The guarantee insurance as a tool to boost the national infrastructure
Once the electoral phase is over and the President has been defined for the next 4 (four) years, the Brazilian economy is expected to resume its growth rate. And the tendency, with the return of the national growth, is that the country will return to invest in infrastructure projects, which will cause the insurance market to also heat up.
In this scenario, there is the guarantee insurance ,an important product for the sector, since its objective is to ensure the full performance of contracts entered into in various sectors, among which we mention the infrastructure works and projects, provision of services, supply of goods, among many others.
The guarantee insurance had its origin in the United States, with a view precisely to foment the infrastructure. There, where it has been operating for over 120 years, the product is consolidated and plays an important role in the delivery of relevant works to the growth of the country.
This is primarily due to the regular exercise by the Insurers of the so-called step in rights, in addition to the fact that there are no surprises in the moment of recovery of the amount indemnified by the Insurer directly from the Principal.
In Brazil, where the product has been commercialized for more than twenty (20) years, the market still seeks alternatives to make it more attractive and efficient, especially to the public sector.
According to information from the Federal Budget Oversight Board , we would have approximately 12 (twelve) thousand works paralyzed in Brazil. And in the face of the alarming numbers presented, negotiations began among all players in the market so that the guarantee insurance would be presented as a solution for the resumption of such works, which will surely contribute to the improvement of the country’s economic indexes and growth.
As a kick-off, the insurance market, represented by three federations, which are the National Federation of Private Insurance, Reinsurance, Capitalization and Private Pensions Brokers of the Insurance and Reinsurance Brokerage Companies - Fenacor, the National Federation of Reinsurance Companies - Fenaber and the National Federation of General Insurance - FenSeg, have been in contact for some years with representatives of the Legislative and Executive Branch, independent regulatory agencies, as well as some financial institutions.
As a result, numerous bills have been passed in the Chamber of Deputies and in the Federal Senate since then, providing for increases in the guaranteed value, as well as several responsibilities to the operating insurers of the product.
Some of these legislative bills, for example, propose the increase in the percentage of the insured amount to up to 100% of the value of the guaranteed contract, to the obligation of the Insurance companies to inspect, audit and conclude the paralyzed works, including assuming the Principal’s liability.
Such proposals, however, should be evaluated with great caution, since many of them aim to transfer State responsibility to the insurance market, which may have negative economic impacts on the sector, mainly due to the companies' exposure to various risks not contemplated by the policies, but which are inherent to secured transactions, such as those arising from non-compliance with labor, social security, tax, environmental and other obligations.
However, after growing 5.8% in the accumulated from January to October 2018, according to information released by Fenacor, the guarantee insurance is already the insurance sector's great bet for 2019. It is expected that the modality will grow almost twice that forecast for the whole sector, namely 3.1%, which would also be explained by the procedure of PL 6814/2017, known as the New Public Bidding and Contracts Bill.
This bill proposes, among others, the increase of 5% to 15% to 30% of the insured amount for contracts that exceed R$ 100 million reais, in addition to the introduction of the clause of resumption of the object contracted by the insurance company.
The market, however, seeks some changes so that the operation of the product in the suggested ways becomes feasible, related, primarily, to (i) the flexibilization of the dispositions that impose on the Insurers the duty to supervise and audit the contractual execution; (ii) the elimination of sections that allow the Insurer to pay the Principal’s employees directly in the case of an accident, provided, of course, that there is coverage for this purpose; and (iii) to reduce the fines set for the case of the insurance company choosing not to complete the scope of the contract in default, if the contractor does not do so.
In addition, the insurance companies are seeking to meet certain specificities within the financing agreements proposed by development banks, but it is known that the market is not suited to assume all the risks of these institutions’ business.
In December 2018, the substitute text presented by Rapporteur João Arruda was approved by the Special Committee and is currently awaiting review by the House of Representatives plenary session.
The market is optimistic about the product, which, in fact, ought to remain an important tool in the development of the national infrastructure.
But from the implementation of the bills in process, it will be of utmost importance that the insurers improve their processes of underwriting, evaluating the Principals and monitoring the risks, which can/should be done by a multidisciplinary team, all as a way of ensuring financial health of the portfolio and the effectiveness of the operation.
The challenges are numerous, but certainly we are in front of an important tool capable of boosting the country's growth.
Pelo segundo ano consecutivo, A Schalch Sociedade de Advogados (SSA) integra o seleto grupo de escritórios brasileiros na área de seguros e é recomendado pelo The Legal 500 Latin America 2017.
A edição 2017 do guia internacional sobre a América Latina The Legal 500, destacou Debora Schalch, como referência na área de seguros, incluindo-a na lista de “Recommended Lawyer”.
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