## cr18343 ## Source details **Canonical URL:** [cr18343](https://www.imf.org/-/media/files/publications/cr/2018/cr18343.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18343.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18343.pdf.json) --- ### EXECUTIVE SUMMARY — Introduction and scope - Technical note provides an update on the Brazil insurance sector and analysis of selected regulatory and supervisory aspects as part of the 2018 Financial Sector Assessment Program (FSAP). Prepared by Nobuyasu Sugimoto (IMF) drawing on discussions in Brazil from February 27 to March 21, 2018. - References the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in October 2011, as revised in November 2017. - Focus on recent developments, including major reforms of solvency and risk management requirements (which took effect in full in January 2018), and on recommendations from the 2012 FSAP (governance, market conduct and group supervision). - Note: Practice analyzed in relation to selected ICPs with macrofinancial relevance and material regulatory changes (solvency requirements, supervisory approach, cross-border cooperation). No ICP observance scoring in this note. ### Market structure, products and performance — key statistics and observations - Insurance growth and size: - Insurance premiums grew about 10 percent annually from 2012 to 2016. - Total assets end-2016: BRL 900 billion (life BRL 749 billion; non-life BRL 124 billion; reinsurers BRL 27 billion). - Sector assets are about 14 percent of GDP and 6 percent of the total assets of the overall financial sector. - Total investments of insurers in 2016: BRL 821 billion. - Total assets of banks and other deposit taking institutions: BRL 8,499 billion. - Market structure and concentration: - SUSEP supervises 154 insurers. - Market share of the top 5 insurers: 85 percent for life; 74 percent for re-insurers. - About 6.4 new entrants each year; number of insurers declined from 156 to 154 since 2012. - Three largest insurance groups have a market share over 60 percent; two belong to banking groups and one is a joint venture with the largest bank in Latin America. - Health insurance: - 1,261 health insurers supervised by ANS; majority small and regional. - Market share of the top 21 health insurers is less than 50 percent. - Number of health insurers declined from about 1,600 in 2012 to about 1,200 in 2016. - Products and risks: - Life market dominated by annuity products without minimum investment return guarantees (VGBL). VGBL liabilities have grown about 300 percent in the last 5 years. - Universal life products growing but limited market share; unit linked products not significant yet. - Non-life dominated by motor, property, liability; credit, mortgage and agricultural insurance present but concentrated in a few large insurers. - Legacy long-term policies with high guaranteed rates indexed to inflation expose insurers to longevity, interest rate and inflation risk; long-term risks may not be fully reflected in accounting and solvency ratios, particularly for health insurers. - Profitability and solvency: - Average ROEs in the last five years: 30 percent for life; 10 percent for property and casualty (P&C); 12 percent for reinsurers. - Average solvency ratios at end-2016: 200 percent for life insurers; 171 percent for P&C; 317 percent for reinsurers. ### Key findings: regulatory and supervisory developments - Improvements since 2012 FSAP: - Introduction of risk-based supervision and risk-based capital requirements. - Adoption of the Liability Adequacy Test (LAT). - New risk management requirements including governance and enterprise risk management (ERM). - SUSEP shifted from compliance-oriented culture to risk-based and outcome-focused approach. - Remaining gaps and vulnerabilities: - Lack of independence and resources for SUSEP: - Superintendents have been dismissed without clear public explanation; superintendents and directors have no fixed terms or qualification criteria. - SUSEP staff lack appropriate legal protection; resources eroded since last FSAP (staff declined from 462 in 2011 to 381). - Limited flexibility to hire industry experts; SUSEP examination for hiring new staff not conducted since 2011 and unable to hire since 2013. - Resource shortages impede implementation of new regulations. - Group supervision and coordination: - Large insurance groups, often in conglomerates, increase need for group-level supervision. - Current SUSEP and ANS supervision focuses on entity level; group-level oversight absent. - Implementation of group supervision requires coordination among SUSEP, ANS, BCB and CVM. - Macroprudential surveillance needs strengthening given large conglomerate groups’ share. - Market conduct and consumer protection: - SUSEP continues to receive significant complaints related to non-payments of policy claims. - Industry faces high surrender rates in annuity products intended to be long-term. - Anecdotal tie-in sales within financial groups; oversight for bank-distributed insurance sales unclear. - Need for improved transparency and quality of sales advice. ### Investment profile, search for yield, disclosure and oversight limitations - Asset allocation and yields: - Largest shares of life insurers’ investments: government securities 21 percent for life general account, 79 percent for life separate account; mortgage loans 6 percent; other loans 6 percent; real estate 4 percent. - Non-life insurers increased “other assets” share from 38 percent in 2011 to 42 percent in 2016. - Life insurers allocated 10 percent of their assets to mutual funds (cannot be look-through) as of end-2016; non-life 5 percent. - 29 percent of life insurer investments allocated to specific funds (FIEs) requiring more than 95 percent investment into Brazilian government bonds; 11 percent for non-life. - Investment yield outperforms 3-year government bond yields, especially for non-life and reinsurers, suggesting leveraged or risky investments could be hidden in SUSEP data. - SUSEP notes majority of “other assets” may be premium receivables from brokers; SUSEP has information on underlying assets of FIEs but lacks quantitative data exchange (underlying assets and leverage) from CVM. - Guarantees and negative spread risk: - Average rate for existing guaranteed products about 6 percent. - Legacy guarantees often in real terms; after normalization of high inflation periods, investment yields from safe assets have dropped significantly. - Brazilian life insurers may suffer negative spreads in the short term. - Individual health insurance is long term without premium adjustment; significant number of health providers have failed causing policyholder losses. - Oversight limitations: - SUSEP does not have power to oversee outsourced entities (including asset managers), complicating monitoring of investment activities conducted via asset management products. ### Solvency standards, valuation and capital requirements - Valuation and technical provisions: - Assets for solvency: financial assets market valued via custodian data processed daily and assessed monthly; illiquid assets (real estate) at acquisition cost or book value with impairment provisions. - Liabilities: best estimate without explicit margin over current estimate (MOCE); LAT required (SUSEP Circular No. 517/15). - Three yield curves specified for discounting cash flows and updated monthly by SUSEP; two additional curves calibrated with reference to an ANBIMA model. - Insurers may submit alternative curves for approval; some use UFR extrapolation approaches. - Unrealized gains from future premiums of long-term policies capped at zero and usable only to offset market risks associated with future premiums (implicit MOCE). - Capital framework and calibration (Act to Modernize Financial Supervision enacted April 2015; fully implemented end-2017): - Required capital composed of credit, market, underwriting and operational risks. - Market risk: VaR with a 99 percent confidence level over a 3-month horizon. - Credit risk (except against reinsurers/other insurers): based on Basel III standardized approach. - Other factors: mainly calibrated based on T-VaR with a 97.5 percent confidence level over a one-year horizon. - Reinsurance credit risk calibration: 97.5 percent for domestic reinsurers; 99.5 percent for admitted reinsurers; 99.9 percent for other reinsurers. - No single, consistent confidence level across calibrations. - Reduced risk factors and governance incentive: - Reduced underwriting risk factor uses a 95 percent confidence level over a one-year horizon, effectively reducing risk factors by about 18–25 percent. - Qualification requires external auditor certification of governance and risk management conditions; SUSEP can withhold approval after on-site inspection. - SUSEP communicated a transitional period with reduced factors (50 percent market risk capital charge waiver in 2016). - Internal models: - Internal models allowed but no formal validation requirement; ICP 17 tests not formalized except as high-level principle targeting 99 percent VaR with 1-year horizon. - SUSEP has no near-term plan or capacity to approve internal models; no partial internal models allowed. - Capital resources recognition and prohibitions: - Only high-quality capital recognized; intangible assets and investments in subsidiaries/affiliates deducted. - Subordinated debt and other innovative capital instruments not recognized; preferred stock recognized. - Profits from unrecognized future premiums prohibited as capital resources. - Cross-shareholding or private securities issued by group financial institutions prohibited; public securities allowed with conditions. ### Group-wide supervision, coordination among authorities and macroprudential surveillance - Current practice and gaps: - Supervision predominantly solo-entity focused; no formal group-level regulation and supervision. - Related party transactions prohibited except repo and securities lending and index-linked investments through funds. - SUSEP previously created a group/macroprudential division in 2013 but it was disbanded without output. - SUSEP has limited power beyond supervised entities and limited access to CVM quantitative information (impeding understanding of exposures to investment funds). - Coordination among SUSEP, BCB and CVM based on MoUs with regular meetings, but gaps remain in demarcation of oversight responsibilities (e.g., market conduct for products sold by banks). - BCB role and exercises: - BCB requires conglomerate banking groups to assess material risks of entire group in ICAAP and reports annually. - BCB has conducted capital and liquidity stress tests for conglomerates; exercises found limited risk to banking capital/liquidity under conservative scenarios. - Macroprudential recommendations: - SUSEP should work with BCB, ANS and CVM to implement consistent group-wide supervision with expanded cooperation (joint-rule making, joint implementation, joint inspections, information sharing). - SUSEP should lead coordination for IFRS 17 implementation and encourage industry ALM improvements. - Enhance SUSEP participation in international discussions on IAIS Insurance Capital Standard and approaches addressing asset-liability volatility. ### ICP-specific supervisory findings and operational practices (selected) - ICP 7 (Corporate governance): - Minimum governance requirements exist; board of directors not mandatory for all companies. - Audit committee required if adjusted capital > BRL 500 million or technical reserves > BRL 700 million. - SUSEP circular creates incentive via reduced capital charge for meeting governance criteria. - Recommendation: limit reduced factors to transitional period and require minimum governance standards for all insurers post-transition. - ICP 8 & 16 (Risk management, internal controls, ERM): - SUSEP Circular 517/15 requires risk management framework; effective since January 2018, supervisory follow-up early stage. - ERM requirement imposed at solo entity level; no group risk incorporation requirement. - Recommendation: close dialogue with industry and supervisors; incorporate emerging risks (liquidity, concentration, step-in, cyber) into capital and investment requirements. - ICP 9 (Supervisory review, reporting, on-site inspections): - Reporting framework: bi-annual comprehensive audited information; monthly electronic information; Periodic Information Form (FIP) for operational, accounting, actuarial data. - SUSEP uses off-site monitoring and on-site inspections; legal power exists for on-site inspections without advance notice. - Recommendation: grant SUSEP power to conduct on-site inspections of outsourced functions or ensure insurers report outsourcing risks to board/senior management. - ICP 10 (Preventive and corrective measures, appeals): - Available corrective measures include fines up to BRL 1 million, suspension up to 180 days, withdrawal of license, blocking disposal of assets; individual manager actions possible (unsuitability 2–10 years). - Supervisory ladder: solvency recovery plan when capital shortage reaches 50 percent; special supervision 50–70 percent shortage; cancellation/resolution/liquidation when shortage > 70 percent. - Appeals to CRSNSP common; appeal processes can last months to years and hinder timely action. About 47 percent of penalties appealed between 2013–2017; of appeals, about 22 percent totally reversed, 19 percent partially maintained, 59 percent fully maintained by CRSNSP. - Recommendation: amend CRSNSP membership to reduce undue industry influence; increase disclosure and transparency on sanctions. - ICP 14 (Valuation): - Valuation follows CNSP Resolution 321/2015 and CPC methods reflecting IFRS including IFRS 4. - Financial assets market valued monthly; real estate at acquisition cost; long-term liabilities use contractual conditions without explicit MOCE. - Recommendation: consider explicit MOCE recognition in capital calculation; engage internationally on standards to address volatility. - ICP 15 (Investment requirements): - Rule-based investment limits: fixed income – 100 percent; equity – 49 percent; property – 20 percent. - Subcategory limits: government – 100 percent; publicly offered fixed income instruments – 75 percent; fixed income issued by commercial banks – 50 percent; securitization products – 25 percent. - Foreign investment largely prohibited with limited exceptions; derivatives allowed only for hedging; securities lending not allowed for assets backing technical provisions. - Supervisory review: SUSEP assesses investments monthly via custodian access; admitted investment funds must be approved by CVM; SUSEP can require replacement of investments it cannot assess. - Recommendation: closer monitoring of off-balance exposures and leverage; consider group-level investment requirements. - ICP 17 (Capital adequacy): - Standardized approach with diversification recognized via square root formula (effective diversification effect 27 percent for life insurers end-2016). - Recommendation: consider granular increase of confidence levels in medium term; cautious approach to internal models including robust validation standards and external advice. - ICP 19 (Conduct of business and consumer protection): - No specific legal provision requiring due skill, care and diligence beyond Consumer Protection Code 8.078 of 1990. - Claims payment required within 30 days per Circular 256 of 2004; CNSP Resolution No. 110 of 2004 requires an ombudsman handling cases up to BRL 30,000 per event. - SUSEP lacks disclosure of penalties and key complaint statistics; commissions not regulated. - Recommendation: collect granular lapse/surrender and complaints data; require intermediaries to disclose conflicts of interest and commissions pre-sale; consider thematic inspections and “mystery shopping” for sales quality. ### Investment funds, derivatives, leverage and monitoring constraints - Investment fund exposures and look-through: - Admitted funds’ inability to be look-through creates high market risk charge (about 20 percent risk charge for equity) when underlying assets inaccessible. - SUSEP has limited access to quantitative details from CVM (underlying assets, leverage) and limited power over outsourced asset managers. - Investment rules and allowed exceptions: - Intra-group transactions generally prohibited except repo and securities lending to group bank; use of derivatives restricted to hedging by insurer; funds may use derivatives up to their NAV. - CNSP Resolution No. 321/2015 limits exposure to derivatives to 100 percent of total assets. - SUSEP working on regulation to introduce margin requirements on derivative exposures. ### Stress Test for Step-in Risk — framework, assumptions and findings (Box 1) - BCB stress-testing framework: - Regular quarterly stress tests cover comprehensive risks of banking groups; BCB quantifies step-in risk (additional liquidity and capital parent banks must provide to support insurers’ outflows). - BCB monitors liquidity of insurance-related funds and collects liquidity flow data of investment funds from CVM. - Liquidity events and drivers (2013 example): - Industry-wide liquidity outflow in July 2013 driven by CMN Resolution 4176 (minimum duration 5 years for portfolios of pension, annuity and capitalization products from May 31, 2013) and an interest rate hike in long-term sovereign bonds in first half of 2013; annuity product redemptions were high. - SUSEP opposed CMN Resolution 4176; part amended later through CMN Resolution 4633 / 2018. - Stress-test methodology and assumptions: - BCB stress test calibrated with about a 95 percent confidence level over one month, based on historical outflow data since 2000. - Scenario includes up to 50 percent of NAV as a redemption shock in some funds. - Insurers hold HQLA mainly Brazilian government bonds and reverse repos; stressed redemptions may exceed insurer HQLA but parent banks’ LCR surplus typically higher than redemptions. - Findings: - Impact on capital and liquidity of banks limited at present; capital impact negligible. - Policy implications: - Continue regular stress tests to monitor liquidity risk of insurance sector. - In lower interest rate scenarios, policyholders likely to choose riskier and less liquid allocations, increasing liquidity risk spillovers; authorities should monitor and act as needed. ### Cyber risks, Insurtech and market innovation - Cyber awareness and market size: - SUSEP and industry aware of cyber risks; some see business opportunities. - Global cyber risk insurance market may now be worth some US$ 2 billion in annual premiums. - Cyber risk creates hidden exposures in general liability and household insurance. - Regulatory monitoring and response: - Insurers evaluating exposures, redesigning policy terms, and improving IT resilience. - SUSEP conducted a monitoring study on cyber insurance and plans a dedicated team to monitor these contracts. - Insurtech growth monitored via SUSEP’s committee on innovation and Insurtech; quantitative impact on sector and policyholder protection remains unknown. ### Policy recommendations (selected, with timing and priority as provided) - Strengthen legal protections and governance of SUSEP leadership and staff: - "SUSEP superintendent and directors should be protected by clear rules, e.g., in legislation, including fixed term, condition of dismissal, public disclosure of reasons for dismissal and qualification criteria for the new appointments. Legal protection of SUSEP staff should be enhanced by ensuring that proper legal support is provided." - Timing: I (Immediate (within one year)); Priority: H - Enhance supervisory and specialist resources: - "Supervisory and specialist resources should be substantially enhanced to manage the continuing challenge of the implementation of new regulatory reforms." - Timing: MT (Medium Term (within 3-5 years)); Priority: H - Communicate transitional arrangements and capital treatment: - "SUSEP should communicate to the public that reduced factors (and thus lower capital requirements) for the companies with higher governance and risk management are only for a short transitional period. SUSEP should require all insurers to meet some of those higher requirements once the short transitional period ends." - Timing: ST (Short Term (within 1-2 years)); Priority: M - Internal models and validation: - "SUSEP should communicate to the public that internal models would not be approved until SUSEP has obtained proper resources, and developed a robust and transparent validation standard for internal models." - Timing: MT; Priority: M - Coordinate IFRS 17 implementation: - "SUSEP should take the lead in coordinating with the relevant authorities to facilitate the smooth and coordinated implementation of IFRS 17." - Timing: MT; Priority: L - Implement consistent group-wide supervision: - "BCB, ANS and SUSEP should implement consistent group-wide supervision that covers both insurance groups as well as conglomerate groups. These authorities should enhance coordination substantially by joint rule-making, joint implementation, joint on-site inspections and information sharing at the granular level for off-site monitoring." - Timing: MT; Priority: M - Improve market conduct and disclosure: - "SUSEP, BCB and CVM should coordinate to improve market conduct by strengthening disclosure requirements. Oversight responsibility of insurance products, e.g., those sold at a bank branch, should be clarified." - Timing: MT; Priority: H - Additional operational recommendations (selected): - Make public which companies use reduced factors and quantify capital impact of subsequent reductions. - Prioritize on-site inspections for insurers failing to meet minimum capital requirements without reduced factors. - Require minimum governance requirements for all insurers after transition (board establishment, independence, risk reporting to board, business continuity plans). - Require intermediaries to disclose clear/simple information, conflicts of interest and commissions before sales; establish qualification criteria for intermediaries selling investment-linked products. - Clarify oversight for insurance sold at bank branches and impose licensing/qualification/disclosure requirements where necessary. ### Implementation and supervisory priorities - Immediate: - Legal protections for SUSEP leadership and staff; public communication regarding capital factor transitions. - Medium term: - Substantial resource increases for SUSEP; development of robust internal model validation standards before approving internal models; coordinated IFRS 17 implementation; establishment of group-wide supervision via enhanced coordination among SUSEP, ANS, BCB and CVM. - Market conduct improvements and clarification of oversight for bank-distributed insurance products. - Ongoing: - Regular stress testing (BCB–SUSEP cooperation) to monitor step-in and liquidity risks; closer quantitative data sharing with CVM on investment fund exposures; monitoring cyber and Insurtech developments. *Source: EXECUTIVE SUMMARY and selected chapters (Technical Note, 2018 Financial Sector Assessment Program — Brazil; IMF staff report excerpts, cr18343).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Introduction and Scope - Technical note provides an update on the Brazil insurance sector and analysis of selected regulatory and supervisory aspects as part of the 2018 Financial Sector Assessment Program (FSAP). Prepared by Nobuyasu Sugimoto (IMF) drawing on discussions in Brazil from February 27 to March 21, 2018. - References the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in October 2011, as revised in November 2017. - Focus is on recent developments, including major reforms of solvency and risk management requirements (which took effect in full in January 2018), and on recommendations from the 2012 FSAP (governance, market conduct and group supervision). - The note analyzes practice in relation to selected ICPs with macrofinancial relevance and material regulatory changes (solvency requirements, supervisory approach, cross-border cooperation). No scoring of observance of ICPs is given in this note; detailed ICP analysis is in the Annex. ### Market Structure, Products and Performance - Growth and size: - Insurance premiums grew about 10 percent annually from 2012 to 2016. - Total assets of the sector reached BRL 900 billion as of the end 2016 (life BRL 749 billion; non-life BRL 124 billion; reinsurers BRL 27 billion). - Sector assets are about 14 percent of GDP and 6 percent of the total assets of the overall financial sector. - Total investments of insurers in 2016 were BRL 821 billion. - Total assets of banks and other deposit taking institutions are BRL 8,499 billion. - Market structure and concentration: - SUSEP supervises 154 insurers; market share of the top 5 insurers is 85 percent for life, 74 percent for re-insurers. - About 6.4 new entrants each year; number of insurers declined from 156 to 154 since 2012. - Three largest insurance groups have a market share over 60 percent; two belong to banking groups and one is a joint venture with the largest bank in Latin America. - Health insurance: - There are 1,261 health insurers supervised by ANS; the majority are small and regional. - Market share of the top 21 health insurers is less than 50 percent. - Number of health insurers declined from about 1,600 in 2012 to about 1,200 in 2016. - Products and risks: - Life market dominated by annuity products without minimum investment return guarantees (VGBL). VGBL liabilities have grown about 300 percent in the last 5 years. - Universal life products growing but still limited market share; unit linked products not significant yet. - Non-life dominated by traditional lines (motor, property, liability); credit, mortgage and agricultural insurance present but concentrated in a few large insurers. - Some insurers have legacy long-term policies with high guaranteed rates indexed to inflation, exposing them to longevity, interest rate and inflation risk; long-term risks may not be fully reflected in accounting and solvency ratios, particularly for health insurers. - Profitability and solvency: - Average ROEs in the last five years: 30 percent for life, 10 percent for property and casualty (P&C), and 12 percent for reinsurers. - Average solvency ratios at end-2016: 200 percent for life insurers, 171 percent for P&C, and 317 percent for reinsurers. ### Key Findings: Regulatory and Supervisory Developments - Improvements since 2012 FSAP: - Introduction of risk-based supervision and risk-based capital requirements. - Adoption of the Liability Adequacy Test (LAT). - New risk management requirements including governance and enterprise risk management (ERM). - These reforms have shifted SUSEP from a compliance-oriented culture to a risk-based and outcome-focused approach. - Remaining gaps and vulnerabilities: - Lack of independence and resources for SUSEP: - Superintendents have been dismissed without clear public explanation. - SUSEP staff lack appropriate legal protection; resources have eroded since the last FSAP. - Limited flexibility to hire industry experts with needed technical knowledge. - Resource shortages impede proper implementation of new regulations. - Group supervision and coordination: - Many large insurance groups (often part of conglomerates) have multiple subsidiaries (life, health, non-life), increasing need for group-level supervision. - Current regulation and supervision by SUSEP and ANS focus on the entity level without group-level oversight. - Implementation of group-level supervision requires substantial coordination among SUSEP, ANS, BCB and CVM. - Macroprudential surveillance should be improved given the significant share of large conglomerate groups in Brazil’s financial sector. - Market conduct and consumer protection: - SUSEP continues to receive significant complaints related to non-payments of policy claims. - Industry faces high surrender rates in annuity products that are intended to be long-term. - Anecdotal evidence of tie-in sales (insurance sold as requirement for loans within same financial group). - Need for improved transparency and quality of advice in the sales channel, particularly in a lower interest rate environment and a search for yield. - Oversight responsibility for insurance sales through banking branches needs clarification. ### Policy Recommendations (from Table 1 — Main Recommendations) - Strengthen legal protections and governance of SUSEP leadership and staff: - "SUSEP superintendent and directors should be protected by clear rules, e.g., in legislation, including fixed term, condition of dismissal, public disclosure of reasons for dismissal and qualification criteria for the new appointments. Legal protection of SUSEP staff should be enhanced by ensuring that proper legal support is provided." - Timing: I (Immediate (within one year)); Priority: H - Enhance supervisory and specialist resources: - "Supervisory and specialist resources should be substantially enhanced to manage the continuing challenge of the implementation of new regulatory reforms." - Timing: MT (Medium Term (within 3-5 years)); Priority: H - Communicate transitional arrangements and capital treatment: - "SUSEP should communicate to the public that reduced factors (and thus lower capital requirements) for the companies with higher governance and risk management are only for a short transitional period. SUSEP should require all insurers to meet some of those higher requirements once the short transitional period ends." - Timing: ST (Short Term (within 1-2 years)); Priority: M - Internal models and validation: - "SUSEP should communicate to the public that internal models would not be approved until SUSEP has obtained proper resources, and developed a robust and transparent validation standard for internal models." - Timing: MT; Priority: M - Coordinate IFRS 17 implementation: - "SUSEP should take the lead in coordinating with the relevant authorities to facilitate the smooth and coordinated implementation of IFRS 17." - Timing: MT; Priority: L - Implement consistent group-wide supervision: - "BCB, ANS and SUSEP should implement consistent group-wide supervision that covers both insurance groups as well as conglomerate groups. These authorities should enhance coordination substantially by joint rule-making, joint implementation, joint on-site inspections and information sharing at the granular level for off-site monitoring." - Timing: MT; Priority: M - Improve market conduct and disclosure: - "SUSEP, BCB and CVM should coordinate to improve market conduct by strengthening disclosure requirements. Oversight responsibility of insurance products, e.g., those sold at a bank branch, should be clarified." - Timing: MT; Priority: H ### Implementation and Supervisory Priorities - Immediate emphasis on legal protections for SUSEP leadership and staff and on public communication regarding capital factor transitions. - Medium-term needs include substantial resource increases for SUSEP, robust internal model validation standards before model approval, coordinated IFRS 17 implementation, and establishing group-wide supervision through enhanced coordination among SUSEP, ANS, BCB and CVM. - Market conduct improvements and clarification of oversight for bank-distributed insurance products should be prioritized at the medium term. *Source: EXECUTIVE SUMMARY (Technical Note, 2018 Financial Sector Assessment Program — Brazil).* ### 15. Despite a generally conservative investment profile, anecdotal evidence suggests ### 15. Despite a generally conservative investment profile, anecdotal evidence suggests ### Investment profile and search for yield - Supervisory data suggests overall asset allocations remain conservative in both life and non-life insurers. - Largest shares of life insurers’ investments: - government securities: 21 percent for life general account, 79 percent for life separate account. - mortgage loans: 6 percent. - other loans: 6 percent. - real estate: 4 percent. - Non-life insurers increased the share of “other assets” in total investments from 38 percent in 2011 to 42 percent in 2016. - Life insurers have made substantial investments in mutual funds, which cannot be looked through. - Investment yield is outperforming the yields of 3-year government bonds, especially for non-life and re-insurers, suggesting some leveraged or risky investments could be hidden within available SUSEP data. - Note: According to SUSEP, majority of the other assets would be premium receivables from brokers. ### Investments in funds, disclosure, and oversight limitations - As of the end of 2016: - life insurers allocated 10 percent of their assets to mutual funds (cannot be looked through). - non-life insurers allocated 5 percent of their assets to mutual funds (cannot be looked through). - 29 percent of life insurer investments are allocated to specific funds (FIEs) that require more than 95 percent of the investment into Brazilian government bonds. - 11 percent of non-life insurer investments are allocated to specific funds (FIEs) that require more than 95 percent of the investment into Brazilian government bonds. - SUSEP has information on underlying assets of FIEs but does not receive quantitative data (such as underlying assets and leverage) from the securities regulator (CVM). - SUSEP does not have the power to oversee outsourced entities (including asset managers), creating difficulties monitoring investment activities conducted under asset management products invested by insurers. ### Guarantees on long-term policies and potential negative spreads - Average rate for existing guaranteed products is about 6 percent. - Legacy policies used to provide guarantees in real terms. - Individual health insurance is long term without a premium adjustment. - After normalization of high inflation periods, investment yields from safe assets (such as government bonds) have been dropping significantly. - Future investment returns could continue to decrease further and Brazilian life insurers may suffer from negative spreads in the short term. - A significant number of health insurance providers have failed and policyholders of those providers have suffered a significant loss of their contributions. ### Interlinkages between banks and insurers - Large bank-related insurers dominate the insurance market and could be increasing their share further. - Current interlinkages between banks and insurers are limited due to conservative regulation prohibiting intra-group transactions. - Linkages are limited to short-term repo transactions backed by Brazilian Government Bonds. ### Cyber risks and Insurtech entrants - SUSEP and the insurance industry are aware of cyber risks; some market participants see business opportunities. - The global cyber risk insurance market may now be worth some US$ 2 billion in annual premiums. - Cyber risk creates hidden exposures in general liability household insurance (e.g., power outages due to a cyber-attack may be covered). - Insurers are evaluating exposures, redesigning policy terms, and improving IT systems for resilience. - SUSEP has carried out a monitoring study on cyber insurance and plans to set up a dedicated team to better monitor these insurance contracts. - Insurtechs are growing in the insurance market; SUSEP is monitoring developments and has established a committee on innovation and Insurtech to facilitate regulatory requests and clarifications. - Impact on existing insurance sector and policyholder protection remains unknown due to lack of quantitative information on Insurtech activities. ### Institutional setting, independence, and resources of SUSEP - CNSP (National Council for Private Insurance) has ultimate supervisory authority and delegates supervisory responsibilities to SUSEP. - CNSP is chaired by the Minister of Finance and includes representatives from other government bodies, including the Ministries of Justice and of Social Security, the Brazilian Central Bank and CVM. - SUSEP is headed by the Superintendent and supported by the Directors Council (Superintendent plus four private Directors). - The Superintendent and the Directors are nominated and can at any time be dismissed by the President of the Republic. - Private health insurance is supervised by ANS under the Ministry of Health. - Since the last FSAP, SUSEP superintendents have been dismissed and replaced four times over 5 years, without explanation or disclosure. - Superintendents and four directors do not have fixed terms and there are no qualification criteria for the superintendent and directors. - SUSEP’s budget stems mainly from fees imposed on the insurance industry (licensing fees, inspection fees and sanctions) but is subject to constraints: annual budget must be approved by Ministry of Planning (MoP) and the National Congress, which consider the need for a primary surplus. - Day-to-day operations are subject to strict constraints (e.g., any international travel of SUSEP staff needs ministerial approval by Ministry of Finance (MoF)). - SUSEP staff are subject to lawsuits even for actions taken in good faith; in some cases SUSEP could not provide legal support due to budgetary constraints. - Industry has significant presence in appeal process; between 2013 and 2017 about 47 percent of penalties are appealed by the subject insurer. - Among appeals presented: - about 22 percent cases where SUSEP decisions had been totally reversed by the CRSNSP. - about 19 percent where SUSEP decisions had partially maintained. - about 59 percent where SUSEP decisions had fully maintained by the CRSNSP. - The number of staff declined from 462 in 2011 to 381 (about a 20 percent decline). - SUSEP examination for hiring new staff has not been conducted since 2011; SUSEP has not been able to hire any new staff since 2013. - SUSEP cannot run a hiring process dedicated to mid-career experts from the outside and must rely on recent university graduates. - Salary levels seem competitive enough to retain experts in SUSEP, but SUSEP is legally constrained from offering competitive salaries to hire skilled staff from outside. ### Solvency standards, valuation, and capital requirements - Valuation of assets for solvency purposes is generally based on market value; financial assets data are provided by custodian houses, processed by SUSEP on a daily basis, and assessed on a monthly basis. - Other illiquid assets, such as real estate, are valued at acquisition cost or accounting book value; provisions are made to reflect impairment. - Valuation of liabilities is based on the best estimate for liabilities, without an explicit margin over current estimate (MOCE). - Three yield curves are specified for discounting insurance cash flows and updated monthly by SUSEP. - Two additional curves are calibrated with reference to an ANBIMA model. - Insurers can submit alternative curves for approval to SUSEP; some firms use a curve derived from appropriate government bond yields up to the last liquid point (10 years) with extrapolation and the Ultimate Forward Rate (UFR). - SUSEP approved different approaches on insurers’ requests; some insurers use the average of observed yields as a proxy of the UFR. - Unrealized gains from the future premiums of long term policies are capped at zero and can be used only to offset the market risks associated with the future premiums (constituting an implicit MOCE). - No further capital adjustment is made beyond that of market risk as described. - The Act to Modernize Financial Supervision of Insurance Undertakings, enacted in April 2015, sets new valuation requirements, own funds rules, provisions on calculation of the Solvency Capital Requirement (SCR), governance requirements; requirement fully implemented since the end of 2017. - Required capital is composed of credit, market, underwriting and operational risks. - Calibration details: - Market risk: Value at Risk (VaR) with a 99 percent confidence level over a 3-month horizon. - Credit risk (except that against reinsurers and other insurers): based on the Basel III standardized approach for the banking sector. - Other factors: calibrated mainly based on Tail Value at Risk (T-VaR) with a 97.5 percent confidence level over a one-year horizon. - Credit risk factors for reinsurance calibrated differently: - 97.5 percent for domestic reinsurers. - 99.5 percent for admitted reinsurers. - 99.9 percent for other reinsurers. - No single, consistent confidence level across capital requirement calibrations. - Reduced risk factors for underwriting risk introduced to incentivize governance and risk management: - Reduced risk factor uses a 95 percent confidence level over a one-year horizon. - Effectively reduces the risk factors by about 18–25 percent. - To qualify, an insurer must hire an external auditor to certify conditions for SUSEP approval (presence of a board of directors, independence of the chairman, formal and periodic communication from the risk management unit to the board). - SUSEP can withhold approval if deficiencies found at on-site inspection. - Internal models: - An internal model is allowed for capital requirements but there is no validation requirement formalized. - ICP 17 requires three tests (“statistical quality test”, “calibration test”, and “use test”) ahead of formal application, but such requirements have not yet been formalized except as a high-level principle targeting a 99 percent VaR with 1-year time horizon. - SUSEP has no plan or capacity to approve any internal model in the near future. - No partial internal model is allowed. - Targeted calibration level for internal models is much higher than the target used to calibrate the standardized approach, limiting incentives for industry to apply. ### Recommendations (selected) - Protect SUSEP superintendent and directors by clear rules in legislation, including fixed terms, conditions for dismissal, public disclosure of dismissal reasons and qualification criteria for new appointments. - Enhance legal protection of SUSEP staff to ensure lawsuits against staff who acted in good faith are appropriately supported in cost and legal process. - Ensure accountability of regulatory actions through well-defined and transparent procedures; amend membership of CRSNSP (Council of Resources of the Ministry of Finance) where equal industry representation may give undue power to the industry; consider complementing representation with policyholders and academics; increase disclosure of internal guidelines, public consultation, and dialogue with industry and policyholders. - SUSEP should endeavor to hire skilled experts for emerging needs (risk based supervision, internal model validation, ERM, Fintech, cyber risks); find a way to hire a small number of skilled experts from the industry or foreign regulators. *Source: IMF staff report (excerpts provided).* ### 39. Even for the standardized approach, complex cash flows can be incorporated without ### 39. Even for the standardized approach, complex cash flows can be incorporated without ### Market risk and cashflow inputs - The input for the market risk of the standardized approach is cash inflow and outflow of all financial instruments, including derivatives and insurance policies. - Some cashflows, especially those from derivatives, are subject to optimality, non-linearity and high volatility conditions, depending on the scenario. - Derivative contracts for hedging could be short term and are subject to roll-over risk; those unilinear and roll-over risks may not have been incorporated into the market risk. - SUSEP is following up monthly or semi-annually and monitors the changes of the cashflow projections very closely. ### Investment rules and limitations - The National Monetary Council (CMN) establishes rule-based requirements for the admitted investments of insurers; the investment rules are strict. - Foreign investment is generally prohibited, with a few exceptions related to currency matching instruments for policies issued in foreign currency. - Securities lending is not allowed for the assets backing the technical provisions. - For other assets, 100 percent collateral is required. - Intra-group transactions are generally prohibited except repo and securities lending transactions from an insurer to the group bank. - The use of derivatives is restricted solely for hedging purposes, if directly engaged by an insurer. - Exceptions and nuances: - Securities lending and repo transactions are allowed between group entities with certain conditions. - The use of derivatives for leverage purposes is allowed in investment funds up to their net asset values. - There is a disincentive for insurers to invest in funds where the underlying asset cannot be look-through: the market risk capital charge for the investment would be assigned the highest (about 20 percent which is equal to equity investment). - SUSEP has a limited ability to monitor investment activities conducted by investment funds as information exchanges with CVM are limited and no quantitative data has been exchanged. ### Capital resources recognition and prohibitions - Only a high quality of capital resources is recognized. - Insurers must deduct intangible assets from net capital, including real estate investments (REITs and other investments are excluded from the deduction), and investment in subsidiaries or affiliates. - Subordinated debt or other innovative capital instruments are not recognized as capital, while preferred stock is recognized as a capital resource. - Profits from unrecognized future premiums are not recognized as capital resources. - Cross-shareholding (reciprocal participation) or investment into private securities issued by financial institutions within the same group is prohibited. - Investment in public securities issued by financial institutions within the same group is allowed with certain conditions, such as index-linked investment through investment funds. ### Recommendations for SUSEP (supervisory and policy actions) - Communicate publicly that reduced factors for companies that have adopted higher governance and risk management practices are only for a transitional period; reduced factors should be limited to a very short term because they could compromise the protection of policyholders. - Make public which companies are using the reduced factors and the impact of subsequent reduction of the capital requirements. - Prioritize on-site inspections of insurers, particularly those that fail to meet the minimum capital requirements without the reduced factors, to minimize compromise of policyholder protection. - Require all insurers to meet higher governance and risk management requirements once the transitional period ends; certain requirements (establishment of the board, requirement of the independence, risk and exposure reporting to the board, development of business continuity plan, etc.) should be implemented as minimum standards for all insurers. - Communicate that internal models would not be approved until SUSEP has obtained proper resources and developed a robust and transparent validation standard for internal models. - Seek advice from supervisors with experience and knowledge of model validation (including model validation team for Internal Rating Based Approach of the Basel Accord in the BCB and foreign insurance regulators). - Ensure proper resources and a rigorous, transparent approval process for internal models, without undue external influence. ### Groupwide supervision: current practice and gaps - Insurance supervision is predominantly focused on the solo entity, with limited contagion risk analysis; there is no formal regulation and supervision imposed at the group level. - Related party transactions (including between the insurance entity and its parent bank) are prohibited, except repo and securities lending and index-linked investment through investment funds. - SUSEP and the BCB monitor compliance with regulations to limit contagion risk between banks and insurers. - SUSEP previously had a division dedicated to group and macroprudential supervision, but it was disbanded soon after its creation without producing any output. - SUSEP has limited power beyond its supervised entities, including outsourced entities; insurers are heavily reliant on asset managers, typically within the same group, and emerging digitalization, Fintech and Insurtech could accelerate outsourcing of IT and data management. - SUSEP can supervise outsourced functions indirectly through supervised entities, but it is not a high priority in on-site and off-site practices. - The BCB monitors contagion risk from insurance to banking sector: - The BCB requires conglomerate banking groups to assess all material risks of the entire group, including underwriting and other risks in insurance subsidiaries, as part of their Internal Capital Adequacy Assessment Plan (ICAAP) and report it annually. - The BCB analyzes adequacy of capital and liquidity positions of insurance entities and has conducted capital and liquidity stress tests of conglomerate groups; the exercise identified that the risks of the banking group to its capital and liquidity are limited at this stage, even under conservative assumptions and scenarios. - Coordination among SUSEP, BCB and CVM: - Based on MoUs, the three institutions can exchange information; SUSEP and the BCB meet regularly to assess risk quantitatively and qualitatively, exchange key findings of inspections, coordinate scope and timing of on-site inspections, and discuss risk identification improvements. - Gaps remain: SUSEP does not have access to quantitative information of CVM, important to understand insurers’ exposures to investment funds. - The cooperation protocol does not provide a clear demarcation of oversight responsibilities between agencies (for example, no clear responsibility assigned to market conduct of insurance products sold by banks). - Inconsistent approaches among authorities could pose material challenges and create opportunities for regulatory arbitrage: - SUSEP has implemented economic-based valuation for insurance liabilities, which includes IFRS 4 and some part of the upcoming IFRS 17 requirements. - ANS has not implemented economic-based valuation of insurance liabilities or IFRS 4, and there seems no intention to implement IFRS 17 in the future, although some health insurers have voluntarily adopted some requirements of IFRS 4 (such as the liability adequacy test). - For general purpose accounting of listed companies, CVM is responsible for implementing the corresponding Brazilian accounting standard. - Insurers need a consistent accounting framework between assets and liabilities; IFRS 9 implementation (assets) should be implemented at the same time as IFRS 17 implementation (liabilities). ### Recommendations on group supervision and international engagement - SUSEP should work with the BCB, ANS and CVM to establish and implement consistent group-based supervision. - Cooperation should be gradually expanded from information exchange to more coordinated actions (including joint-rule making, joint-reporting, joint-inspection and coordinated supervisory actions). - SUSEP should take the lead in coordinating with relevant authorities to facilitate smooth implementation of IFRS 17. - Encourage the industry to improve Asset and Liability Management (ALM) to mitigate the impact of IFRS 17. - SUSEP should take more active involvement in international discussions to convey views on international standards (such as the IAIS Insurance Capital Standard) and identify internationally acceptable approaches to address high volatility of assets and liabilities, especially for long-term insurance policies. ### Macroprudential surveillance - SUSEP established a special division for group and macroprudential supervision in 2013, but it was short-lived and produced no output. - SUSEP occasionally conducts surveillance at the industry wide level. - Example: in 2016, SUSEP identified the risk of unexpected losses from large construction projects; SUSEP collected information using ad-hoc reporting requirements and analyzed potential impact on the industry. - Bank and insurance regulations mitigate significant contagion risk; the BCB has conducted stress tests of capital and liquidity assuming banks will step-in and cover all capital and liquidity loss from their insurance subsidiaries. - The exercise suggests cooperation between BCB and SUSEP is effective. *cr18343 - 39. Even for the standardized approach, complex cash flows can be incorporated without* ### Box 1. Stress Test for Step-in Risk ### Box 1. Stress Test for Step-in Risk ### Stress-testing framework and scope - The BCB conducts regular stress testing, cooperating with other authorities. - Quarterly stress tests cover comprehensive risks of banking groups. - In those exercises, the BCB examines the risks and potential contagion from insurance companies to the banking group by quantifying step-in risks. - The BCB also monitors liquidity risk of the insurance sector and collects liquidity flow data of investment funds from CVM. - The BCB identifies episodes of increased volatility in the net inflows in insurance-related funds. ### Liquidity events and drivers (2013) - Annuity products underlying those funds have high redemption rates; the entire insurance industry faced a significant net outflow in June and July 2013. - Higher outflows have been observed more frequently at the individual insurer’s level; the outflow at the company level reached several hundreds of million BRL. - The industry-wide liquidity outflow in July 2013 was due to: - A regulatory change: CMN Resolution 4176 issued on January 2, 2013, which required a minimum duration of 5 years for the portfolios of pension, annuity and capitalization productions from May 31, 2013. - A coincident interest rate hike in long-term sovereign bonds in the first half of 2013 that led several long-term fixed income funds to show negative returns, triggering withdrawals from annuity and capitalization products. - SUSEP opposed the reform made in CMN Resolution 4176. Recently, through CMN Resolution 4633 / 2018, part of the requirements has been amended. ### Stress-test methodology and quantified assumptions - Stress tests for step-in risk analyzed both the capital and liquidity impact on the parent banks. - The BCB’s stress test uses a stress test calibrated with about a 95 percent confidence level over one month, based on historical outflow data since 2000. - The scenario includes up to 50 percent of NAV as a redemption shock in some funds. - Insurers hold a significant amount of high-quality liquid assets (HQLA) in the insurers’ investment funds, mainly Brazilian government bonds and reverse repos based on the bonds. - The BCB quantifies the step-in risk as the estimated amount of additional liquidity and capital that the parent banks need to provide to support the outflow of the insurers. - The additional capital requirement is also calculated assuming that banks would continue to hold the illiquid assets. ### Findings from the BCB analysis - The analysis found that the impact on capital and liquidity of the banks is limited at present. - While stressed redemptions exceed HQLA in some insurers, the LCR surplus of the parent bank is much higher than the redemptions. - The capital impact to banks is negligible. ### Policy implications and recommendations - It is recommended that the BCB continue the stress tests regularly to monitor the liquidity risk of the insurance sector. - The majority of the insurance products (VGBL) provide greater flexibility for policyholders to choose their asset allocation. - In a lower interest rate scenario, policyholders are likely to choose riskier and less liquid asset allocation, which could have an adverse impact on liquidity risk from the insurance sector to the banking sector. - It is important for the authorities to keep monitoring the liquidity risk and take regulatory actions if needed. *Source: Box 1. Stress Test for Step-in Risk (cr18343).* ### 12.249 of 2010. In 2017, the fees and fines collected by SUSEP were BRL 242 million and ### cr18343 - 12.249 of 2010. In 2017, the fees and fines collected by SUSEP were BRL 242 million and ### Organizational resources and independence - Fees and fines collected by SUSEP in 2017: BRL 242 million. - Expense limit: BRL 226 million. - Actual expenses: BRL 220 million. - Number of staff positions approved by Congress: on the order of 800; positions confirmed by the MoP: around 500. - Any international trip needs ministerial approval and is published in the Official Gazette. - Key governance concerns and recommendations: - Superintendents and directors could be dismissed anytime for any reason and have been dismissed without public disclosure of the reasons. This could have material impact on SUSEP’s operational independence. - Recommendation: establish legally binding rules and established fixed terms, clear conditions for dismissal, public disclosure of the dismissal reasons and qualification criteria for the new appointments. - Legal protection of SUSEP staff should be enhanced; ensure lawsuits against staff who acted in good faith are appropriately supported in terms of both the cost and legal process. - SUSEP should hire a small number of skilled experts from the industry or foreign regulators for emerging needs (risk based supervision, internal model validation, implementation of ERM, Fintech and cyber risks). ### ICP 7 — Corporate governance: general framework and findings - Minimum corporate governance requirements exist in CNSP resolutions and the Companies’ Act; applicants must provide intended corporate governance standards. - SUSEP Circular No. 249 of 2004 and CNSP Resolution No. 118 of 2004 set board responsibilities including: - providing oversight of risk management and internal controls; - ensuring there is a reliable financial reporting process; - ensuring appropriate, timely, and effective communications with the supervisor and relevant stakeholders on the governance of the insurer; - ensuring senior management carries out its responsibilities effectively. - Board of directors: - Not mandatory for all companies; for non-listed companies qualification criteria limited to good reputation and some management experience. - SUSEP circular creates incentive by reducing capital charge for companies which meet certain corporate governance criteria. - Reliable financial reporting process: - Audit committee required if either adjusted capital in excess of BRL 500 million or technical reserves in excess of BRL 700 million. - Insurers can only hire independent external auditors registered with the CVM, and need to change the auditor every 5 years. - Comments and policy recommendations: - SUSEP should communicate that reduced factors are only for a transitional period and should limit reduced factors’ application for a very short term. - SUSEP should make public which companies are using reduced factors and the impact on capital requirements. - SUSEP should prioritize on-site inspections for insurers that fail to meet minimum capital requirements without reduced factors. - SUSEP should require minimum governance requirements for all insurers after the transitional period (e.g., establishment of the board, independence, risk and exposure reporting to the board, business continuity plans). ### ICP 8 & 16 — Risk management, internal controls and ERM - SUSEP Circular 517/15 requires a risk management framework including identification, evaluation and measurement of all material risks both quantitatively and qualitatively. - Effective date and implementation status: - Requirements effective since January 2018; compliance and supervisory follow-up are in the early process. - SUSEP issued a questionnaire to all insurers to encourage proper implementation. - ERM requirement is imposed at the insurance solo entity level; no specific requirement on group risk incorporation in current framework. - Compliance and actuarial functions: - SUSEP Circular No. 249 of 2004 prescribes internal controls, compliance function, and internal audit reporting directly to the board. - CNSP Resolution No. 321 of 2015 requires an actuarial function; CNSP Resolution 311/2014 requires an independent actuarial audit; annual reports require an actuarial statement on sufficiency of provisions. - Supervisory practices: - On-site inspection module inspects internal control systems; Deficiency Table used to set deadlines and actions. - Inspections generally focus on accounting; evaluation of risk management systems is being developed with off-site monitoring through guidance manuals. - Comments: - Actual supervision for ERM implementation will be in the future; close dialogue with industry and relevant supervisors is recommended. - Emerging risks not yet incorporated into capital and investment requirements (liquidity risk, concentration risk, step-in risk, cyber risk) should be followed more closely. - SUSEP should coordinate with BCB, ANS and CVM to develop ERM at group and conglomerate levels. ### ICP 9 — Supervisory review, reporting and on-site inspection practices - Legal authorities and reporting: - CNSP Resolution No. 321 of 2015, SUSEP Circulars No. 522 of 2015 and No. 517 of 2015 set supervisory reporting requirements: financial, statistical, actuarial reports, adequacy of liabilities. - Comprehensive audited information reported bi-annually; some information reported monthly in electronic format. - Insurers submit detailed operational, accounting, actuarial and statistical information via the Periodic Information Form (FIP); automated validation is in place. - DL 73, CL 109, and CL 126 empower SUSEP to require reports/materials and to conduct on-site inspections; no legal requirement to give advance notice. - Risk based supervision: - SUSEP uses off-site monitoring and on-site inspections; has a risk assessment methodology and uses inputs for planning inspections. - On-site inspections: - Verification includes systems and controls testing, sampling transactions and calculations, claims reserves checked against claims files. - SUSEP reviews external audit working papers and meets with external auditors (confidentiality waiver required). - Inspections conclude with notice of deficiencies and requirement for corrective plans; a formal report is prepared. - Comments: - SUSEP should be granted power to conduct on-site inspection of outsourced functions or ensure insurers manage and report outsourcing risks to board/senior management. ### ICP 10 — Preventive and corrective measures, appeals and timeliness - Legal powers and actions: - DL 73 Article 113: unauthorized insurance activity can be banned and fined in an amount equal to the amount at risk. - Example cited: a fine (in dispute) on the order of USD six billion issued to an offshore insurer operating in Brazil without a license. - Availability of corrective measures (legislated): - Administrative fine up to BRL 1 million. - Suspension of part or the entire business up to 180 days. - Withdrawal of the license, blocking disposal of assets backing insurance liabilities. - Actions can be imposed on individuals or groups of managers including declaration of unsuitability for a period from 2 to 10 years. - Supervisory ladder of intervention (Resolution CNSP 321/2015): - When shortage of capital resources against capital reequipment has reached 50 percent, or liquid assets become below 20 percent of the capital requirement, insurers must present a solvency recovery plan; - When shortage has reached between 50 percent and 70 percent, insurers would be subject to special supervision; - When shortage has reached over 70 percent, insurers will be subject to cancelation of the license, resolution and/or liquidation. - Timely action concerns: - Many penalties are appealed to the Council of Resources of the Ministry of Finance (CRSNSP); appeal processes can last several months to years and can render regulatory action ineffective during the appeal. - Comments and recommendations: - Appeal processes hinder timely action; representation in CRSNSP (equal government and industry representatives) may give undue power to industry—representation could be complemented by policyholder and academic representatives. - SUSEP should enhance accountability through disclosure of internal guidelines, public consultation, dialogue with industry and policyholders, and consider public disclosure of sanctions related to policyholder protection. ### ICP 14 — Valuation of assets and liabilities - Framework and standards: - Valuation standards established in Resolution CNSP 321/2015; methods specified by Brazilian Accounting Pronouncements Committee (CPC), which reflects IFRS including IFRS 4. - SUSEP established a chart of accounts for consistency. - CNSP Resolution 321 of 2015 determines rules for calculating admitted assets for solvency purposes; intra-group investments, tax credits, and assets with doubtful valuation are excluded. - Valuation practices: - Financial assets valued at market value via direct access to custodian houses monthly. - Real estate valued exclusively at acquisition cost. - Illiquid assets, including derivatives, valued at notional value or using latest market transactions; impairment provisions required when book value is materially higher than market value. - Technical provisions: - Long term life and pension liabilities calculated using contractual conditions at issuance; valuation does not include explicit margins over current estimates. - SUSEP Circular No. 517 of 2015 requires Liability Adequacy Test (LAT) and any deficiency recognized. - Monthly submission of databases to facilitate testing technical provisions under alternative scenarios; cash flows discounted by an interest rate term structure set by SUSEP, updated monthly and available on SUSEP’s website. - Insurers required to consider embedded options and guarantees; very few products with embedded guarantees are sold. - MOCE and own credit: - No requirement to recognize explicit MOCE; profit from unrecognized future premiums is prohibited from being recognized as capital resources (only used to offset market risk capital charge associated with future premium cash flows). - Valuation does not reflect insurer’s own credit standing; technical provisions do not include an explicit risk margin. - Comments: - Recommendation: explicit MOCE recognition in capital calculation; more active engagement in international standard setting (e.g., IAIS Insurance Capital Standard) to address volatility of assets and liabilities. ### ICP 15 — Investment requirements and supervisory review - Rule-based investment limits (CMN 4444/2015, CNSP 321/2015, SUSEP Circular 517/2015): - Assets divided into free and collateral assets (collateral assets cover technical provisions and SUSEP can block selling). - Investment concentration limits by class: - fixed income – 100 percent, - equity – 49 percent, - property – 20 percent. - Subcategory concentration limits: - government – 100 percent, - publicly offered fixed income instruments – 75 percent, - fixed income instruments issued by commercial banks – 50 percent, - securitization products – 25 percent. - Foreign and intra-group investment: - Foreign investment largely prohibited with limited exceptions (currency matching instruments for policies in foreign currency; investments made by investment funds). - Intra-group transactions prohibited except for index investments containing shares of a related party; some exemptions for lending securities to parent bank for liquidity. - Derivatives and off-balance exposures: - Derivatives allowed only for portfolio hedging purposes. - Securities lending not allowed for assets backing technical provisions; for other assets 100 percent collateral required. - Admitted investment funds cannot hold derivatives in excess of their total value. - CNSP Resolution No. 321 of 2015 limits total exposure to derivatives to 100 percent of the total assets. - SUSEP working on regulation to introduce margin requirements on derivative exposures. - Supervisory review: - SUSEP assesses monthly the appropriateness and market value of investments via direct access to custodian and clearing houses. - Admitted investment funds must be approved by CVM; underlying assets disclosed to SUSEP on request. Investment limits for funds do not account for quality or nature of underlying assets. - SUSEP can require immediate replacement of investments it cannot appropriately assess. - Comments: - Investment requirements are transparent and conservative with objectives safety, profitability and liquidity. - Recommend closer monitoring of off-balance exposures and leverage (derivatives, repo, securities lending in investment funds). - Group-level investment requirements recommended to address potential regulatory arbitrage among group entities. ### ICP 17 — Capital adequacy framework and calibration - Legal and implementation framework: - Act to Modernize Financial Supervision of Insurance Undertakings (enacted April 2015) sets valuation, own funds rules, SCR calculation, governance; fully implemented from end-2017 with a short transition period when 50 percent of market risk capital charge was waived in 2016. - Required capital composed of credit risk, market risk, underwriting risk and operational risk. - Focus on solo entity; conservative capital charges and prohibitions on intra-group transactions address major group risks. - Standardized approach and diversification: - Standardized approach provides specified risk factors; internal models allowed upon SUSEP approval. - Diversification recognized with a square root formula among three risk categories; effective diversification effect was 27 percent for life insurers as of the end 2016. - Target criteria and calibration: - Market risk calibrated with Value at Risk (VaR) with 99 percent confidence level over 3-month horizon. - Other factors calibrated mainly based on Tail Value at Risk (T-VaR) with a 97.5 percent confidence level over 1-year horizon. - No single, consistent confidence level across capital requirement calibration. - Reduced factors incentive: - SUSEP introduced reduced risk factors with lower confidence level (95 percent confidence level over 1-year horizon) for underwriting risks to incentivize improved governance and risk management, effectively reducing risk factors by about 18 - 25 percent. - Qualification requires external auditor certification of governance and risk management conditions; SUSEP can reject requests after on-site inspection. - Internal model policy: - Internal models allowed but no formal validation requirement in place; high-level principle communicated that internal models should be calibrated based on 99 percent VaR with 1-year time horizon. - SUSEP communicated low near-term expectation of approving internal models; no partial internal model allowed. - Risk mitigation and capital resources: - Standardized approach allows recognition of hedging with derivatives; no minimum requirements for hedging instruments’ credit quality or length. - Insurers must look through investment funds to derive capital requirements; when underlying assets inaccessible, highest capital charge applied (about a 20 percent risk charge for equity). - Credit risk module: reinsurance exposure uses SUSEP model allocating probability of default by rating/type; calibration for reinsurance: 97.5 percent for domestic reinsurers, 99.5 percent for admitted reinsurers and 99.9 percent for other reinsurers. - Risk factor for domestic reinsurance is fixed at 1.9 percent regardless of credit rating; foreign reinsurance can reach over 13 percent depending on credit rating. - Credit risk exposure for other counterparties aligned with BCB model; module contains 45 different parameters; reinsurance and financial asset counterparty risks added using a correlation matrix. - Only high-quality capital (common equity and preferred equity) recognized as capital resources; intangible assets, certain real estate investments, and investments in subsidiaries/affiliates deducted. Subordinated debt and innovative capital instruments not recognized. Profit from unrecognized future premiums prohibited as capital resources. - Comments and recommendations: - Inconsistent target criteria may encourage risk-taking in less conservatively calibrated areas; overall calibration is less conservative than best practices in many developed countries. - Recommendation: consider granular increase of confidence level comparable to foreign regulation in medium term. - SUSEP should follow up on risk mitigation practices (hedging counterparties’ credit quality, long-term liability nature), monitor intragroup transactions (particularly insurance and health insurers supervised by ANS), and consider group capital for insurance groups in the long term. - Cautious approach recommended before allowing internal models; develop robust validation standards and seek advice from experienced supervisors (BCB model validation team, foreign insurance regulators). Ensure approval process transparency and independence given SUSEP vulnerabilities. ### ICP 19 — Conduct of business and consumer protection - Legal and supervisory framework: - No specific legal provision requires insurers and intermediaries to act with due skill, care and diligence; Consumer Protection Code 8.078 of 1990 supports customers’ rights. - SUSEP increased emphasis on consumer protection; set up ombudsman centers at head office and regional offices; PROCON handles general consumer complaints and orientation. - Claims and complaint handling: - Claims payment requirement: insurers required to pay claims within 30 days or face fines as per Circular 256 of 2004; 30 days can be suspended when insurer requests justified additional information. - On-site inspections review claims payment internal controls and processes; SUSEP enforces penalties and requires process strengthening where needed. - CNSP Resolution No. 110 of 2004 requires each insurer to have an ombudsman; ombudsman centers handle cases up to BRL 30,000 per event. - Information, conflicts of interest and confidentiality: - SUSEP Circular No. 292 of 2005 sets administrative procedures and requires an applicant to sign declaration acknowledging receipt of information needed to enter into insurance contract; sales materials reviewed during product approval. - No general legal requirement on the type of information consumers should receive before, during and after intermediation except for open pension plans. - No disclosure requirement of commissions and conflict of interest of intermediaries when advising insurance purchases. - Consumer Protection Code 8.078 of 1990 includes provisions to protect personal information in outsourced management; SUSEP will act on complaints related to confidentiality violations. - SUSEP public disclosure and supervisory resourcing: - SUSEP website issues warnings about unauthorized solicitation and publishes consumer education leaflets; involved in financial education at schools. - No disclosure of penalties or other regulatory actions applied to supervised entities, nor useful statistics about complaints received by SUSEP. - SUSEP allocates substantial staff to handle policyholders’ complaints (including 30 inspectors and 20 general staff). As of end-2016, more than 100,000 brokers registered with SUSEP. Commission level is not regulated by SUSEP. - SUSEP is introducing risk based supervision for market conduct. - Comments and recommendations: - SUSEP should collect more granular information to make risk based supervision effective (lapse/surrender rates, more comprehensive and timely complaints data, commission levels, sales growth rate by product). - Summary statistics could be disclosed to the public; SUSEP should publish regulatory actions related to policyholder protection. - SUSEP should require intermediaries to disclose clear/simple information, conflicts of interest and commissions before sales; this becomes more important as products grow more complex. *Source: IMF Financial Sector Assessment — SUSEP chapter (excerpts provided).* ### introduction of unit-linked products. ### introduction of unit-linked products ### Market conduct and intermediaries - Lower interest rate environment is likely to encourage policyholders to take more risk in their annuity products and unit linked products. - Insurance intermediaries should provide advice about investment opportunities and the riskiness of assets for investment-linked products (including VGBL). - Recommendations: - Establish qualification criteria for intermediaries who can sell investment linked products (including VGBL). - Conduct thematic inspections targeting training programs for intermediaries at insurers with a high share of investment linked products. - SUSEP could consider conducting “mystery shopping” to evaluate the quality of advice in more detail. - Oversight of insurance products sold at bank branches: - Annuity products sold by bank branches are exempted from brokerage requirement. - CNSP or SUSEP has not imposed regulation to the sale channel yet; SUSEP does not have legal enforcement power against sales persons in bank branches. - The BCB can take enforcement actions for mis-selling at a bank branch if it involves banking activities (for example, the payment of the premium has been made through a checking account), but its legal power against purely insurance sales at a bank branch is unclear. - Recommendation: Clarify that CNSP and SUSEP are responsible for oversight of mis-selling of insurance products at bank branches and impose requirements (such as licensing, qualifications, disclosure, governance) for intermediaries and take regulatory action if necessary. ### ICP 23 — Group-wide Supervision / Conglomerate Supervision - SUSEP meets with the BCB annually to exchange information on conglomerate groups with both bank and insurance entities, backed by the MoU; main objective is to assess risks of insurance entities within conglomerate groups. - Current cooperation appears limited to qualitative information exchange. - Legal and supervisory framework: - Definition of a financial group or conglomerate does not exist in current legislation for supervision. - SUSEP considers possible double counting of related parties’ investments by deducting from the qualified assets for solvency purposes. - SUSEP circular 508/2015 requires insurers to provide their consolidated financial statements. - SUSEP neither requires insurers to provide group structure nor approve the group structure. - SUSEP established a special division for group and macroprudential supervision in 2013 and worked on a plan of action with the definition of groups for supervisory purposes; the division conducted an impact analysis of group capital requirement but was short-lived and produced no output. - Comments and recommendations: - SUSEP should work with the BCB, ANS and CVM to establish and implement consistent group-based supervision. - Cooperation should expand from information exchange to coordinated actions (including joint-rule making, joint-reporting, joint-inspection and coordinated supervisory actions). - Implementation of regulations (such as ERM, governance requirements) will be more effective if implemented at the group level due to contagion risk through the reputation channel. ### ICP 24 — Macroprudential Surveillance and Insurance Supervision - Institutional roles: - CMN is responsible for formulating overarching monetary and credit policy and, together with the BCB, shapes macroprudential policies, working with MoF and other regulators: CVM (securities), SUSEP (insurance), PREVIC (pension funds). - A consultative forum, COREMEC, composed of BCB, CVM, SUSEP, and PREVIC with a rotating presidency, provides coordination of multi-agency supervisory and regulatory actions and information-sharing; members’ recommendations and advice are not binding on each other. - The BCB takes a leadership position in macroprudential surveillance because of its data processing capacity, the bank-centric nature of Brazil’s financial system, and perception of a financial stability mandate. - SUSEP’s macroprudential activity: - SUSEP established a special division for group and macroprudential supervision in 2013, but it was short-lived and with no output. - SUSEP occasionally conducts surveillance at the industry-wide level. - Stress testing and cooperation: - The BCB has conducted stress tests of capital and liquidity with an assumption that banks will step-in and cover all capital and liquidity loss from their insurance subsidiaries; the exercise suggests cooperation between BCB and SUSEP is effective. - Comments and recommendations: - BCB and SUSEP are encouraged to enhance cooperation to ensure prompt identification and analysis of emerging risks. - Further SUSEP input into the BCB’s stress testing would enrich analysis (for example, deeper analysis of reasons behind high redemptions and cash outflows of insurance products with more granular data sharing from SUSEP). - The focus could be expanded to cover other material risks (such as interest rate risk) of entire conglomerate groups. - Regular stress testing or scenario analysis of large conglomerate groups with close cooperation between BCB and SUSEP could be useful for vulnerability analysis of the entire Brazilian financial sector. ### ICP 25 — Supervisory Cooperation and Coordination - Legal basis and arrangements: - Article 25 of Complementary Law 126 empowers SUSEP to enter into agreements to exchange information with other regulators, supervisors, and self-regulatory organizations, both local and foreign. - SUSEP has entered into bilateral agreements with some foreign authorities and is a signatory member of the IAIS Multilateral Memorandum of Understanding. - SUSEP participated in recognition of equivalence of supervision with European authorities and granted a provisional equivalency in 2015. - Supervisory colleges and working groups: - SUSEP occasionally participates in colleges of supervisors for foreign insurers operating in Brazil, but has not established colleges for Brazilian insurers with foreign operations. - A working group for group supervision established in 2013 was disbanded without concrete outcome. - Comments and recommendations: - SUSEP should enhance supervisory cooperation with the BCB, ANS and CVM. - Information exchange should be expanded from qualitative to quantitative data sharing (for example, underlying assets and off-balance sheet activities of investment funds that insurers are investing in between SUSEP and CVM). - Supervisory coordination could be expanded to coordinated actions, including joint-inspections, joint supervisory follow-up and joint-regulatory actions. *Source: cr18343 - introduction of unit-linked products* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18343.pdf_