BRASILIA, Jan 25 (Reuters) - Brazil's National Monetary Council (CMN), the country's highest economic body, granted approval on Thursday for regulations enabling insurers and reinsurers to raise funds from investors through the issuance of insurance-linked securities.
The Finance Ministry, whose minister is a part of CMN along with the Planning Minister and the central bank governor, said this initiative will diversify funding sources for these companies, enhancing the insurance market's coverage capacity.
Finance Minister Fernando Haddad has previously said that the insurance market in Brazil is smaller than it should be. Under leftist President Luiz Inacio Lula da Silva, the government believes that new regulatory frameworks supporting the sector can stimulate much-needed infrastructure investments.
Inspired by insurance-linked securities, the Brazilian counterpart, Letras de Risco de Seguro (LRS), was legislatively established in 2022 but lacked regulatory guidelines until now. The newly approved rules will take effect in March.
The investment returns tied to LRS are directly linked to insurance risk factors, specifically focusing on events like climate catastrophes in specific regions.
In the absence of such events, investors receive their initial capital and a return. However, if the events occur, investors may experience losses. In essence, they bear the reinsurance risk and, in return, receive a coupon payment. (Reporting by Marcela Ayres Editing by Alistair Bell)
