What is the Impact of Operations with Admitted and Eventual Reinsurers on the Credit Risk of Insurers?

The opening of the Brazilian reinsurance market, decreed by Complementary Law N° 126 in 2007, marked the end of the state-owned IRB Re's monopoly and the beginning of significant transformations in this sector by allowing the participation of admitted and eventual reinsurers in the national market. In this context, this research aims to assess the profile of insurers that opted for these reinsurers after the market opening and the increase in the cession limit to eventual reinsurers promulgated by Decree N° 10,167. The fundamentals that motivated this strategy change and the risks involved in this choice are also investigated. To this end, we evaluated whether the new regulation has effectively resulted in an increase in ceded premiums to admitted and eventual reinsurers, and consequently, in an increase in the insurers' credit risk, since these reinsurers are not fully subject to SUSEP’s (Brazil’s autarchy that regulates the insurance market) supervision. The database consists of 80 insurers over the period from 2013 to 2023. The information regarding the risk cession of each Insurance Company to reinsurers were collected from the explanatory notes of their financial statements and from SUSEP's statistical system. Subsequently, were applied regression models for panel data. The results indicate a positive correlation between Decree No. 10,167 and the proportion of premiums ceded to eventual reinsurers. In addition, a positive correlation is also observed between the proportion of premiums ceded to these reinsurers and the credit risk capital of insurers.