Changes to the Reinsurance Brokers’ Legal Framework

On February 2011 the Argentine Superintendence of Insurance (“SSN” after its acronym in Spanish) enacted resolution No. 35,615, which dramatically affected the reinsurance regulatory framework (see Insurance News #1 “Changes in reinsurance regulatory framework”). The SSN complemented the new reinsurance regime with Resolutions Nos. 35,726 and 35,794 (see Insurance News #3 “Reinsurance Legal Framework – Reinsurance Contracts” and Insurance News #4 “Further Changes to Reinsurance Regulations”).

Now, by means of Resolution No. 36,266 issued on November 17, 2011 and published in the Official Gazette on November 23, the SSN amended Chapter III of the new reinsurance regulatory framework approved by Resolution No. 35.615, referred to reinsurance brokers.

The new Chapter III of the reinsurance regulatory framework begins with an explanatory note pursuant to which the scope of the terms reinsurance and reinsurer includes the terms retrocession and retrocessionaire at all levels.

As a requirement to act as a reinsurance broker, the new regulation requires corporations, domestic or branches of foreign companies, the annual filing of financial statements audited by an independent auditor. It further provides that the fiscal year’s end shall be on June 30 each year, except for branches of foreign companies that may maintain the fiscal year of their headquarters, unless they opt for the June-30 ending date.

In addition, the new regulation requires reinsurance brokers to evidence a minimum capital of AR$ 1,000,000 (equivalent to approximately USD 231,000 at the current rate of exchange). Those brokers already authorized to operate who had a lower capital may increase it by an amount of not less than AR$ 250,000 (equivalent to approximately USD 58,000) per quarter as from the period ending on December 31, 2011.

The new regulation also requires that, once operations commence, brokers must maintain a net worth equivalent to the required capital.

As to the duty to maintain errors and omissions coverage, the new regulation increases the minimum sum insured from USD 1,000,000 to the higher of USD 3,000,000 or 10% of the premiums intermediated in the previous fiscal year. The maximum deductible permitted remains at USD 50,000.

The deadline for brokers already registered at the date of Resolution No. 36.266 to adjust to the new requirements in connection with the submission of audited financial statements, the minimum required net worth and the errors and omissions coverage expires on December 31, 2011.

The sworn statement by the broker committing itself to place all operations with the reinsurance companies provided for in the new reinsurance framework, as well as the requirement, in the case of domestic legal entities, to include in their name the term "Reinsurance Broker", remain in place. Also branches of foreign companies must submit to the SSN an updated certificate issued by the competent authority in their country of origin certifying that the applicant is authorized to intermediate in reinsurance contracts, indicating the authorized dates and classes or types of risks.

The regulatory framework imposes brokers certain information duties and periodical filings with the SSN, and the duty to provide information and technical assistance to ceding companies.

Within 30 days from the inception of the reinsurance contract, either obligatory or facultative, reinsurers must submit to the cedant company cover notes documenting the operations, executed by all the reinsurers involved in the operation. Pursuant to the amendment introduced by Resolution No. 36.266, brokers may sign the cover notes only if: (i) coverage does not exceed USD 3,000,000 and they have supporting placement documentation issued by the relevant reinsurer; or (ii) they have been granted sufficient powers to do so by the reinsurer. The power of attorney documenting such authority must be submitted on an annual basis to the SSN for its registration, together with the financial statements and any revocation must be reported to the SSN. The cover note signed by a broker with a general underwriting power of attorney must state the registration number of the corresponding power of attorney.

Within six months from the inception of the reinsurance contract, either obligatory or facultative, brokers must provide to the cedant company the reinsurance contract documenting the operation signed by all reinsurers involved.

All brokerage commissions and expenses agreed in each operation must be specified both in the cover notes and in the reinsurance contracts.

Other change introduced by this regulation is the fixing of brokerage commission caps. The new resolution provides that the SSN will object any reinsurance brokerage commissions in excess of 20% in facultative reinsurance, 5% in proportional treaties and 15% in non-proportional treaties.

In addition, the cover notes and reinsurance contracts must specify the bank accounts in which the funds for premiums and claims will be deposited (the "Trust Account") and the amounts relating to commission payments (the "Commissions Account"), which must be separate accounts.

Finally, the new regulation requires brokers to keep and retain in their offices, for each placement made, a file containing at least: (i) the offer or placement slip; (ii) a dated confirmation of the placement issued by the broker; (iii) the cover note issued by the broker; and (iv) all other supporting documents regarding premium payments, balance settlements or coverage costs incurred in the deadlines agreed during the relevant negotiations. All documents in the file must be signed by the broker.