With the deadline to comply with Brazil’s New Public Procurement Law passing in late 2023, contracts for large infrastructure projects over R$200 million are now required to include a “step-in clause.” The first case was in April 2024, in the state of Mato Grosso.

The insurance industry sees strong growth potential for this product, which is expected to help solve Brazil’s chronic issue of stalled public works. By reducing uncertainty, the model could also expand the scope of infrastructure projects and attract more investors.

But adoption has been slower than expected, said Esteves Colnago, head of institutional relations at CNseg, Brazil’s national insurance confederation, which compiled the project data by analyzing public tenders.

“We expected more momentum. Usage began strong, especially in states like Mato Grosso, but the lack of adoption by federal authorities has hindered broader uptake,” Colnago said. Insurers are pushing for regulatory clarity to unlock growth.

The Superintendence of Private Insurance (SUSEP) is working with the Finance Ministry on a draft decree to define the rules, said Jéssica Bastos, director of market organization and conduct regulation at the insurance regulator.

“In a second phase, additional regulations by the National Council of Private Insurance and SUSEP may be needed to improve understanding and support growth,” she said. “It’s not that the instrument hasn’t caught on, but there’s a lot of room to scale up.”

Attorney Guilherme Reisdorfer, a partner at law firm Vernalha Pereira, said regulation is not strictly required under the law, but would be welcome to strengthen legal certainty and clarify processes like communication between parties.

He highlighted governance benefits of the new model: “For the public sector, it helps to have an insurer assessing the contractor. For contractors, the insurer validates their work. It adds an extra layer of control for both sides.”

Cássio Amaral, partner in the insurance and finance practice at law firm Machado Meyer, said adoption so far has been “very timid,” due to a lack of understanding about how step-in clauses work in practice. “We need guidelines, decrees at the federal, state, and municipal levels, so public agencies know how to include this in contracts and tenders,” he said.

Some states have lowered the project value threshold for requiring the insurance. Mato Grosso, which led the way, passed a law mandating step-in clauses for works above R$50 million. Goiás followed suit in 2025. Paraná and Pernambuco also included the model in tenders this year.

Under the rules, the bond issued by the insurer may cover up to 30% of the total project value. If the contractor defaults, the insurer has two options: take over and complete the project by hiring another construction company, or pay the full value of the bond.

One key point under discussion is ensuring that the bond is not used to cover penalties that should remain the responsibility of the original contractor. The goal is to clarify the division of obligations among the parties.

Insurers also have questions about what happens after the step-in clause is triggered. “When choosing a new company to finish the project, do we have to select from the original bidders, or can we pick someone we trust?” Colnago asked.

Another unresolved issue is the flow of funds. While part of the remaining budget comes from the insurer, the other portion is public money. It’s unclear whether this public share will be paid directly to the construction company or routed through the insurer, the latter is considered less efficient.

Colnago also stressed the need to clarify when insurers can decline to complete a project. Some argue that step-in should be mandatory, but insurers want the right to opt out in cases where technical flaws make the project unfeasible.

The market agrees on one point: if the bond covers significantly less than 30% of the project, insurers are unlikely to take on the risk of finishing the work.

“You don’t take over a project with less than a 30% bond,” said Amaral. “In the U.S., most states require surety bonds to cover 100% of the project value, and some require at least 50%.”

“Public entities in Brazil need to understand that demanding a step-in clause with a lower percentage is unrealistic. The additional cost is too high, and in the end, insurers will prefer to just pay the bond amount.”

The potential of this new market has already led insurers to expand their teams, hiring engineers and specialists to meet growing demand.

Tokio Marine, which issued the first such policy in Mato Grosso, and Junto Seguros, which has had a risk management team since 2011, are two examples.

“Even so, we’re still hiring specialized engineers to strengthen our capacity, and we’ve mapped companies across Brazil that can support us as demand grows,” said Roque de Holanda Melo, CEO of Junto.