Protectionist trends in Latin America and Asia
In recent years, reinsurers increasingly have directed their attention to so-called "regulatory risks”. Typically regulatory risks will arise anytime an unexpected change takes place in a state’s supervisory or regulatory environment which prospectively may negatively impact the reinsurance sector. In many countries, such regulatory changes are driven by the desire to protect domestic markets.
In the past decade, protectionist measures have affected the reinsurance market generally, although this trend is most clearly observable in Latin America and Asia. In these regions specifically, reinsurers have been compelled to rethink their transnational business strategies comprehensively, including especially the manner in which they provide reinsurance protection to local cedents. The following sections will examine recent protectionisttrends affecting the reinsurance industry in Latin America and Asia.
Latin America
In Brazil, the monopoly held by IRB Brasil Resseguros SA ended in 2008. However, the legal framework for foreign reinsurers remains quite restrictive. Under the new regime three classes of authorisation were (and still) are available to reinsurance companies: local reinsurers (with a local head office), admitted reinsurers (with a local representative office) and eventual reinsurers (merely registered with the supervisory entity).
Initially local reinsurers had the "right of first refusal” by which local insurance companies had to make a preferential offer to them of at least 60% of total premiums ceded per risk. Currently the local insurance companies are obliged to cede at least 40% of each reinsurance cession to local reinsurers.
Intra-group cessions were originally prohibited. This rule was partly lifted in 2011 and risk transfer from insurers and local reinsurers to companies based abroad and belonging to the same financial group was permitted up to 20% of the premium corresponding to each cession.
Recently, these restrictions have softened. In 2015 the cession limits for intra-group transfers were raised from 20% to 75% and the compulsory level of reinsurance to be placed with local reinsurers dropped from 40% to 15%. These proposals are to be gradually implemented across a five-year time-frame.
In Argentina after the liquidation of the reinsurance monopolist INDER (Instituto Nacional de Reaseguros), the regime allowed foreign reinsurers to operate from their home country, either upon registration with the regulator or via an authorised broker.
However, following the Brazilian trend the Argentinean regulator in 2011 prohibited almost all cross-border reinsurance operations and established a class system concerning authorisation for reinsurance companies to do local business: local insurance companies were obliged to cede reinsurance risks only to local reinsurers and admitted reinsurers were limited to offer retrocession coverage to local reinsurers.
Similar to Brazil intra-group risk transfers were limited to 40% of the annual premium and local reinsurers had to retain at least 15% of the reinsurance premium ceded to them.
Now, with the change of government, in Argentina too there is a trend in reopening the market for foreign reinsuers. As of January 1, 2017 local insurers are allowed to place 10% of their ceded premiums directly with admitted reinsurers, this percentage gradually increasing to 80% over an eight-year period.
Ecuador too saw new regulations as of 2014 by which the outflow of reinsurance premiums from the country were to be reduced. Maximum cession percentages were established for certain lines of business, alternative risk transfer reinsurance was prohibited and a basic minimum commission was introduced for quota share reinsurance contracts.
Asia
As in Brazil and Argentina, the Indian reinsurance regulatory regime establishes a hierarchy according to which domestic insurers must offer reinsurance cessions. Under the Indian system, domestic insurers must offer all reinsurance cessions initially to domestic reinsurers.
If domestic reinsurers do not accept the business, Indian insurers are permitted to offer the respective reinsurance business to foreign reinsurers who have established a branch office in India. Only after respective foreign reinsurers also reject the business will domestic reinsurers be permitted to offer reinsurance cessions to other foreign reinsurers.
If domestic reinsurers do not accept the business, Indian insurers are permitted to offer the respective reinsurance business to foreign reinsurers who have established a branch office in India. Only after respective foreign reinsurers also reject the business will domestic reinsurers be permitted to offer reinsurance cessions to other foreign reinsurers.
The system establishes a preferential right of first acceptance for domestic reinsurers and a secondary acceptance right for foreign reinsurers with an established presence in India.
Compared with Latin American models, the Indian system appears less rigid in retaining local reinsurance cessions. As few domestic reinsurance carriers exist in India (General Insurance Corporation of India Re currently is the only major carrier), initial offers often reach the second stage of the hierarchy consisting of foreign reinsurers with a local branch office.
Foreign reinsurers willing to invest in a local branch office therefore will be well-placed to receive a considerable share of India’s domestic reinsurance business.
Foreign reinsurers willing to invest in a local branch office therefore will be well-placed to receive a considerable share of India’s domestic reinsurance business.
By contrast, the Indonesian legislature has enacted a stricter, more protectionist regime. The Indonesian system requires local insurers to cede 100% of so-called ‘simple risks’ exclusively to domestic reinsurance companies. Simple risks include in particular health and accident insurance as well as credit/surety business. All other risks are qualified as ‘non-simple risks’. At least a 25% share of these risks must be ceded to local reinsurers.
The obligatory cessions policy allows for no practical exception, so that consequently, foreign reinsurers effectively are forced to conduct business via retrocession.
The Indian and Indonesian models are noted in other Asian countries and may well gain greater recognition moving forward.
In this vein, the Vietnamese government has announced its intention to institute an Indian or Indonesian style system in the near future. Although presently no corresponding regulatory system has been established, this appears to be only a matter of time.
Outlook
While protectionism presently contributes towards regulatory risks in the reinsurance industry and will continue to do so in the future, two very different protectionist trends are likely to influence the regulatory regimes in Latin America and Asia.
The intensity of protectionist measures in Latin America appears to be linked to the preferences of changing political administrations.
The intensity of protectionist measures in Latin America appears to be linked to the preferences of changing political administrations.
As a consequence hereof, the new governments in Argentina and Brazil respectively have and likely will continue to lead to a certain liberalization of the market in the near future.
By contrast, the strict protectionist models in India and Indonesia have influenced the regulatory environment in numerous Asian countries. It therefore is probable that many regions in Asia will tend towards greater protectionism in the immediate future.
By Phillip K. Schulz (Senior Legal Counsel at Hannover Re) and Shivaun Moreno (Senior Legal Counsel at the head office of the Hannover Re Group)
By contrast, the strict protectionist models in India and Indonesia have influenced the regulatory environment in numerous Asian countries. It therefore is probable that many regions in Asia will tend towards greater protectionism in the immediate future.
By Phillip K. Schulz (Senior Legal Counsel at Hannover Re) and Shivaun Moreno (Senior Legal Counsel at the head office of the Hannover Re Group)
