Characterized by large and well-developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other South American countries and Brazil is expanding its presence in world markets. In 2006, Brazil reached energy independence and today is a net exporter of oil. The country is also one of the world's largest hydroelectric generators.
General Information About Brazil
By far the largest and most populous country in South America, Brazil underwent more than half a century of populist and military government until 1985, when the military regime peacefully ceded power to civilian rulers. Brazil continues to pursue industrial and agricultural growth and development of its interior. Exploiting vast natural resources and a large labor pool, it is today South America's leading economic power and a regional leader. Highly unequal income distribution and crime remain pressing problems.
Geographically, Brazil is slightly smaller than the United States. The climate is mostly tropical; however, the southern agricultural region is temperate. The country possesses substantial natural resources including bauxite, gold, iron ore, manganese, nickel, phosphates, platinum, tin, uranium, petroleum, hydropower, and timber.
Natural hazards are limited to drought in the northeast and floods in the south. The area is not seismically active nor is it prone to tropical storms. Deforestation in the Amazon basin will have future ramifications on the environment and is a source of international friction with its neighbors and the world.
Brazil
Insurance Marketplace
Brazil requires that insurance for exposures resident in the country be placed with duly authorized insurers. The only exceptions are for international Marine Hull and Liability coverage and in the rare instance that coverage is unavailable in the Brazilian market. Given the maturity of the market and the level of multinational participation, it would be a rare occurrence for the regulators to approve a non-admitted placement due to unavailability of local coverage.
On December 31, 2008, the Instituto de Resseguros do Brasil, (IRB), lost its position as the monopolistic reinsurer for all insurance business transacted in Brazil. As the sole reinsurer, the IRB controlled rating, policy forms, and retentions for all insurers operating in the country. While the market opened to private reinsurers, including foreign owned entities, there is still a requirement that local reinsurers, including the former IRB, be offered the right of first refusal to a minimum of 60% of the ceding company's reinsurance placements. (On January 16, 2010, the minimum changes to 40%).
There are presently 70 insurance groups and 119 active insurance companies in the Brazilian market. No single insurer dominates the marketplace for Property and Casualty lines. All of the U.S. based multinational insurers, as well as European and Asian based companies, are licensed. The majority of the foreign-based multinational insurers are also licensed as reinsurers. In the past 18 months, there has been no growth in the local market, which is directly attributable to the global economic crisis. Slower economic activity translates to lower industrial and service revenue that in turn directly affects premium income.
Topics of Discussion
This document highlights the most common operational scenarios that expose portfolio companies and private equity firms to loss in Brazil, and how they should be addressed from an insurance and risk management standpoint. The scenarios are as follows:
- Your product is manufactured in Brazil at a facility that is owned and/or managed by your company
- A Brazilian based contract manufacturer is responsible for all aspects of the manufacturing process of your product, but they can’t or won’t prove they purchase valid insurance
- Your employees travel to Brazil for business reasons
- You have full-time employees based in Brazil that require health insurance and/or Workers’ Compensation coverage
- An acquisition is based in Brazil
- Directors and/or officers permanently reside in Brazil
- Your product is manufactured in the U.S. and sold in Brazil
- Your product is manufactured, sold, and intended for use in the U.S., but somehow ends up involved in a lawsuit in a Brazilian court
Your Product is Manufactured in Brazil at a Facility That is Owned and/or Managed by Your Company
Non-admitted insurance is not allowed in Brazil. The law provides that insurance must be purchased from companies licensed to operate in Brazil.
To ensure that coverage is in place to respond to claims or suits in any jurisdiction permitted by U.S. law, based upon an occurrence in Brazil, it is necessary to coordinate locally issued Brazilian insurance with coverage issued in the U.S. Typical Brazilian policies contain a jurisdictional restriction and will only respond to claims brought in Brazil. Further, any coverage dispute must be adjudicated in Brazil. The coverage should mirror the objectives and risk tolerance of the overall organization, so it is important for the U.S. based decision maker to control the coverage placed in Brazil. Potentially disastrous inconsistencies in coverage can occur if the decision is left to local management, not to mention the potential cost savings associated with coordinating the coverages appropriately.
The policies available in Brazil respond to the statutory, political, and cultural norms of the country. Therefore, a U.S. based insurance buyer should not expect a Brazilian insurance policy to respond in the same manner as one issued in the U.S.
A Contract Manufacturer Based in Brazil is Responsible for All Aspects of the Manufacturing Process of Your Product, but They Can’t or Won’t Prove That They Purchase Valid Insurance
This exposure creates challenges even if the contract manufacturer evidences cover. It is impossible to know if the manufacturer kept the coverage in force after the evidence is provided. Brazil still does not recognize the importance of insurance the way that businesses in the U.S. do. In addition, determining whether the coverage would respond appropriately can be challenging because the policy will not be issued in English. Your broker must understand how the insurance system works in Brazil.
The most important thing to keep in mind is that it is your brand that is at risk when a claim occurs. Ultimately, the contract manufacturer’s policy might pay a claim, but their insurer will concentrate on making the contractor whole. There are insurance products that allow you to extend your insurance program to your international contract manufacturers. This allows you to control how the program is designed, negotiate the premium, and control the claims process. The expense associated with obtaining coverage, and/or the expense that you incur under your deductibles/self-insured retentions when a claim occurs, can be passed through to the contract manufacturer. This approach is typically followed when your business model has a heavy reliance on foreign-based contract manufacturers.
Your Employees Travel to Brazil for Business Reasons
Americans visiting or residing in Brazil are advised to take vigilant safety precautions. In particular, travelers should remain aware of their surroundings and of ongoing events. Travelers should respect local police requirements to avoid travel in some areas.
Crime throughout Brazil has reached very high levels. The Brazilian police and the Brazilian press report that the rate of crime continues to rise, especially in the major urban centers – though it is also spreading in rural areas. Brazil’s murder rate is more than four times higher than that of the U.S. Rates for other crimes are similarly high. The majority of crimes are not solved. Street crime remains a problem for visitors and local residents alike, especially in the evenings and late at night. Foreign tourists are often targets of crime and Americans are not exempt. This targeting occurs in all tourist areas but is especially problematic in Sao Paulo, Rio de Janeiro, Salvador, and Recife.
Caution is advised with regard to nighttime travel through more rural areas and satellite cities due to reported incidents of roadside robberies that randomly target passing vehicles. Robbery and “quicknapping” outside of banks and ATM machines are common. In a “quicknapping,” criminals abduct victims for a short time in order to receive a quick payoff from the family, business, or the victim’s ATM card. Some victims have been beaten and/or raped.
Traveling expatriates should be covered for their home Workers' Compensation benefits, including Emergency Repatriation Expense and with a carrier that provides additional services, e.g. pre-screened medical referrals, medical case management, medical charges payment guarantees.
Kidnap and Ransom insurance should also be considered for traveling personnel. In addition to the insurance provided, the selected insurer should provide pre-trip security advice and planning services as well as online resources including country crime and security information.
You Have Full-time Employees Based in Brazil that Require Health Insurance and/or Workers’ Compensation Coverage
Healthcare is available within the framework of the public health system, the United Health System (Sistema Unico de Saude - SUS), but medical, dental, and surgical services can be of a low standard. Expatriates working legally in Brazil are included in the United Health System, although most expatriates choose to purchase private health insurance and avail themselves of services in the private sector.
The private healthcare sector in Brazil is composed of some 7,000 public and private hospitals, health insurance companies, diagnostic clinics and other peripheral healthcare services such as home healthcare, medical emergency, and rescue services. It is financed mostly by private health insurance companies and maintenance organizations, although insurance companies do not own or operate health facilities. In the major cities hospital and private physician facilities are comparable to those found in the United States.
Workers’ Compensation coverage in Brazil is provided via the social security system. All workers legally resident in Brazil are covered, including expatriates. Coverage does not extend to work performed outside of Brazil. The maximum monthly income utilized for benefit calculations is the equivalent of U.S. $1,570. Higher paid employees are commonly insured under a private disability scheme to fill in the gap above the social security system’s maximum.
An Acquisition is Based in Brazil
An acquisition of a Brazilian company presents multiple insurance and risk management challenges.
- The majority of Property insurance in Brazil is written on a named peril basis, typically Fire, Lightning, and Explosion coverage. Additional perils are available; however, All Risk coverage is generally only carried by large multinational risks.
- Midsized businesses generally do not carry Business Interruption insurance. Historically, only larger businesses carried this form of insurance.
- General Liability and Products Liability coverages represent less than 2% of the Brazilian Property and Casualty premium volume. The class is growing mainly due to Brazil’s economic growth. Consumer protection legislation does not require negligence to be proven for a manufacturer or supplier to be held liable for damages. Standard policies contain a jurisdiction clause limiting claims to those brought within the Brazilian territory.
- Travel Risk Assessment: Travelers to Brazil need to be aware of the potential for violent crime in the major cities. Murder and armed carjacking are serious threats. The murder rate in Brazil is four times that of the United States. Your Equity Risk Partners professional can assist in the evaluation of risk and advise as to political and social events that may increase the potential for violence.
Directors, and/or Officers That Permanently Reside in
Brazil
On January 10, 2002, the president approved the introduction of Law No 10.406, which established a new Brazilian civil code effective January 11, 2004. This new code (Article 50) made directors and officers personally liable, along with their company, for their actions as executives of their company. If directors and officers are sued, their personal bank accounts can be frozen until the case is resolved, and a global, non-admitted D&O policy cannot be used as collateral for legal reasons. Should directors or officers receive claims payments from a non-admitted insurer, they may have to give evidence of the origin of such payments to the tax authorities. Cash payments made from overseas countries directly to a person in Brazil will be considered "revenue" by the tax authorities.
The D&O market in Brazil is dominated by multinational carriers including AIG, ACE, Zurich, Chubb, XL, Allianz, MAPFRE, and HDI. Rating is very competitive and limits are available up to the equivalent of U.S. $20 million.
Your Product is Manufactured in the U.S. and Sold in
Brazil
Product Liability coverage is affordable and easy to obtain for a U.S. based company that manufactures a product in the U.S. and sells it in Brazil. This exposure can be addressed for as little as $2,500 annually.
Unfortunately, at this moment a product liability suit involving your product could be transpiring somewhere around the world and you could be unaware that it is happening. Some international courts are not required to notify the defendant of the pending suit. Most insurance policies purchased in the U.S. provide coverage on a worldwide basis; however, most insurers will only tender a defense if the suit on its merits is brought in the U.S. Therefore, without a Foreign Liability policy your company could be uninsured for suits that are brought outside of the U.S., and for Federal enforcement orders recognizing the judgment of a foreign court.
Your Product is Manufactured, Sold, and Intended for Use in the U.S., but Somehow Ends Up in a Lawsuit in a
Brazil Court
Coverage to address this exposure is easy to obtain and relatively affordable. However, it is a difficult claim scenario to foresee and the expense is equally difficult to justify. Coverage for this exposure can be secured for as little as $2,500 annually. It will provide coverage as illustrated in the prior section.
Addressing the aforementioned exposures requires the coordination of brokers and underwriters in both Brazil and the U.S. At Equity Risk Partners, we have Brazilian partner brokers that we work with on a regular basis. Our partner brokers in Brazil: Anthony Wyles of Interbrok Corretores Internacionais De Seguros Ltda (Sao Paulo) and Carlos Taricano, Wood Interbrok Seguros, (Rio de Janeiro). You can learn more about them at
www.interbrok.com.br.
Please let your Equity Risk Partners professional know when you are travelling to China (for business or pleasure), considering selling your product/service, and/or operating a facility in China. It would be our pleasure to assist you in assessing the risks associated with doing so.
Our White Papers on Mexico, India, China, and Brazil complete this four part series on insurance and risk concerns in emerging markets. You are invited to join us on Wednesday, September 23rd from 4:00-4:45pm EDT for a live webinar on these risks. You can request information at
http://www.equityrisk.com/subscribe.asp . Following the event, transcripts and a recording will be posted to our website.
