01/25/2024 – 22:40
An instrument that aims to expand the sources of resources for insurers and reinsurers, the Insurance Risk Letters (LRS) overcame yet another barrier to be offered to the public. The National Monetary Council (CMN) regulated this Thursday (25) the actions, requirements, duties and responsibilities of the agents involved in the operations.
The resolution approved by the CMN defines the institutions that can serve as fiduciary agents (protectors of the rights of those who issue debt securities), with rules for the appointment and remuneration of these agents. Institutions linked to special purpose insurance companies (SSPE) will not be able to issue these titles.
According to the standard, the SSPE must provide the trustee with any and all necessary information. These agents must also comply with the regulations of the Securities and Exchange Commission (CVM) to offer and distribute the LRS.
The rules will only come into force on March 1st, but they still need approval from the National Private Insurance Council, which should occur in the next few days.
Financing
Created by Law 14,430 of 2022, LRS are inspired by Insurance Linked Securities (ILS), a title widely used abroad by insurance companies and reinsurers (institutions that cover the risk of insurance companies) to raise funds from investors in the capital market. In 2023, ILS emissions totaled US$16 billion, approximately R$80 billion.
In the international market, ILS is mainly used to cover large risks for insurers with a low probability of occurrence. Issued by an SSPE, the LRS is linked to a portfolio of insurance and reinsurance policies, which transmits to investors the risk or return arising from insurance or reinsurance activities.
According to the Ministry of Finance, the LRS will expand sources of funding for Brazilian insurers and reinsurers, contributing to the development of these markets in the country. This instrument, the ministry highlights, helps to increase the coverage capacity of the insurance market by spreading insurance risks to the capital market.
Features and risks
From the investor's point of view, LRS is a fixed income security, with different maturities and yield linked to insurance risk factors. The return is based on easily identified parameters, such as floods, winds, hail and climate catastrophes in a pre-defined region.
If, during the validity period of the LRS, the risk factor does not occur within the predefined scale, the investor receives back the invested capital. The money comes with a return to compensate for the risk assumed and the remuneration of the SSPE company's investments.
If an accident (disaster) occurs, the investor does not receive this return and may lose part of the invested capital. This capital will be used by SSPE to pay the corresponding compensation due. Despite the risk, the Ministry of Finance states that the LRS allows diversification for investors' portfolios. This is because the return on the LRS has no correlation with the return on other financial investments in Brazil.
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