On December 26, 2006, the National Private Insurance Council (Conselho Nacional de Seguros Privados – CNSP), the government agency responsible for insurance and private pension plan policies in Brazil, issued CNSP Resolution no. 155, establishing more rigorous rules on the minimum capital requirements companies must meet to be authorized to operate as insurers.
Currently, the minimum capital requirements for insurance companies in Brazil is determined according to their line of products and the geographical regions in which they are authorized to operate. Under CNSP Resolution 73/2002, for example, insurers authorized to operate throughout Brazil must have a capital of no less than R$7.2 million.
The new minimum capital established under CNSP Resolution no. 155 is composed of a fixed amount of capital, termed the "base capital", and a variable amount of capital, termed the "additional capital". Both the base and the additional capital must be maintained at all times in order for the company to operate as an insurer. The solvency margin currently required of insurers will be replaced by new requirements imposed by the modified minimum capital, except in the case of health insurers.
The base capital requirement is the sum of a fixed amount of R$1.2 million, related to authorization to do business in the non-life (general) and life insurance sectors, and a variable amount established according to the regions in which the insurer is authorized to operate. The maximum base capital is R$15 million, for insurance companies authorized to do business throughout Brazil. The additional capital will serve to guarantee risks inherent to insurers' business activities and will be determined in accordance with specific regulations to be issued by the Superintendent of Private Insurance (SUSEP) and the CNSP. With the exception of subscription risk, no regulations have yet been issued on the calculation of the amount to be included in additional capital to cover market, credit, operating and legal risks of insurance companies.
Under CNSP Resolution 158/2006, insurers that develop their own model for assessment of subscription risks will be allowed to adopted comparatively lower factors for insurance premiums and retained losses when calculating the additional capital component of their minimum capital, while companies without an internal model will have to adopt higher factors.
Once the required minimum capital is calculated, insurance companies must show that their adjusted net equity is equal to or greater than the minimum capital requirement. Starting January 1, 2008, the adjusted net equity of insurance companies will be compared to their required minimum capital, in accordance with regulations to be issued by CNSP and SUSEP. If CNSP and SUSEP have not issued the relevant regulations by January 1, 2008, capital adequacy will be determined by comparing insurers' adjusted net equity to the greater of the solvency margins currently in force and the minimum capital required under Resolutions issued by CNSP in December 2006.
Any capital inadequacies revealed by the comparison must be cured as follows: (i) at least 30% of the insufficiency by the first anniversary of the complementary regulations; (ii) at least 60% by the second anniversary; and (iii) 100% by the third anniversary. Measures that insurance companies can take to solve their capital insufficiencies include a reduction in their level of business, by ceasing to do business in certain regions and no longer offering high-risk product lines, increasing their level of reinsurance, capitalizing accumulated profits, increasing their net equity, or a combination of these measures.
Insurance companies will be required to show compliance with the new minimum capital requirements by submitting trial balance sheets to SUSEP every six months, and will be subject to penalties that range from recuperation plans to cancellation of their authorization to operate, depending on the degree of non-compliance.
Both CSNP Resolutions nos. 155 and 158 reflect preventive regulatory mechanisms adopted by SUSEP to bring Brazilian insurers into line with the standards of care and risk management practiced internationally, such those recommended by the International Association of Insurance Supervisors, to which Brazil belongs. Stricter capital adequacy requirements, implemented through a risk-based capital model, represent an important step toward ensuring that risk management in Brazilian insurers meets the best practices adopted in the international insurance market.
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