Advanta News - December 2014
Dec 15, 2014
Brazil, a maturing market
In 1807, the Portuguese Prince Regent ordered the transfer of the Portuguese Royal Court to Brazil in anticipation of an invasion of the Iberian Peninsula by Napoleon Bonaparte’s army. Since the Royal Court arrived in Brazil, the Brazilian ports have been open to friendly nations, which led to the establishment of the first, national, Brazilian insurers. Reinsurance was provided by foreign companies until 1939 when the then President of the Republic, Getúlio Vargas, created the Brazilian Reinsurance Institute (IRB) to protect the income generated within the country.
This measure proved effective in the development of a strong, local market. On the other hand, the IRB was recognised as a state monopoly, characterised by interventionist and protectionist policies. As a result, limitations imposed on professionals within the insurance industry brought certain stagnation and impeded the development of contracts, underwriting and risk analysis (pre-inspections, risk management, claim adjustments etc). Consequently, in a market regulated by the IRB, all insurance products had similar covers, with very few variations.
The end of military dictatorship in 1985 marked the beginning of democracy in Brazil. In 1989, the first, civilian-administered, presidential elections by popular vote took place, initiating a period of economic liberalisation and greater integration in the world economy. The success of these social and economic reforms required profound changes within Brazilian society.
The Brazilian insurance industry, like other industries in the country, was considerably isolated from its counterparts in more globalised economies. In order to keep pace with the growing demands of the industry, major changes were required. It was necessary to reform the domestic insurance market to comply with the international markets and initiatives were introduced to modernise the entire sector; the first step of which was to put an end to the IRB monopoly.
After nearly 70 years, this monopoly came to an end in 2007 with the introduction of Supplementary Law No. 126/2007. This gave the insurance and reinsurance markets the opportunity to develop in line with other countries according to free market practices. Due to IRB’s long-standing monopoly of the Brazilian reinsurance market, prediction of risk exposure is difficult, as there is little precedence in terms of how wordings will be interpreted by the Brazilian courts. This creates difficulty in the calculation of the appropriate premiums, which in turn creates challenges with risk placement.
There are further challenges ahead that will need to be overcome; consensus must be reached between insureds, brokers, insurers, reinsurers and the legal system in order to accommodate increasing demands from newly-established Brazilian Reinsurers as well as those from external markets. Surmounting these obstacles will encourage an unparalleled development of the industry.
Brazilian insurance law is currently under review, however Brazil is a young market and it will take time to develop. Having said this, Brazil is growing rapidly with many new infrastructure and energy projects that will present ample opportunity for enterprising companies, especially in the insurance industry.
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