Following the completion of Brazil’s first-ever insurance-linked securities (ILS) issuance earlier this year, analysts at Fitch Ratings have highlighted how the country’s ILS framework marks the beginning of a new chapter for its re/insurance market.Brazilian reinsurer IRB (Re), via its wholly owned subsidiary, Andrina Special Purpose Insurance Entity (SSPE) sponsored the country’s first ILS transaction, a R$33.7 million transaction covering risks related to the reinsurer’s surety bond portfolio.Recall that , Andrina Sociedade Seguradora de Propósito Específico, or Andrina Special Purpose Insurance Entity.

Meanwhile, at the end of 2024, we also reported that As we’ve explained before, the ILS regulations in Brazil allow for the structures known as Sociedades Seguradoras de Propósito Específico (SSPE) to issue Letra de Risco de Seguro (Insurance Risk Letters) (LRS), as a type of ILS note that can be sold to capital market investors, to collateralize insurance or reinsurance arrangements.Now, in a new commentary released by Fitch, the agency noted that Brazil’s ILS framework marks a new chapter for the country’s insurance and reinsurance markets.The agency also emphasized that the inaugural issuance of LRS represents a key milestone for Brazil’s market, as it is backed by legal guarantees rather than exposure to natural catastrophe risks.

“LRSs can expand (re)insurers’ access to alternative sources of capital, diversify portfolios, and contribute to the stability of reinsurance costs.At the same time, they can offer investment opportunities with low correlation to traditional assets for investors,” the agency noted.“Risk sharing between insurers, SSPEs, and investors can reduce insurers’ financing costs, providing them with an alternative to the traditional reinsurance market, which can be more expensive or restrictive at certain times,” Fitch added.

Concurrently, the agency also noted that LRS allow re/insurers to optimise capital and risk management, increase liquidity, and mitigate risk transfer expenses, including reinsurance premiums.In addition, Brazil’s Securities and Exchange Commission (CVM) will oversee and monitor the issuance and distribution of these LRSs, Fitch noted, while the Superintendence of Private Insurance (SUSEP) and the National Council of Private Insurance (CNSP) regulate the activities of SSPEs.“The demand for alternative reinsurance capital markets in Brazil and its growth will depend on (re)insurers’ search for alternative capacity, any limitations or increases in reinsurance rates, and the potential return for investors,” Fitch added.

Given that many global ILS issuances, particularly catastrophe bonds, are geographically concentrated in the United States, the agency affirms that issuing an insurance-backed LRS covering Brazil could attract international investors seeking greater geographic diversification in their portfolios.As Brazil’s insurance and reinsurance sector deepens its understanding of local ILS regulations and their potential to attract efficient capital from global markets, it will be interesting to see how ILS developments evolve in the country..All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.

Our can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.