2nd August  2002

The recent fall in the value of the Brazilian Real is affecting clients, insurers and reinsurers in a number of ways.

Reinsurers are concerned that the same thing will happen as did in Argentina, and are requiring contracts are made in dollars and paid upfront - according to an executive from one of Brazil's largest insurers.

Only insurers who have external risks or contracts on the international market are allowed to insurer in dollars or in local currency.  Until just a few weeks ago, large clients were faced by complicated conditions for negotiating premiums and deductibles because the international market is very restrictive.  Now they also face difficult financial conditions.

Another potential impact of the high dollar and economic uncertainty in general is corporate failures and unemployment.  Most insurance contracts explicitly state that non-payment of premiums cancels a contract automatically.  However, economic slowdown will reduce the volume of business in real terms.

There is also the problem of sufficiency of cover. Professionals in the sector are warning their clients who have contracts in Brazilian Reals and assets in dollars to be careful about how adequately their insurance policies are covering their real risks.

Additionally, those who have contracts in dollars also have to re-evaluate conditions, because it could be in excess of the amount needed in local currency terms.  There are cases, also, where it is possible to reduce the insured value by revaluing the amount being insured.  Machinery could be all imported, but if the building was lost, for example, the reconstruction costs would be in local currency.

Insurers are worried about technical reserves which have to take into account dollar-denominated risks - from import contracts to insurance for imported cars.  Insurers are looking for ways to get financial protection such as dollar-hedges for risks assumed in US dollars.

[Redacted in part with some changes from Gazeta Mercantil, Portuguese edition]

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