sr 2012 369 brazil market review - a.m. best company special report brazil non-life another part of...

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Brazil Non-Life

Brazil’s Economy Fuels Pace for Growing Insurance MarketGrowth prospects for the Brazil insurance market’s non-life segment remain posi-tive, driven by continued government spending on major infrastructure projects, two upcoming global mega-events and momentum from recent economic growth.

Non-life premium increased 16% to BRL 47.5 billion (USD 25.3 billion) in 2011 (see Exhibit 1), according to the Superintendence of Private Insurance (SUSEP). That amount comprises 45% of the BRL 105 billion in total premium generated last year in Brazil’s insurance industry, which has averaged annual growth of 16% over the past three years.

Continued demand from a growing middle class, abundant natural resources and the country’s host role for the 2014 FIFA World Cup and 2016 Olympic Games are catalysts for continued public and private-sector investments, all of which point to a positive growth outlook for the insurance industry’s non-life segment. As overall industry pre-mium grows, the non-life segment’s share has declined from 70% in 2002 (see Exhibit 2).

Brazil’s direct market included 112 active insurance companies as of February 2012, according to SUSEP. The commercial lines segment has shown signs of broadening as insurance buyers gain more appreciation for business-related products and specific segments continue to grow.

Brazil’s BRL 5.7 billion reinsurance segment continues to expand under an open-market system enacted five years ago, but that competitive dynamic has been shaped further by regulation that prompted international carriers to establish local reinsurance operations.

In just five years, the reinsurance segment has grown from a single, state-run entity to include 10 local reinsurers, 29 admitted reinsurers registered with SUSEP and 59 “occasional” reinsurers. As of March 2012, three local reinsurer applications were pending with SUSEP. While this geographic market lacks a distinct renewal period for reinsurance, indications are that reinsurance premium rates have dropped about 10% on more competitive pricing in the early part of 2012.

Insurance Penetration Just 2.5% of Gross Domestic Product.

Market ReviewMay 21, 2012

Analytical ContactsPeter Dickey, Oldwick+1 (908) 439-2200, Ext. [email protected]

Greg Reisner, Oldwick+1 (908) 439-2200, Ext. [email protected]

Editorial ManagementAl Slavin, Oldwick

BEST’S SPECIAL REPORTOur Insight, Your Advantage.

Exhibit 1Brazil Non-Life – Direct Premium Growth vs. Loss Ratio (2006-2011)(BRL Billions)

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Bill

ions

) Loss Ratio (%)

DPW Loss Ratio (%)

Note: Loss ratio as calculated by regulator (retained claims/earned premium). Source: Superintendence of Private Insurance

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Special Report Brazil Non-Life

Despite low insurance penetration and the assumption that Brazil has low exposure to natural catastrophes due to its relatively little experiences with earthquakes or hurri-canes, natural hazards including floods and landslides may have a significant impact on the development of industrial hubs and related economic activities.

Rainstorms in January 2011 that killed more than 900 people in Rio de Janeiro’s mountain-ous region caused estimated economic damage of almost BRL 2 billion, according to Swiss Re. But insured losses of BRL 93.3 million comprised less than 5% of that total loss figure.

As Brazil’s industrial hubs increase in size and importance, annual heavy rainfalls that bring flooding and landslides pose potential risk with major consequences for the insurance market, especially in the country’s more economically developed southeast region. Droughts, wildfires and windstorms could also have growing implications as Brazil’s industrial base develops.

Brazil Regulator Gains Higher Profile In terms of economic, political and financial system risks, A.M. Best ranks Brazil along-side China with a Country Risk Tier 3 (CRT-3). A.M. Best defines country risk by those country-specific factors that could adversely affect an insurer’s ability to meet its finan-cial obligations. A.M. Best categorizes countries into five tiers, ranging from “CRT-1,” denoting a stable environment with the least proportion of risk, to “CRT-5” for countries that pose the greatest risk. India and Russia are deemed CRT-4 countries.

A.M. Best believes that Brazil’s risk profile has improved since 2008, and so has its insur-ance regulatory environment, which is subject to federal regulation under guidelines established by the National Council of Private Insurance (CNSP). SUSEP functions as the country’s regulator and supervises the sectors of insurance, reinsurance and private pensions, as well as the capitalization program.

Brazil’s insurance regulators in 2008 implemented a risk-based capital model that built on the use of geographic regions to define minimum capital levels. Insurers operating on a national basis must maintain a minimum base capital level of BRL 15 million, with that level scaled down for carriers operating on a regional basis.

The additional capital standard added in 2008 also factored in the underwriting risks inher-ent in a non-life insurer’s operation. Credit risk was added into the minimum capital require-ment calculation in 2011, while similar measures for market and operational risks have yet to be implemented but are still expected.

Exhibit 2Brazil Non-Life – Share of Industry Direct Premium (2002-2011)

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20112010200920082007200620052004200320020

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Non-Life Market Share (%

)Non-Life Total Industry

Source: Superintendence of Private Insurance

Non-Life Market Share (%)

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Another part of that regulation addressed varying levels of insufficient capital. Solvency actions are triggered when policyholders’ surplus reaches 70% of the minimum required capital level, with insolvency triggered at the 30% level.

Brazil’s financial regulators have also implemented international guidelines along a path established by the International Association of Insurance Supervisors. These Interna-tional Financial Reporting Standards (IFRS), as defined by the International Accounting Standards Board, took effect in 2010, and the resulting liability adequacy testing has required more detailed notes on financial statements. Brazil has taken a varied approach in the adoption of IFRS by opting to officially decide which contracts qualify as insur-ance, unlike in Europe, where a company has discretion.

SUSEP has indicated that more than 500 rules were revised since the modernization process started in 2003. The regulator has publicly recognized that additional progress toward international solvency standards is still needed, particularly in relation to such issues as risk-based capital, internal models, governance processes, monitoring systemic risk and stress testing, among others.

The regulatory environment is expected to become more conservative based on new proposals, which would generate pressure for small and mid-sized carriers. SUSEP has announced plans to tighten the solvency rules for life insurance companies, and it plans to increase the minimum retained capital for these companies, which is cur-rently very low.

An element of uncertainty has prompted some carriers to adopt a more conservative approach to the market in anticipation of regulations tightening further.

SUSEP maintains approval over products and policy language, which can result in tighter approaches that may slow innovation. As policyholders give more consideration to pricing, competition may drive retention levels downward. Rates operate on a file-and-use approach under which an insurer must submit the minimum rate to SUSEP and explain the variables that were used.

While such regulatory constraints might be mitigated by an emerging market’s lure, whether Brazil’s appeal will continue in more crowded conditions is not yet clear. Brazil ranked 126th out of 183 economies in a 2012 World Bank study that used fixed criteria to analyze the ease of doing business; it marked a slide of six positions from Brazil’s 2011 ranking. Draft legislation would also give the Brazilian gov-ernment authority over approving business mergers. Official review would be conducted once a transaction is formalized and would be completed within 330 days.

Positive Growth Outlook for Insurance IndustryBrazil recorded strong economic growth of 7.5% in 2010, which slowed consider-ably to 2.9% in 2011 (see Exhibit 3). Yet its global profile remains elevated on

Exhibit 3Brazil – Real GDP Growth vs. Inflation (2005-2013*)

-2-1012345678

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E*

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2005

%

Real GDP Growth Rate

E = EstimatedSource: International Monetary Fund's World Economic Outlook

Inflation Rate

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strong currency and favorable ongoing prospects for development. In 2011, Brazil’s BRL 4.6 trillion economy moved ahead of the United Kingdom in terms of size, ranking it the sixth largest in the world.

With Brazil’s expanding economy well positioned against eurozone challenges, the potential for organic growth within its insurance sector can be viewed as an attractive alternative to more mature geographic markets.

Brazil’s insurance premium in 2011 was about 2.5% of gross domestic product (GDP), relatively low compared with a more developed market such as the United States (10.2%). Brazil’s level of insurance penetration ranks just behind two of its BRIC coun-terparts – India, 3.6%; and China, 3% – and just ahead of Russia, 1.8%.

Amid these favorable indicators, the spending power of Brazil’s growing middle class continues to strengthen, with GDP per capita at BRL 20,781 in 2011 (see Exhibit 4), according to the International Monetary Fund’s World Economic Out-look. This economic growth bodes well for increased consumer spending power and sales of non-life products such as auto insurance, which accounted for 52% of non-life premium in 2011. The auto sector had a loss ratio of 68.8 in 2011, com-pared to 67.1 in 2010.

About 49% of the auto market premium in 2011 was concentrated among the top five writers (see Exhibit 5), according to SUSEP data. This was slightly higher than the non-life segment as a whole, where 40% of the market’s premium was concentrated among the top five writers in 2011 (see Exhibit 6). The non-life segment’s loss ratio held steady at 53.4 in 2011, according to SUSEP.

Compulsory coverage within personal lines is limited to third-party motor liability cov-erage for bodily injury – a product line known as DPVAT. The coverage is purchased upon acquiring a vehicle and renewed annually with rates set by the regulator. Death and disability limits are set at BRL 13,500 and medical expense limits at BRL 2,700. Half of the DPVAT premium generated is paid to the government, with all but 5% of that por-tion going to the National Health Fund to cover accident-related injury costs. DPVAT premium increased 17% to about BRL 3.4 billion in 2011, according to SUSEP.

Newer entrants looking to gain market share through organic growth could face chal-lenges, given the well-established role of bank-owned insurance companies and the

Exhibit 4Brazil – Gross Domestic Product Per Capita vs. Population (2010-2014E*)

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2014E*2013E*2012E*20112010192

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GDP

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ions

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GDP Per Capita (BRL)

E = EstimatedSource: International Monetary Fund's World Economic Outlook

Population (Millions)

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agent/broker network that is ingrained within Brazil’s market. While the challenge of cultivating and retaining talent isn’t limited to underdeveloped markets, it can gener-ate added financial pressure for carriers trying to establish distribution channels, new product lines or even brand identity. Brazil’s banking industry has maintained a long-established and dominant role in the country’s insurance market, benefiting from an entrenched distribution channel. Bancassurance will drive growth in the industry as more of the population gains access to formal banking channels.

Market leaders continue to achieve growth through affiliation-type arrangements. The strat-egy can help foreign entities minimize cultural barriers and maximize market presence under firmly established brands and distribution systems. Mapfre America has benefited under its partnership with Banco do Brasil, Brazil’s largest bank as ranked by assets, which is both federally controlled and publicly traded.

The joint venture was formalized in June 2011. Mapfre, which is part of Mapfre S.A., the Spain-based multiline insurer, reported that its Brazil business volume increased 69.1% as a result and now represents 52% of premium volume in its Latin American region business segment. Banco do Brasil reported that revenue from its insurance companies increased 34.1% to BRL 22.1 billion in 2011.

Two different holding companies were established for the joint venture and each main-tains a separate market focus. Banco do Brasil has a 75% stake in the company (BB Mapfre

Exhibit 5 Brazil Auto – Top 25 Writers (2011)Ranked by direct premiums written.(BRL Millions)

Company DPW Y/Y % Change Market Share Loss Ratio*1 Porto Seguro Cia De Seguros Gerais 3,377.1 6.4 13.7 55.82 Bradesco Auto/Re Companhia De Seguros 2,987.5 2.6 12.1 72.13 Sul America Cia Nacional De Seguros 2,202.1 6.3 8.9 64.14 Mapfre Seguros Gerais S.A. “Em Aprovacao”** 1,985.3 26.0 8.0 59.15 Itau Seguros De Auto E Residencia 1,569.6 4.0 6.4 67.46 HDI Seguros S.A. 1,486.0 15.6 6.0 75.67 Brasilveiculos Comphanhia De Seguros 1,310.7 -16.7 5.3 70.68 Liberty Seguros S/A 1,286.0 7.8 5.2 69.49 Allianz Seguros S.A. 1,185.2 15.5 4.8 68.1

10 Azul Companhia De Seguros Gerais 1,064.5 8.1 4.3 78.111 Tokio Marine Seguradora S.A. 599.0 11.3 2.4 67.212 Maritima Seguros S/A 523.1 18.9 2.1 67.213 Zurich Minas Brasil Seguros S.A. 427.1 64.2 1.7 68.114 Indiana Seguros S/A 357.9 1.2 1.4 78.315 Chubb Do Brasil Cia De Seguros 354.2 -3.5 1.4 69.216 Caixa Seguradora S/A 307.6 -0.9 1.2 86.017 Bradesco Vida E Previdencia S.A. 304.0 38.1 1.2 87.018 Alfa Seguradora S.A. 241.5 6.7 1.0 59.019 Itau Seguros S/A 177.1 -1.5 0.7 85.720 Mitsui Sumitomo Seguros S/A 171.9 5.1 0.7 80.521 Santander Seguros S/A 167.4 34.3 0.7 86.822 Yasuda Seguros S.A 154.0 21.3 0.6 66.723 Generali Brasil Seguros S.A. 144.6 11.7 0.6 90.524 Tokio Marine Brasil Seguradora S/A 142.0 -1.8 0.6 67.025 Itau Vida E Previdencia S/A 130.6 25.8 0.5 68.1

Other 2,061.3 13.6 8.3Total 24,717.2 7.8 100 68.8

* Loss ratio as calculated by regulator (retained claims/earned premium). ** Mapfre consolidated joint operations with Banco do Brasil on May 31, 2011. Source: Superintendence of Private Insurance

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SH1) that sells insurance for personal lines, real estate and rural exposures. That division had net income of BRL 589.5 million in 2011, based on revenues of BRL 3.1 billion.

Each side also holds a 50% stake in a company (Mapfre BB SH2) largely focused on auto and other non-life products, which had net income of BRL 95.4 million in 2011.

Zurich bolstered its market position after paying USD 1.7 billion for a 51% stake in Banco Santander’s Latin American operation, which reaches into Brazil, Mexico, Chile, Argentina and Uruguay. The 25-year distribution agreement has given Zurich access to 23 million Santander customers in Brazil alone, in addition to nearly 3,700 branches. In Brazil, the non-life operations of the two companies generate more than BRL 2 billion in combined revenue for a 4.3% share of the non-life seg-ment (see Exhibit 6).

Another example of the banking sector’s presence in insurance is Itau Unibanco, which holds a leading position in the non-life market. Itau Unibanco acquired a 30% stake in Porto Seguros, which was valued at BRL 950 million at the time of the August 2009 trans-action. Porto Seguros was the largest writer of auto coverage when the two companies announced in 2009 that they would combine auto and homeowners operations. Porto Seguros now maintains a leading auto market share of 13.7%, placing it just ahead of Bradesco at 12.1%. An agreement has created access for Porto Seguros to distribute home and auto products through Itau Unibanco’s banking network in Brazil and Uruguay.

Exhibit 6 Brazil Non-Life – Top 25 Writers (2011) Ranked by direct premiums written.(BRL Millions)

Rank Company Direct Premium Y/Y % Change Market Share Loss Ratio*1 Itau Seguros S/A 4,428.7 11.8 9.3 25.72 Porto Seguro Cia De Seguros Gerais 4,275.6 8.0 9.0 51.63 Bradesco Auto/Re Comphania De Seguros 3,976.1 6.5 8.4 64.74 Mapfre Seguros Gerais S.A. “Em Aprovacao” 3,456.2 23.5 7.3 58.15 Sul America Cia Nacional De Seguros 2,640.6 6.4 5.6 62.46 Allianz Seguros S.A. 2,489.7 23.6 5.2 60.87 Itau Seguros De Auto E Residencia 1,882.7 6.4 4.0 61.48 HDI Seguros S.A. 1,687.9 16.6 3.6 72.79 Caixa Segurodora S/A 1,592.9 12.9 3.4 34.9

10 Liberty Seguros S/A 1,560.5 9.1 3.3 67.611 Brasilveiculos Comphanhia De Seguros 1,310.7 -16.7 2.8 70.712 Companhia De Seguros Alianca Do Brasil 1,202.2 32.7 2.5 24.913 Azul Companhia De Seguros Gerais 1,068.1 8.0 2.2 77.914 Maritima Seguros S/A 1,035.3 19.4 2.2 56.715 Bradesco Vida E Previdencia S.A. 959.7 35.9 2.0 44.416 Zurich Minas Brasil Seguros S.A. 927.0 161.9 2.0 51.117 Chubb Do Brasil Cia De Seguros 806.3 10.8 1.7 48.818 Tokio Marine Seguradora S.A. 784.2 8.8 1.7 55.819 Ace Seguradora S.A. 748.7 12.1 1.6 36.820 Santander Seguros S/A 705.0 75.2 1.5 36.121 Tokio Marine Brasil Seguradora S/A 651.4 12.7 1.4 51.522 Royal & Sun Alliance Seguros (Brasil) S.A. 465.7 25.6 1.0 42.723 Alianca Do Brasil Seguros S.A. 464.1 251.6 1.0 31.524 Nobre Seguradora Do Brasil S/A 375.4 22.3 0.8 47.425 Santander Brasil Seguros S/A 362.0 24.7 0.8 7.4

Other 7,619.2 25.5 16.0Total 47,475.9 15.8 100.0 53.4

* Loss ratio as calculated by the regulator (retained claims/earned premium).Source: Superintendence of Private Insurance

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Commercial Segments Well Positioned Amid Growth ProspectsBrazil is also in the midst of the Growth Acceleration Program, a BRL 1.6 trillion spend-ing project designed to enhance the country’s infrastructure. Improvements to housing, safety and highways, along with better access to water, sewers and electricity, are among the initiatives to be addressed in government spending projects through 2014. The gov-ernment estimates that the program created 8.9 million jobs between June 2007 and Jan-uary 2011. A January unemployment rate of 5.5% was the lowest for that month in nearly 10 years.

Short-term market optimism is being fueled by the run-up to the 2014 FIFA World Cup and 2016 Olympic Games. Brazil’s Ministry of Sports estimates that the country’s national economy will grow by more than BRL 120 billion as a result of the World Cup. The federal government is investing BRL 25 billion to upgrade infrastructure and another BRL 11 billion in the service sector. This spending will support employment projections of around 330,000 permanent jobs and 380,000 temporary positions. Addi-tional government estimates project that the World Cup could lift future GDP growth by 0.4% through 2019.

Premium volume within construction-related insurance segments such as surety and professional liability stands to benefit from this pipeline of government-related projects. Direct premium for the engineering risks segment doubled to BRL 939 million in 2011 from the prior year, according to SUSEP.

Considerable opportunities are taking shape in the energy sector, coupled with infra-structure projects to address transportation needs for highways and airports, which will also benefit marine and cargo lines. The oil risks segment increased to BRL 403 million in 2011, up from BRL 155 million in 2010.

Discoveries of massive offshore oil deposits have the potential to place Brazil among the world’s largest oil producers, according to the U.S. Department of Energy (DOE). In January 2012, Brazil produced a record 2.2 million barrels of oil per day. The DOE predicts that Brazil’s oil production will reach 2.8 million barrels per day in 2012. The majority of this oil is heavy crude produced offshore in deepwater drilling operations, which has an elevated risk profile that will generate growth in energy-related coverage. This also could give rise to more environmental liability coverage, given Brazil’s more than 4,600 miles of coastline.

Exhibit 7Brazil Non-Life – Segment Growth vs. Loss Ratio (2007-2011)

2011 DPW (BRL Millions) CAGR*

Average 5-Year

Loss Ratio

Loss Ratio

2007 2008 2009 2010 2011Motor 24,717.2 7.3 67.6 65.5 68.4 69.3 67.1 68.8Property 10,565.7 12.0 31.9 31.3 32.3 33.0 30.7 31.2Personal Accident & Health 4,967.1 18.4 19.7 23.1 21.2 19.1 17.1 16.4Financial Risk 2,897.6 13.4 38.3 46.7 45.5 41.6 26.9 26.9Cargo 2,407.1 8.8 57.7 59.0 61.1 61.9 56.6 53.5Marine & Energy 672.9 19.0 51.5 47.0 67.5 46.3 65.4 35.9General Liability 660.3 11.1 40.9 48.8 49.3 33.0 33.4 38.3Aviation 315.8 -4.4 42.5 86.8 16.7 54.6 63.7 9.3Professional Liability 272.2 14.0 29.6 10.7 27.3 39.2 45.9 27.9Non-Life 47,475.9 9.8 54.8 54.9 56.3 56.2 53.9 53.4Note: Loss ratio as calculated by regulator (retained claims/earned premium).* Compound annual growth rateSource: Superintendence of Private Insurance

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Offshore oil development is also viewed as having a key role in Brazil’s future eco-nomic development, based on the dominant industry role of Petrobras, a publicly traded energy producer in which the government holds a majority stake.

Citing the Deepwater Horizon disaster in the Gulf of Mexico, Lloyd’s has called on its individual syndicates to reassess their own aggregation of energy liability expo-sure. While Brazil’s marine and energy sector averaged direct premiums in excess of BRL 395 million between 2008 and 2010, the loss ratio reached 102.3 in 2010. Property coverage premiums on a direct basis increased by a third to BRL 8.3 bil-lion in 2010, but finished that year with a loss ratio of 32.8, according to SUSEP data.

Other commercial lines segments holding promise of increased premium volume include errors and omissions, as well as more specialized coverage needs within the directors and officers (D&O) line. Employment practices liability has gained more acceptance as businesses look to capitalize on a growing economy. As the markets for these types of coverage expand and grow more competitive, as well as more special-ized, this will create a potentially larger role for brokers.

The growth and competition that characterize Brazil’s insurance market will also place greater emphasis on the ability to identify, assess and execute in favorably performing segments, while mitigating exposure to underperforming ones. Generating quality data remains an issue for some companies.

Reinsurance Market Still Making TransitionBrazil’s reinsurance market totaled BRL 5.7 billion in 2011, according to SUSEP. While this represents a 23% increase over 2010, a regulatory accounting change implemented in 2011 no longer counts commission among total reinsurance premiums, making an exact comparison unworkable. Combined premium for the local reinsurer segment was BRL 3.3 billion, up from BRL 2.1 billion in 2010 (see Exhibit 8).

The Brazilian Insurance Confederation (CNSeg), an industry trade organization, projects that increased oil production and preparation for the upcoming sporting events will generate an additional BRL 2 billion in reinsurance premium by 2015.

The local reinsurance seg-ment generated a net profit of BRL 543.3 million in 2011, an increase of 20% from 2010, according to SUSEP data. SUSEP regulations have played a significant role in shaping market conditions after the privatization of the reinsur-ance market. The recent move requiring that direct writers cede 40% of any reinsurance business to local reinsurers has prompted additional carri-ers to establish bases of opera-tions and capital within Brazil. Local reinsurers, of which

Exhibit 8Brazil Local Reinsurers – Earned Premium (2011)Domestic reinsurers ranked on earned premium as of Dec. 31, 2011.(R$ Millions)

Rank Company2011

PremiumMarket

Share (%)1 IRB Brasil Resseguros S/A 2,070.5 63.52 Munich Re Do Brasil Resseguradora S.A. 549.4 16.93 Mapfre Re Do Brasil Cia De Resseguro 186.5 5.74 J.Malucelli Resseguradora S/A 164.1 5.05 Ace Resseguradora S/A 163.1 5.06 XL Resseguros Brasil S.A. 73.3 2.37 Austral Resseguradora S/A 48.0 1.58 Chartis Resseguros Brasil S.A. 3.1 0.1

Total 3,258.1 100.0Note: Annual premium increase could not be tallied due to regulatory account-ing change implemented for 2011 data. Source: Superintendence of Private Insurance

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there are now 10, must establish a base of operations and minimum capital of BRL 60 million.

The two other classifications of reinsurers – admitted and occasional – must also meet minimum requirements. Admitted reinsurers must establish a local office and maintain a minimum rating such as an A.M. Best Financial Strength Rating of B+, among other crite-ria. Occasional reinsurers must appoint a local representative and also have a minimum rating, such as an A.M. Best Financial Strength Rating of B++.

The 40% mandate came unexpectedly for some of the foreign capital that arrived with the privatization of the reinsurance market. According to published reports, Brazil’s Council of Economic Defense has called for federal authorities to review the role of tri-angulation in the reinsurance segment. This practice involves reinsurance being placed with a local reinsurer under a fronting arrangement, which is prohibited under regula-tions. A separate regulation placed a 20% limit on offshore, intragroup cessions, loosen-ing a previous standard that prohibited the practice.

The 40% cession rule has favored market leader IRB Brasil Resseguros (IRB), which obtained an A.M. Best Financial Strength Rating of A- in December 2011. The gov-ernment-operated reinsurer had a 68-year monopoly until the reinsurance market opened. The amount of gross premiums written at IRB dropped from BRL 3.2 billion in 2008 to BRL 1.3 billion in 2010. For 2008, IRB accounted for 97% of the local rein-surance segment’s net profit of BRL 416.3 million (see Exhibit 9). IRB’s share of the local reinsurance segment’s net profit tapered off to 96% in 2009 and 88% in 2010 before dropping to nearly 86% last year. IRB had also slid 15 positions to 40th in A.M. Best’s 2011 ranking of global reinsurers based on 2010 gross reinsurance premium.

In 2011, IRB wrote BRL 2.1 billion of premium, making it the top local reinsurer ahead of Munich Re, which wrote BRL 549.4 million in premium. Lloyd’s is an admitted reinsurer in Brazil and reported that its 2011 reinsurance premium increased by 17% to BRL 556 million. Eight Lloyd’s syndicates had a presence in Brazil as of April 2012, with more expected dur-ing the course of the year.

IRB’s Private-Sector Role Still Being ShapedBrazil’s treasury maintains a 51% stake in IRB, with the bal-ance owned by investors, which include Bradesco, Itau, Banco do Brasil and 63 other insurance companies. A process is under way to shift the majority of ownership to the private sector. An external party is handling the valuation of IRB shares, with pricing anticipated by the end of the year.

IRB has operated predomi-nantly as a property and casu-alty reinsurer, with a small amount of life business. About 90% of the company’s portfolio

Exhibit 9Brazil Non-Life – Local Reinsurer Segment Profit/Loss (2008-2011)IRB Brasil Resseguros' monopoly ended in 2007, but it maintains a dominant share of the local reinsurance segment's profit margin.

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is written in Brazil. Argentina is viewed as one potential market. In late March, SUSEP Superintendent Luciano Portal Santanna indicated that a bilateral agreement between his agency and Argentina’s insurance regulator – Superintendencia de Seguros la Nacion – was being worked on to enable the sharing of company information between the geo-graphic markets.

IRB still maintains the largest market share among Brazil’s reinsurers and has withstood the early challenges of competing in a privatized market. It has enacted various initia-tives to maintain a competitive edge, which include a client management group to provide enhanced customer service and strengthen business relationships. In addition, IRB has established a corporate risk management group to optimize capital and aid in prudent risk-taking.

Brazil’s strategy toward the reinsurance segment has faced criticism for being protec-tionist. While this approach may hinder the full benefit of spreading risk across the international reinsurance market, Brazil has demonstrated an interest in dictating mar-ket momentum and having the reinsurance segment diversify at a more measured pace.

In December 2011, the 40% provision was loosened to enable placement of cover within that quota to admitted or occasional reinsurers, provided that no local capacity was available to take any or all of the risk. The revision has given cedents an alternative under a lack-of-capacity scenario.

Proving that no local cover exists first requires the placement to be marketed among local reinsurers, which must respond within five to 10 days, depending on the type of coverage sought. A failure to respond within the allotted time is deemed a lack of capacity.

The competitive nature of Brazil’s reinsurance market is expected to continue increas-ing. International carriers have a vested interest in providing an established reinsurance platform for multinational corporations that are vying for business in Brazil.

This growth of competition has placed downward pressure on rates for less volatile risks and shifted more reinsurance coverage to a treaty-oriented basis as opposed to facultative. Reinsurers are more inclined to accept the underwriting offered with treaty business, which to some degree reduces reliance on their own underwriting teams to scrutinize facultative-oriented business.

As more local reinsurers are licensed to write business in Brazil, the range of competi-tion is expected to increase and keep pricing and terms steady. While it stands to rea-son that Brazil’s insurance sector will grow more sophisticated as it matures, companies must continue to develop the ability to collect and analyze data.

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Published by A.M. Best Company

Special ReportCHAIRMAN & PRESIDENT Arthur Snyder III

EXECuTIVE VICE PRESIDENT Larry G. Mayewski

EXECuTIVE VICE PRESIDENT Paul C. Tinnirello

SENIOR VICE PRESIDENTS Manfred Nowacki, Matthew Mosher, Rita L. Tedesco, Karen B. Heine

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