New Capital Rules about Insurance Linked Securities and Subordinated Debt

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New Capital Rules about Insurance Linked Securities and Subordinated Debt

Published 10 septiembre 2020

Two new regulations to be issued in Brazil intend to get the insurance and reinsurance markets closer to the capital market, providing more capital and resources for the industry growth and demonstrating the growing maturity of the sector.

The first regulation will allow cedants to transfer insurance and reinsurance risks to a local reinsurer which will have as exclusive purposes the acceptance of those risks for the issuance of Insurance Linked Security (ILS), which in turn will finance the risk retention.

The ILS is an alternative form of insurance risk transfer, which, instead of being assigned only in the insurance-reinsurance chain, also begin to rely on the resources coming from the capital market to finance this risk assumption. The ILS investor's position, on the other hand, assumes the insurance risk effectively underwritten, but has the technical reserves of reinsurance company as collateral of the ILS.

The second proposed regulation will establish rules for issuance of subordinated debt by insurance companies, capitalization companies and public supplementary pension entities incorporated in the form of local corporations and reinsurers.

"Subordinated debt" is defined as debentures or any other debt instrument that is issued by the supervised companies, whose guarantee is subordinated to the payment of the other liabilities, giving preference only to the shareholders in the remaining assets, if any, in the event of liquidation of the supervised company.

Authors

Marcia Cicarelli

Marcia Cicarelli

São Paulo

+55 11 3291 4808

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