Brazil publishes “Letra de Risco de Seguro” rules for ILS securitization

The Brazilian government has published new legislation in its official gazette for what are being termed “Letra de Risco de Seguro”, or LRS and translates to Letter of Insurance Risk, which are insurance-linked securities (ILS) laws, as the country looks to encourage risk transfer and reinsurance to the capital markets.

We’ve explained before that Brazil’s insurance and reinsurance market regulator, the Superintendência de Seguros Privados (Susep), had been working towards enabling direct capital market’s sources of third-party reinsurance and retrocession capital to be accessed by Brazil’s re/insurers, ultimately to help lower insurance costs for the country’s consumers.

The regulations were formalised and published by the government and the awaited rules on insurance-linked securities (ILS) issuance and special purpose reinsurance vehicles came into force from January 4th 2021.

After which we explained that the Brazilian regulator’s ILS ambitions were for the right reason, as it wanted to bring capital market efficiencies to its insurance and reinsurance market.

But the legislative work to make ILS issuance possible in Brazil, both of catastrophe bonds and other securitizations of insurance risk, has continued and now the Brazilian government has published ILS rules in its gazette, which will go before its lawmakers for approval.

The Letra de Risco de Seguro, or LRS, is essentially an ILS security it seems, that can be issued through a special purpose vehicle. It can be used as a securitized instrument through which funds can be raised from the capital market to finance the risks of insurance or reinsurance operations.

Brazil is also creating a specific special purpose reinsurance vehicle, for issuing ILS, the Sociedades Seguradoras de Propósito Específico or SSPE.

Translating to the Special Purpose Insurance Company, an SSPE will be the structure that issues an LRS, which we assume are securitized notes that can be sold to capital market investors and funds.

Funds raised from the sale of LRS can be used to guarantee the risks of an insurance or reinsurance company, supplementary pension entity, or health plan operator, it appears.

An LRS must raise sufficient funding to fully cover the risks accepted by the SSPE, so the risk must be fully collateralized.

An SSPE can also make multiple issuances of LRS, or ILS, but each issuance must be segregated, in the same way as other insurance-linked securities (ILS) structures and domiciles demand.

Each LRS will be issued either as a book-entry or in electronic form and will feature a series of information, such as the expiration date of the cover, the type of coverage provided, the sponsor or beneficiary of the coverage, the investor’s remuneration or coupon payable, as well as the details of the relevant SSPE.

We understand that the next step for this legislation is to be reviewed by the Brazilian government’s Chamber of Deputies and the Senate, where its passage will make the laws effective.

Each Letter of Insurance Risk (LRS) is a transferable credit instrument, so can be traded in secondary markets, are linked to insurance and reinsurance risks and represent a promise of payment in cash, so reinsurance or retrocession coverage.

The Brazilian insurance-linked securities (ILS) legislation is a little different to some other domiciles, having the specific LRS securitized instrument for issuances, but at their core they achieve the same objectives, of enabling insurance, reinsurance and retrocession arrangements to be transacted with capital market investors or funds and that capital being used to fully-support the underlying risks held by a special purpose insurer.

It’s going to be interesting to see how these ILS rules get used once Brazil’s lawmakers have approved and enacted them.

As Brazil seeks access to more efficient reinsurance capital to support its re/insurance industry, the LRS and SSPE, or ILS and SPI, could become essential structures for companies operating there to source risk transfer and protection through.