Re/insurers look to Latin America for growth

Re/insurers look to Latin America for growth

The global insurance and reinsurance industry feels a bit down. 

In the US, rates are creeping up, but slowly in most areas, giving an improved but far-from-stellar outlook for returns. Economic concerns are keeping growth expectations low. And, with the start of hurricane season on June 1, all bets are off until November comes. One big event could ruin the year.

The situation in Europe is much bleaker. Uncertainty over its sovereign debt crisis is casting a shadow over everything. On top of that, doubts over the implementation of Solvency II continue to be a downer for the industry, and an increasing source of concern for insurance leaders.

Not all of the industry is like this. In emerging markets, the industry is buzzing. As our story this month on the Singapore market shows, confidence in this Asian hub is as sky-high as the city’s distinctive skyline. This is despite coping with unprecedented insurance losses in the Asia-Pacific region.

The same is true in Latin America, if the mood at Reactions’ Brazilian Reinsurance Conference in Rio in April and our Latin America Re/Insurance Forum in Miami in May was anything to go by. Both were filled with optimistic talk of growth and opportunities.
International insurers and reinsurers have a case of Latin fever.

“Asia and Latin America are the growth areas,” Hank Greenberg, the keynote speaker at the Miami conference, said. “While Latin America is not growing as rapidly as the Asian economies are, nonetheless it’s doing much better than most. Certainly Europe is a disaster, so Latin America picks up a lot of opportunity.”

The region’s biggest market, Brazil, is still generating fevered interest from international firms. And no wonder. Prospects for the Brazilian insurance market remain extremely positive, with the World Cup and the Olympic Games being cited among its positives, according to an AM Best report.

Brazil’s recent economic growth along with the two pending global sporting events are reasons that non-life premium increased in 2011 by 16% to R$47.5bn ($25.3bn), according to figures from Brazilian insurance regulator Susep.

“Continued demand from a growing middle class, abundant natural resources and the country’s host role for the 2014 FIFA World Cup and 2016 Olympic Games are catalysts for continued public and private-sector investments, all of which point to a positive growth outlook for the insurance industry’s non-life segment,” said the rating agency.

It is not just Brazil. The region as a whole is enticing to insurers and reinsurers alike. According to Swiss Re’s latest figures, Latin American non-life premiums grew 5.5% in 2010 to $73bn.

Of this, Argentina’s non-life premiums grew 18.1%, Brazil 7.9%, Chile 15.2%, Columbia 7.4%, Ecuador 13.9%, Panama 9.1%, and Peru 6.6% (all figures are inflation adjusted). However, Mexico’s non-life premiums fell 4.8% in 2010 and Venezuela’s fell 1.3%.

Compared to the meagre 0.5% growth in the US non-life market in 2010, and 0.3% growth in Europe, it is easy to see what all the fuss is about.

Some players are seeing the potential of the market and deciding to go all in. This was demonstrated by Swiss Re’s recent appointment of Willis Re Brazil’s Margo Black and Cooper Gay’s Alejandro Padilla to jointly lead its Latin America reinsurance operations from the ground.

Lloyd’s of London also highlighted how confident it was of the role Latin America would play in its growth when unveiling its Vision 2025  in May.

Lloyd’s underlined its commitment to the region and was at pains to point out that it is not just about Brazil, noting Mexico’s market in particular. It already writes $650m of premium in the Central American country, with premium growth estimated at “double digits per annum”.

“When people say Latin America they assume Brazil, but Mexico is actually a bigger market for us,” said Richard Ward, CEO of Lloyd’s, at the launch of the strategy.

Growth does not equal profit, however. Plenty of pitfalls await insurers and reinsurers in Latin America. The first thing to realise is that this is a diverse region. Each country has its own needs and challenges.

For example, at the Miami conference, Rolf Steiner, regional head for Brazil and the southern cone at Swiss Re, said Brazil and Mexico are the main markets but are very different.

“If you want to be successful as a reinsurer in Latin America you have to be successful in both Mexico and Brazil,” said Steiner. “These markets, however, are not comparable in the type of business they have. Mexico has size, it has relatively professional organisations and it has all the nat cat exposures, which are where reinsurers most look at it.

“Brazil is totally different. Nat cat exposure is missing. In Brazil, only 5% of the premium rates goes to the reinsurance market. But it’s still quite a big market. It’s probably the most important growing market for the future.”

Competition across the region is fierce, and shows no sign of letting up. In addition, the regulations in the region pose some challenges. This was shown by the recent moves by Brazil and Argentina to keep more reinsurance business within those countries, changing the rules of the game for international players.

And if the industry has learned anything in the past few years it is not to underestimate exposures in emerging regions. The premiums that international players have grown over years in Thailand and New Zealand have been wiped out by catastrophe losses on business that was greatly underpriced. The Latin American market had a taste of this with the 2010 Chile earthquake. Assumed cold spots for catastrophes can turn extremely hot, extremely quickly.

International firms are quite right to be excited about the potential of Latin America and to try to take a slice of the action. But they would do well to remember that losses can pile up even quicker than premiums.

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