Wednesday 27 July 2022
On 31 March 2021, Brazil’s Insurance Regulator (SUSEP) issued Resolution 407, which could significantly change the market for large-risk insurance, as it grants freedom for the parties to negotiate contract terms.
Brazil’s insurance market is known for being highly regulated, and SUSEP’s role is to ‘draft the conditions of the policies, operation plans and prices that must be used by the national insurance market’ (Art 36(c) of Decree-Law 73/1966). As a result, insurance policies in Brazil reflect SUSEP’s templates, which, although ensuring certain predictability on the one hand, prevent private parties from negotiating their own contractual terms on the other, making the market excessively rigid.
After several years of heavy criticism, the above Resolution has been enacted, stating that ‘large-risk insurance contracts will be governed by contractual conditions freely entered into by and between the insurer and insured’ (Art 4).
Article 2 of the Resolution provides that a policy should be deemed large-risk insurance if it covers petroleum, aeronautics, marine or nuclear risks; specified all risks; global insurance for banks; or, if the insured is a company, internal credit and export credit. Further to that, any other cover would be deemed large risk if the parties are companies and: (1) the maximum security cap exceeds BRL15m (approx US$2.77m); (2) the insured’s assets exceed BRL27m (approx US$5m); or (3) the insured’s gross revenue is greater than BRL57m (approx US$10.5m).
The resolution allows private parties to negotiate the contracts without being bound to SUSEP’s template terms, which were often drafted for consumer insurance purposes. Policy wording in Brazil is excessively complicated and rigid, generally becoming an obstacle for sophisticated parties interested in tailoring the terms of their insurance policy.
There was no reason for such level of government intervention. Sophisticated parties, duly assisted by lawyers, should be free to negotiate the terms of an insurance contract in the amount of dozens of million reais, instead of being tied to template terms which do not necessarily meet the parties’ interests.
The Resolution is more than welcome and is expected to be a turning point in Brazil’s insurance market. It may encourage insurance companies to offer new products/covers, more efficient solutions and possibly better prices. It may also be a milestone for the development of Brazil’s insurance market.
However, on 8 February 2022, the Workers’ Party (PT) filed a challenge, namely Direct Action for the Declaration of Unconstitutionality of the Resolution (ADI 7,074), before the Federal Supreme Court (STF). It argues that the regulator does not have the authority to enact this kind of rule. According to the PT, it is a matter to be addressed by federal law passed by Congress. The challenge should be tried soon, and our view is that the suit will be rejected.
In conclusion, Resolution 407/2021 is very good news for Brazil’s insurance market, allowing private parties to negotiate contract terms freely for large risk insurance.