Brazil’s new insurance risk ‘note’: contribution to insurance and reinsurance

February 2025 | EXPERT BRIEFING | FINANCE & INVESTMENT

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Inspired by insurance-linked securities (ILS), Brazilian Law No. 14,430 of 3 August 2022 introduced the legal framework for accepting insurance, supplementary pension and health, reinsurance or retrocession risks from one or more counterparties and financing them through the issuance of an insurance risk note (IRN).

The IRN is a debt bond linked to insurance and reinsurance risks, issued by a company called a special purpose insurer (SPI).

In this context, the Superintendence of Private Insurance (SUSEP) regulated the matter through Resolution No. 453/2022 issued by the National Consul of Private Insurance (CNSP). This bond is expected to contribute to the further development of Brazil’s insurance and reinsurance market.

This registered, transferable and freely tradable IRN represents a promise of payment in cash, linked to insurance and reinsurance risks. It offers investors the opportunity to participate in this market in a unique way. For the detainer, it tends to enable new financial structures to reinforce innovative operations in the insurance and reinsurance sectors.

The IRN allows funds to be gathered so that insurers and reinsurers can transfer risks from those activities to investors. By purchasing an IRN, the investor becomes a partner to the insurers, financing protection against adverse events and receiving compensation tied to the occurrence or non-occurrence of insurance claims.

The return of investment in an IRN is directly linked to the occurrence of insurance claims in a predefined region. If no insurance claims occur during the stipulated period, the investor receives, in return, the invested amount plus compensation arising from the assumed risk and the yield on the investments.

On the other hand, if an insurance claim occurs, the investor would not only miss out on receiving a return on investment, but could also lose part of the amount invested, which would be used to pay compensation to the insured. This is the business risk assumed by those who invest in this financial product.

The SPI is an entity that will be responsible for creating a segregated legal structure, separating assets and liabilities related to the specific risk assumed by the investor. This is a way of guaranteeing the transfer of risks between the SPI and the insurer or reinsurer that will assign the risks by means of a securitisation operation.

The SPI gathers funds through IRNs, an operation that must maintain asset independence from the SPI and its other operations. The issuance value must correspond to the maximum amount of possible loss arising from the assumed insurance and reinsurance risks, plus any operational expenses the SPI may incur. These funds are used exclusively to cover the risks and ensure compliance with the issuer’s obligations.

The SPI is also an insurance company with the exclusive corporate purpose of operating in this sector and must meet the requirements established in CNSP’s Resolution 453/2022 to be authorised to carry out operations. Recently, the first SPIs were authorised to operate in Brazil.

To align with international best practices, the SPI must demonstrate transparency in its operations, ensuring that all information regarding risks, obligations and expected returns is clearly available to investors and regulatory authorities. This includes regular and detailed disclosures of financial results and the management of assumed risks, fostering greater trust in the credit instrument offered to the market.

These companies must comply with governance rules, such as appointing directors responsible for technical and accounting areas and setting up technical provisions, in accordance with SUSEP rules. In addition, the SPI must maintain a minimum level of capital that considers base capital, up to R$1.2m and additional instalments per operation of R$100,000 or the risk capital, calculated based on the specifications of CNSP Resolution 453/2022.

The SPI will also elect directors considered independent of the counterparties and investors, which may bring consequences in terms of risk management, compliance and auditing structures. SPI governance also requires the implementation of anticorruption, cyber security and sustainability controls.

Implementing these standards reduces compliance and operational risks, as well as making the operation more attractive to investors interested in environmental, social and governance (ESG) criteria, broadening the diversification of insurers’ and reinsurers’ sources of capital.

Once the IRN has been issued by the SPI, investor remuneration is based on the full return of the independent equity of the operation or, as contractually established, on the assets that make up that equity.

As a rule, the IRN must state that the credit will only be redeemed once the obligations related to the risk transfer contract have been discharged, i.e., until all the insured events that the IRN protects have ended or been paid for. This ensures that the original investment is available to cover indemnities in the event of claims.

In the event of a claim, the SPI’s funds are used to pay the compensation due, up to the limit of the capital contributed. The investor’s liability is limited, so they are not liable if the SPI capital is insufficient to pay the insured.

The IRN allows insurers and reinsurers to access the capital market as an alternative source of funding, transferring risks from those activities to investors, which reduces the insurers’ and reinsurers’ dependence on equity and traditional financing.

As a consequence, there may be a reduction in the cost of capital for companies in the sector and an increase in their risk underwriting capacity. The IRN, therefore, is a credit security that should help the insurance and reinsurance market absorb risks arising from large projects, such as infrastructure, energy and industrial projects, which require protection against low probability, high impact events.

As a result, risks are transferred more efficiently to the capital market, helping to reduce the financial impact of adverse events on insurers and the economy in general. This is particularly important in a country like Brazil, which is highly exposed to climate and environmental risks due to, among other factors, the size of its territory and its climatic diversity.

By facilitating the transfer of insurance and reinsurance risks to the capital market, the bond enhances financial stability for insurers and reinsurers, allowing them to manage their portfolios more effectively and underwrite larger or more complex risks. This mechanism reduces the reliance on traditional reinsurance arrangements and expands the industry’s capacity to absorb high-impact events, such as natural disasters or catastrophic losses, fostering a more robust and resilient insurance ecosystem. In addition, the IRN promotes innovation by encouraging the development of customised financial solutions to address specific risk profiles, positioning Brazil as a pioneer in integrating capital market tools with the insurance sector.

In addition, the use of IRNs can encourage investments in strategically relevant areas, such as the energy transition and the construction of resilient infrastructure, contributing to Brazil's long-term socioeconomic development. By introducing a financial asset linked to specific risks in the insured sector, IRNs contribute to the capital market and offer investors the opportunity to diversify their portfolios, given that this financial product is unrelated to real economic indicators, such as interest and exchange rates, focusing solely on the risk of adverse events and the pricing of this risk.

IRNs represent a significant innovation in the insurance and reinsurance market in Brazil, which will not only attract investment but also has the potential to strengthen the insurance sector, increase the country's economic resilience, and foster the development of a more diverse and sophisticated capital market.

Cláudio Luiz de Miranda and Letícia Vilen Amorim are partners at Chalfin Advogados. Mr de Miranda can be contacted by email: claudio@cgvadvogados.com. Ms Amorim can be contacted by email: leticia.amorim@cgvadvogados.com.br.

Cláudio Luiz de Miranda and Letícia Vilen Amorim

Chalfin Advogados