The Lava Jato money-laundering scandal has caused deep reverberations throughout the insurance industry. Alex Guillamont and Anna Weiss of Kennedys discuss its implications.
What has been the fallout from the scandal and the effect on the insurance industry?
Lava Jato has caused deep reverberations throughout the insurance industry in Brazil, particularly in surety and financial lines. However, the impact of Lava Jato does not end in Brazil, as its effects are being felt throughout Latin America.
The scandal also resulted in the expansion of the powers of the Brazilian administrative authorities, allowing them to impose more severe penalties on companies that are not complying with the relevant regulations; presenting a new risk of exposure that insurers must take into consideration.
Another important effect of Lava Jato was the Brazilian Congress’ approval of the Anticorruption Law, effective on 28 January 2014. The intention of this law is to fill some gaps in the existing law; creating a specific law imposing liability on corporations for corrupt acts committed by their employees or agents. Previously, only individuals could be punished for such violations.
As a consequence of Lava Jato, politicians, and high-level directors of Brazil’s largest companies are being prosecuted and receiving jail sentences for the first time in the country’s history.
One of the biggest questions presented to claims adjusters is whether insurers should pay the defence costs of many directors, officers, and managers implicated in the corruption scandal—information gathered mostly from these plea bargain agreements. Each case will depend on the specific allegations made against the insured, the specific D&O policy wording, and how any admissions by the insured are phrased.
These questions are far from being solved and further complicating the situation are the conflicting positions that come from the complex re/insurance structures backing the majority of large policies.
Thus, more than ever, re/insurers need to review their wording and consider whether specific clauses for the kinds of situations detailed above should be covered.
What has been the effect on the construction industry?
Before Lava Jato, the Brazilian economy enjoyed an accelerated growth in the construction market; it was full of large-scale programmes such as power plants, hydroelectric dams, oil wells, and projects for the World Cup and the Olympics. However, in 2015 a financial crisis gripped Brazil that continues to this day.
In the midst of this crisis, Lava Jato revealed that the company’s biggest contractors were complicit in the largest corruption scheme in the country’s history. Odebrecht admitted it paid US$788 million in bribes to win contracts in 12 countries. This naturally aggravated the impact of the economic crisis on those companies, which had to sell assets, fire many employees, and in some extreme cases, declare bankruptcy. Peru and Colombia have banned Odebrecht from bidding on new contracts.
Several construction companies have been trying to exculpate themselves of Lava Jato by actively collaborating with the investigation and working to create a new business environment, but the outcomes of Lava Jato and the attempts to create this change of mentality to the business culture are forward-looking measures that have yet to produce any immediate results.
In the midst of the political and economic crisis that is gripping Brazil, there has been no discussion on the real necessity to improve infrastructure in all areas of Brazil. It is believed that the government will soon have lucrative opportunities to tender and the expectation is that new players in the construction sector will step into the vacuum left by Lava Jato, especially from China.
What will this mean for insurers in the country?
It is not clear when the government will resume its investment in the different sectors. Until then, construction and engineering insurance will suffer the impact felt by their clients and will have to consider how to reinvent themselves.
However, what represents a loss of opportunity for the pure construction insurance sector, represents a large opportunity for the financial lines and surety sectors. The underwriters that are dealing with these lines of business need to be more active and consider all elements that can affect the risk of their clients.
What do insurers need to be aware of in relation to the scandal?
The takeaway for re/insurers from Lava Jato is that the relationship between the public and private sector needs to be fundamentally redefined and that corruption is a threat that must be combated relentlessly. How companies in Brazil, and in the rest of Latin America, will do that, is not yet clear.
Insurers need to assess their wordings and exclusions in order to avoid indemnifying losses arising out of fraudulent schemes. But perhaps more than that, a more active (as opposed to reactive) solution lies with insurers. Insurers should take steps to be aware of their client’s profile and business culture through a thorough due diligence and more direct interaction with the client.
Alex Guillamont is head of the Latin America and Caribbean practice at Kennedys. He can be contacted at: email@example.com
Anna Weiss is head of construction for Latin America and the Caribbean at Kennedys. She can be contacted at: firstname.lastname@example.org
This interview was published by Intelligent Insurer on Nov 13 2017 (https://www.intelligentinsurer.com/news/the-fallout-from-lava-jato-13866) and in the FIDES Day 1 Newsletter.
Isadora Talamo and Javier Vijil, both from Kennedys also contributed with the content of this interview.
SUSEP Regulation 553/2017
On 23 April 2017, SUSEP, the Brazilian insurance authority, issued its suspension of Regulation 541/2016–its most recent regulations on D&O insurance. In its stead, SUSEP issued Regulation 553/2017, which aims to re-establish minimum requirements that D&O wordings in Brazil must comply with, effectively replacing the requirements issued under 541/2016. We view this new regulation as SUSEP’s much-needed response to the lack of appropriate and specific regulations on the topic.
Regulation 553/2017 expressly states, under Article 4, that individuals are now entitled to purchase D&O policies directly. Purchasing D&O policies used to be an exclusive right of legal entities who would purchase the policies as policyholders while their directors and officers were designated as the insured. How (re)insurers and D&O wordings will adapt to this new reality is yet to be answered. We also note that this new policy catered directly to individuals must have its wording approved by SUSEP.
Regulation 553/2017 also holds that insurers are able to offer a broader definition of Insured Person, to be taken out as additional coverage, so as to encompass service providers hired by the policyholder and/or the insured, e.g. lawyers, accountants, etc. There is also the possibility to broaden the definition of Insured Person to provide coverage for depositaries, liquidators, and other administrative intermediaries.
The regulation also establishes new rules related to Side B cover. D&O insurance is typically offered via three coverages—Side A, Side B, and Side C:
Read More: 2017 SUSEP D and O Brazil
Kennedy’s will be hosting a new seminar as part of its London Market series.
Fabio Torres, Partner in Kennedys Brazil, will be speaking about Aviation in Latin America covering the following:
October 19, 2017
8:30 am Registration and breakfast
8:45 – 9:45 am Seminar
25 Fenchurch Avenue
Hope to see you there!
Trans Re shared with us the following opportunity available in its Miami office:
Sr. Underwriter-Property Treaty
The Underwriter for the Latin American & Caribbean Division of Transatlantic Reinsurance Company will be responsible for the following:
For immediate and confidential consideration, please email your resume to email@example.com.
We are an Equal Opportunity Employer (EOE) and we support diversity in the workforce.
We are a leading international reinsurer, operating in 25 cities worldwide. Since 1977 we have built our business on the principles of offering constructive flexible solutions backed by rock solid financial security, and we have grown into one of the world’s leading reinsurers by coupling a global perspective with local support.
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Dive In Miami would like to invite you to attend the Festival for Diversity and Inclusion in Insurance.
Dive In is a global festival for diversity and inclusion in insurance that aims to highlight the business case for diverse and inclusive workplaces and provide practical ideas and inspiration for how to create positive change. All events are completely free! You can register or learn more about the events via the links below:
A riveting panel discussion focused on leadership dynamics and the impact of D&I in the workplace with a networking reception to follow.
28 September, 16:00 – 19:00
The Conrad Miami 1395 Brickell Ave, Miami, FL 33131, Miami, United States
For more information on Dive In visit http://diveinfestival.com. Please spread the word and encourage your colleagues and network to attend. Looking forward to see you there.
As the first major hurricane to make US landfall since 2005 and with a ferocity reminiscent of Katrina, Hurricane Harvey has impacted a wide segment of the property, construction, and energy (re)insurance market located within the coastal areas of southeast Texas, Houston and its surrounding counties, and the Gulf Coast. The early projections anticipate USD 40 – 50 billion in losses, and years of restoration.
In recent days, all associated with the (re)insurance market have closely followed the developments associated with Hurricane Harvey. As the first major hurricane to make US landfall since 2005 and with a ferocity reminiscent of Katrina, it will no doubt remain a focal point for the (re)insurance market in the weeks and months ahead. As the market responds to the devastating damage caused by the hurricane, as well as the subsequent rainfall and flooding, the market should keep sight of the critical provisions of the Texas Insurance Code. Texas has a “Prompt Payment of Claims Act” establishing specific limited periods of time to acknowledge receipt of a claim, begin the investigation, and request information. The Act also limits the time insurers have to make claim decisions, and issue payments after an insurer determines it will pay the claim. The Act obligates insurers to effectuate prompt, fair, and equitable settlements, and imposes penalties on insurers who run afoul of these provisions. While a new law going into effect on September 1 moderates some of the penalties and provisions associated with weather-related claims, risks remain. As the market addresses the exposures covered by the broad scope of implicated policies, it will need to mindfully adhere, and document that adherence, with the proscribed practices to effectively handle the claims and minimize their extra-contractual risk.
Kennedys CMK is here with straightforward and supportive advice to assist the market with its good faith compliance with all applicable laws and implicated policies. Kennedys CMK has offices in Texas, Illinois, New York, New Jersey, Pennsylvania, and Florida. In addition, Kennedys is available around the globe where our clients’ interests or policies may involve exposures arising from Hurricane Harvey.
Dan Sanders is a Partner in our Miami and Philadelphia offices and focuses on representing (re)insurance clients with the evaluation, negotiation, and litigation of multi-national (re)insurance disputes, and counsels clients on insurance coverage and good faith claim handling. http://www.kennedyslaw.com/dsanders/
Daisy Khambatta is a partner in the Austin office and focuses on representing clients in all aspects of insurance and reinsurance – including claims counseling, litigation and arbitration, regulatory issues and government relations, and formation of captive insurers and risk retention groups. http://www.kennedyslaw.com/dkhambatta/