Bossanova with Brazil's new broom

Following the sacking of the board of the state-run reinsurance monopoly because of allegations of corruption, the new president of the Reinsurance Institute of Brazil (IRB) says he has taken the first step toward liberalising the market.

In an interview with Reinsurance, Marcos Lisboa, who took over from the sacked Luiz Appolonio Neto in June, said he had already completed an internal investigation of the department following suspicions of a scheme for collecting funds for political parties, and has handed the dossier over to the Brazilian attorney general.

Mr lisboa, who is a highly regarded in Brazil as the ex-Secretary for Political Economics at the Brazilian Finance Ministry and has a respected technical background, said one of his main goals in his new post was to make the IRB more accountable and transparent.

"We have also allowed insurance companies to get quotations directly from foreign markets," said Mr lisboa. "This is a first step to liberalisation of our market, as well as a mechanism to provide more transparency to our business."

The change is in essence a formalisation of what has been happening for a while at the IRB, but before the IRB could refuse the proposal. Previously, guidelines were in place to get quotations from foreign markets, but contracts had to be made under the conditions and prices determined by the state.

IRB will still have to be consulted to close the deal using foreign markets, but now if the IRB does not have a better deal on the table in terms of price and/or cover, the IRB may not refuse the business. "There has been a formalisation of what was already happening. Before I went out there (abroad), I made a valuation of the client's insurance, then I came back and presented it to the IRB," Fernando Pereira da Silva, vice-president of the Brazilian branch of Aon Risk Services told Valor Economico, a Brazilian business magazine.

Since 1999, reinsurers around the world have been waiting for the markets to be opened up. But the government's promise to decentralise has taken a long time in coming, and deadlines for liberalisation have come and gone, becoming something of a running joke.

However, the IRB has been doing well. At the close of the first half of 2004, it had achieved net profits of 280m reals (US$119m), one of the best performances in its history. There was 165% growth compared to the same period a year earlier. There is a feeling there is a lot more money to be made out there and foreign markets now want a slice of the pie.

Legislation to liberalise the state-run reinsurance monopoly, the IRB, is still on the table, but it has lain stalled since 2000. Now new legislation, put forward in May by Mr lisboa before he was appointed to the position of president of the IRB, is waiting for a vote from politicians in the congress.

In the closed shop of Brazil, the main lines of business are property, aviation, general public liability, financial and oil risks. All it would take is an opening up for some international players to get a better foothold - and the world's largest players have been waiting to get in on Brazil's huge potential.

In a report issued in January 2005, Standard & Poor's highlighted how important the market is. The report was written before the explosive scandals and the appointment of Mr lisboa, which at the time did not see the market opening up soon, and stated: "The opening of the market could help the development of the insurance industry in Brazil, bringing investments and product diversification."

A recent report from the International Monetary Fund called 'Brazil's Remarkable Journey' confirmed liberalisation was once again on the cards.

It said: "The government's attention is now focused on the insurance and reinsurance business, with a view to opening the latter to competition."

Tangoing with corruption

The President of Brazil, Luis Inacio Lula da Silva, has made the struggle against corruption one of the principal watchwords of his mandate. However, it was the Brazilian president himself who seemed for a while to be in trouble after Roberto Jefferson, the leader of the Labour Party (PDT) - one of the main parliamentary groups so far allied to the current government - claimed that Lula's governing Workers' Party (PT) had bought the votes of at least two legislators for $12,000.

Investors held their breath when talk surfaced of the lavish scheme to buy the votes of congressmen willing to back the government's legislative initiatives - and wondered if market reform would be put on the back burner.

At the end of July, the Congressional committee investigating the cash-for-votes scandal revealed that at least 46 politicians and aides received bribes totalling $12m from 2003.

At the World Congress on Corruption, which this year happened to be held in Brazil, Lula pointed out that his struggle against this social ill is a "life-long commitment". And while he had previously refused a parliamentary inquiry into alleged corruption in the postal service and the IRB (controlled by the PDT), he has now decided to go ahead and open the cash-for-votes inquiry, in order, as he said, "to get to the bottom of the problem."

At the heart of the allegations are claims that the Brazilian government had made "cooperation agreements" with other political parties in order to increase its political base and increase its majority, and therefore make governing the country easier.

At the IRB, the allied parties are suspected of collecting illegal contributions from the state-owned monopoly via reinsurance contracts. The scheme in doubt involves outgoing reinsurance contracts dispersed by the IRB among a large number of smaller reinsurance brokers. Among these reinsurance brokers is the local representative in Brazil of Acordia, which may be pivotal to the scheme.

Federal police are investigating charges that the IRB has funnelled money to a brokerage headed by a friend of Jefferson. Many governments in Brazil have had to depend in congress on rent-a-parties, which seek to reward followers with state jobs and hand-outs, but milking public companies is a graver matter and is not being tolerated.

Dancing toward liberalisation ...

An industrial power with the largest population in Latin America and the Caribbean, Brazil has made big strides in reducing social and economic inequality, which are both cause and consequence of the poverty that continues to afflict its millions of people.

This small task has kept liberalising the reinsurance market off the agenda for the past five years. But now, with these allegations swirling around, the time is seen as ripe to move forward - and the pro-reform Finance Minister Antonio Palocci has seized the moment. Following the scandal, he has placed one of his closest aides, 40-year-old Mr Lisboa, at the helm of the IRB with a remit to clean up its act and move toward reform.

Speaking to Reinsurance, Mr Lisboa said he is unable to speak about the scandal or the allegations in general. But he said: "Our job is to provide all required information to the proper authorities, and it is up to them to evaluate whether there is enough evidence of misconduct or not. Two weeks after the new administration took office, we finished an internal review of all allegations and provided it to public attorneys who are currently conducting the investigation. I'd rather make no further comment on this subject so as not to interfere with their work."

Mr Lisboa, who was also previously the president of the IRB administrative board, took the helm after - as part of the investigation - Neto and all the directors were dismissed. There is now a newly appointed board, which assumed office a couple of weeks after Mr Lisboa was put in place.

As well as being a favourite of the Minister of Finance, Mr Lisboa comes with good credentials. He was in charge of writing a proposal that went before Congress on May 18, 2005 to liberalise the reinsurance market in Brazil.

Mr Lisboa's Complimentary Law Project offers a new way forward, a set plan for the Brazilian reinsurance market when it is opened up - but again, no date has been set for the law to be voted upon.

When asked about the timescale for liberalisation, Mr Lisboa said it was not up to him - but said there had been a shift toward favouring liberalisation in government.

"The decision of liberalisation of Brazilian reinsurance market is up to congress," he said. "During my tenure as secretary of economic policy, the government sent congress a proposal in that direction, which is currently under analysis by our lower house. I believe that there is a broad majority view favourable to the measure."

The appointment of Mr Lisboa, with his pro-liberalisation stance and understanding of the reinsurance industry, has been welcomed by the market leaders in the country and around the world. He says he is going to take the IRB as far toward liberalisation as his position allow.

"In the meantime, we will take additional steps toward liberalisation of the market to the extent allowed by current legislation," he added.

But Mr Lisboa has his work cut out for him following the allegations of misconduct and corruption: "Our job here is twofold. On the one hand, we have to deal with the allegations of misconduct of the previous administration that are of public knowledge," he said. "On the other, we have to prepare the company for the liberalisation of the Brazilian reinsurance market.

With respect to the first aspect, our job is to provide all required information to the proper authorities and it is up to them to evaluate if there is enough evidence of misconduct or not."

... and greater transparency

Mr Lisboa is keen to make sure that the IRB is more accountable and transparent, and is busy putting up systems to make the monopoly a better place to do business with and less susceptible to corruption.

"We have already made several changes in the company and the way it relates to our partners," he said. "We have a full disclosure of our major contracts, as well as of all board agenda. Our website already displays several of our numbers, and we want to improve it continuously. Transparency is our priority from now on, which is an obligation for any publicly controlled company."Mr Lisboa also said that part of what he could do to move toward the opening up of the markets was to improve the choices available to insurers.

"The basic idea is that the insurance companies who pay for the service should be free to choose who is going to provide the service. We will only interfere if their choice implies additional risk for our company," he said.

Mr Lisboa is convinced that both the IRB and Brazil are ready for the opening up of the market, and he is critical of past administrations for not using the staff properly in the department:"I believe that IRB can successfully compete in an open market. We have very competent technical staff and quite impressive data sets. Unfortunately, the company has not been using them to their full extent. Our company can definitely be much more competitive. It is our job to do that."

A visit to the IRB website (not yet translated into English) shows more information on the IRB - its workings, finances and people - at one click of a button than has ever been available to the public before.

Mr Lisboa said this was only the first step toward greater transparency and changes in the offing. In fact, the way he speaks sounds very similar to a company headed towards an IPO.

He continued: "We have created a compliance office and a research department. We have changed our investment policy to focus on our core business, and we are going to start a quite intensive training programme for our staff so they can be up-to-date in the most recent tools of risk management. Human capital, information and risk management are our fundamentals to make IRB-Brasil Re a competitive player in an open market."