event of insolvency that generates liquidation or bankruptcy of the counterparty, direct payment of the portion corresponding to the assignment of risk to SSPE will be allowed
- The risk transfer agreement must provide for the maximum date for reporting claims by the counterparty, which must be equal to or less than the due date of the LRS.
Patrimonial Independence (articles 20 to 22):
- The securitization operation will have equity independence and the amount to be redeemed by investors will be equal to the Operation’s independent equity after payment of claims due, administration costs and tax obligations;
- The value of the equity must be sufficient at the time of the effective obligation to meet the commitments assumed with the holder investors and counterpart(s). The SSPE equity can be met in a subsidiary way (i.e., if the independent equity is not sufficient).
- Provisions: in addition to the creation and maintenance of standard supervised provisions, the SSPE must create two new technical provisions:
- (i) Profitability Guarantee Provision (PGR): covers the present value of the commitments assumed by SSPE related to the profitability guarantee determined in the LRS; and the
- (ii) Technical reserve for insufficiency (PTI): with an amount equal to the sum of the equity insufficiency amounts of each securitization operation.
- For the PGR and PTI, an actuarial technical note must be made available to SUSEP and signed by the technically responsible actuary. This assumes that with each issue, the supervised body must adjust its actuarial technical note
- Assets: the draft brings two categories of provisions: (i) those destined to guarantee the technical provisions of each securitization operation (ii) and the technical provision of the SSPE itself, which shall be applied in accordance with the rules of the National Monetary Council (CMN) already in force and in accordance with those applicable to the other supervised bodies
- Assets guaranteeing technical provisions, under custody or guarantors of independent assets must be registered in accounts linked to SUSEP in institutions authorized by the Central Bank of Brazil or CVM that have an agreement with the entity
- Capital and Adjusted Shareholders’ Equity (PLA):
- the minimum capital required (CMR) for the SSPE to operate will be the same as with the other supervised bodies, that is, the higher value between base capital and risk capital
- the base capital must be composed of the sum of the fixed portion of BRL 1,200,000.00 (one million, two hundred thousand reais) and the variable portion of BRL 100,000.00 (one hundred thousand reais) per operation of current securitization, which limits the base capital to the amount established for insurance companies observing the specific segmentation
- as with the other supervised bodies, the PLA must always be equal to or greater than the CRM. The calculation of the PLA must not consider the assets independent of the operations.
- Reports and Ancillary Obligations: the SSPE must prepare audited financial statements for each securitization operation and must set up an Audit Committee or director responsible for monitoring, supervising and complying with the rules and procedures for independent accounting auditing
- When issued in Brazil, the LRS must be (i) registered in registration systems or object of centralized deposit authorized by the BCB or the CVM; and (ii) when issued abroad, be registered in a registration and centralized deposit system, in a central custody, or regularly registered in institutions authorized by the competent authority in the country where the issue is carried out.
Amendments to CNSP Resolution No. 388/2020:
- Provision of an exception for SSPEs in the parameter rules for measuring technical provisions in segment S1 (art. 4, §1, I), S2 (art. 4, §2, I) and S3 (art. 4, §3, I); and
- Provision of an exception for SSPEs from the rules on premium amounts and technical provisions of supervised bodies (article 4, paragraph 6).
The Resolution takes effect from January 2, 2023, enabling the application of Law No. 14,430/2022 and the respective issuance of the LRS by the SSPEs.
Lefosse’s Insurance, Reinsurance and Private Pension practice will continue to follow the news and changes that impact the sector. For further clarification on this subject, or others that may be of interest to you, please contact our professionals.
Luciana Dias Prado
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+55 11 3024-6424