Latin America insurance and reinsurance - Growing pains in a growth region

Latin America insurance and reinsurance - Growing pains in a growth region

Concerns about inefficient distribution channels, inadequate products, coinsurance and flood coverage are just some of the issues facing Latin America’s insurance and reinsurance markets.

But this is not coming close to putting international insurers and reinsurers off this region’s vibrant and increasingly sophisticated insurance markets, according to speakers at the 2nd Annual Latin American (Re)Insurance Forum held in Miami by Reactions and Euromoney Seminars in May.

Herman Weiss, senior vice-president, managing director, and Latin America zone officer at Chubb Group, said the cultural, financial and regulatory environments across the region are distinct enough for firms to need a very specific view of how they operate in each individual country. He said that it is easy to grow in the region, but hard to do it profitably.

“People who are working in the region will say well we’ll grow as much as you want; the question is how much money do you want to make,” Weiss said. “It is a matter of defining your timeframe. You have got to look at it in a larger timeframe and in the context of what your long term strategy is, and make sure your short-term plan and long-term plan are aligned.”

Weiss pointed out that there is a lot of infrastructure needed across the region as well as a growing middle class. Jose Sojo, CEO for Latin America at QBE Insurance Group, agreed but said the industry needed better products and services.

“When you compare the kind of coverage that an individual purchases when he is buying a product in the US with Latin America we are not selling the real product,” said Sojo. “When it comes to flood the industry excludes it and look for any reason not
to pay the claim when we should say the reason we exist is to pay claims. We need to come up with a better value proposition to the middle class consumer that today only buys insurance when he is obliged. Very few voluntarily go and buy insurance.”

Sojo also predicted that distribution will need to change.

“There are opportunities around distribution,” he said. “About 80% of the business is distributed through very expensive intermediaries for personal lines. Microinsurance is a good opportunity but it is not when we spend 65% of the premium to distribute the product. That product cannot work longer term like that.”

Chubb’s Weiss added: “Consumer protection is going to come into play and I think that will be the end of the 65% cost. It would be wise for the industry to anticipate that and start refraining ourselves from getting into those types of deals before regulators step in, as they have done in other countries, because it will be very expensive.”

Jorge Luis Cazar, Latin America president at Ace Group, said: “On the consumer side the main problem we have suffered in the past 20 years is whoever controls the collection, controls the business. That is why they can charge the commission they can.”

Sojo estimated that the average cost of distribution for commercial business is around 17% to 18% and personal lines is 21% to 22%.

“There will be more direct business,” he said. “The average commission has to come down in personal lines and in commercial lines you see more of the big purchases of insurance. The reality is I think the distribution costs will come down and I think the expense costs will come down.”

Edward Navarro, head of international insurance operations and global head of accident and health at Starr Companies, said insurers doing business in Latin America are being squeezed. He said there will be many losers in the region.

“The consumer is demanding more, the regulator is demanding more, our shareholders are demanding more, which means we are getting squeezed at every turn,” said Navarro. “So we have to squeeze back. There is no easy way to put it. So if you are not focused on multiple sources of distribution, if you are not focused on what is the least expensive vehicle that you can use to get your product to the consumer then you will be left behind. Whether you are in the insurance business, reinsurance business or the banking sector, it doesn’t matter – every sector is facing the same challenge: how do you lower your cost and get it to the customer, because if the customer is not demanding it, the regulator is. If you don’t understand that, you will get left behind.”

A reinsurance panel revealed how far advanced the region is now. Alejandro Padilla, head of Latin America north at Swiss Re, revealed his firm has high hopes for Latin America.

“In Swiss Re, we don’t call them emerging markets any more – we call them high growth markets,” said Padilla. “Of the 10 countries that Swiss Re really wants to invest in during the next years, at least half of those is Latin America. The level of margins and the results of the Latin America portfolio is quite impressive.”

Gabriel Anguiano, who is in charge of developing international markets at Lloyd’s, said the London market was also targeting the region for growth.

“With Lloyd’s we also have priority countries with Vision 2025. In the near term there is actually more interest in the Lloyd’s market in Colombia and in Mexico. But the buckets are already quite full in Mexico and in Colombia so some Lloyd’s businesses prefer to start developing their business in the smaller markets.”

He added: “We are actually going to write more business in Central America than Turkey, and Turkey is one of top five countries .”

Padilla added that Venezeula is also a strong market. “It is very difficult to take the premium out of Venezuela but it is a country that we know and we want to be there,” he said.

Anguiano added: “We have the same at Lloyd’s with the change in the scheme in Argentina. The rumour was that no one was going to renew Argentinean business, but then it actually grew. Everybody was telling each other, it is very difficult, don’t write it! So countries like Argentina and Venezuela always present very good opportunities. Results from Venezuela are very good. If I was an underwriter I would be very happy for everyone to be scared away from those markets.”

One trend Anguiano identified was how the foreign capital in the region was changing the market. “In Mexico foreign invested capital accounted for something like 20% of the premium 10 years ago; a decade later it accounts for 70% of the region. We scratch our heads and ask where is this leading to because are our natural clients are the locally owned insurance companies,” he said.

He also pointed out that talent in the region was important. He said Lloyd’s was keen to take advantage.

“One change we hope to see within Lloyd’s is to see more Latin Americans working. On the Lloyd’s underwriting floor back in London it is still predominately Anglo-Saxon, what we need in the future is Brazilians, Mexicans, Colombians and also Chinese and Russians on the underwriting floor,” he said.

Cat programmes getting bigger 

Catastrophe reinsurance was identified as the driver of growth for reinsurers in the region into the future. Cat programmes are getting bigger. Alfredo Gomez, senior vice-president at Swiss Re, said limits on cat programmes have increased. “We have already seen some placements with 10%-15% growth,” he said. “This is mainly driven by the regulations in countries like Colombia or Chile, where they need to buy fixed limits based on a certain percentage of the key zone. There is a need for more capacity.”

Gomez also reported that there is a need to focus on data quality in a challenging environment.

“We expect to see a lot more exposure data coming in the renewal submission,” he said. “We also expect some changes in proportional programmes, where there is a lot of loss coming from flood or fire in an environment where prices are coming down. Flood continues to be a big issue. So perhaps some companies are going to try and place some additional covers on an aggregate basis. That would be a good idea for those countries exposed to flood.”

Ron Diaz, senior vice-president for Latin America and the Caribbean at Everest Re, said clients have become more sophisticated. “Brokers have helped them quite a bit in preparing data so that modelling can be better done. That tendency will probably continue,” he said.

Diaz said original rates are falling, especially in Chile. “Chile can be viewed a bit separately to the rest of Latin America because the earthquake a few years ago bumped them up in rates,” he said.

“There is this idea it should come back into line and that is to some degree occurring. They still aren’t down to where they were in 2009 but they have been dropping.”

Mike Hughes, CEO for Latin America at Aon Benfield, highlighted the problem of large insurers coinsuring each over, a practice that is frustrating reinsurers. This is especially prevalent in Brazil.

“The one thing we are seeing a lot of is more coinsurance locally,” said Hughes. “That is a growing trend that is really impacting the ceded premiums. At some point there will be a large loss and it will hit some of the insurers three or four times and then we will get a change and maybe the ceded premiums will increase.”

Gomez at Swiss Re added: “It used to be a limit in coinsurance up to 50% of the capacity. We are already having some discussions with clients where they want to increase that limit above 50%, to 60%, even 70%. We have to do a lot of pushback on this,” he said.

“It is not a price situation, and it is not because we are afraid of the competition, it is because of the lack of necessary underwriting when it comes to corporate risk, which gets diluted on proportional capacity. Eventually if this trend continues we will see losses, and companies with proportional capacities are certainly going to face issues in placing again or renewing such capacity in the future.”

Diaz commented: “In addition to the 50% rule, when you follow another insurance company I would like to see it limited to three maximum coinsurers. In Brazil you sometimes have five or six insurers on the same business. Some ceded companies argue that it means that way they don’t fight on price as hard. I am not sure that is correct or not but I do think when you are using large capacities, mostly in Brazil, and you are using it with six companies, it is probably going to lead to a market failure at some point in time when a market risk hurts six or seven players at the same time.”

Diaz said natural catastrophe is still being the biggest reinsurance purchase in Latin America and the biggest profit driver.

“I think it will grow as well because a lot of the indigenous or local companies rely on pro rata capacity to cover their nat cat and their fire. That is becoming a lot more difficult to justify. The margins just aren’t there in that line of business. We will likely see a lot of that business that was automatically ceded to pro rata treaties going into the cat XL and risk XL environment, and you will have growth coming there,” he said.

Diaz said casualty business has had favourable results but a lot of it is retained and doesn’t make its way to reinsurers.

Hughes predicted that reinsurance retentions will increase, particularly among the multinationals and globals. “That’s going to be put pressure and reinsurers are going to have to grow in other lines,” he said.

Gomez at Swiss Re said some of the new regulations being introduced in Mexico and elsewhere will help driver cat business.

“The future will be that the region must have the type of protection driven by features of the companies’ portfolios and not based on a percentage or a mandatory regulation regardless of the type of business they write. That will require more sophisticated approach to writing nat cat business. When the region continues to grow there will be need to tap into new capacity such as capital markets,” he said.

“In order to do that the markets in Latin America need to develop common indices in order to assess what is going on, similar to the PCS index. You can build on those types of measurements to develop new products such as cat based on that industry loss or more sophisticated insurance such as a parametric solution. The markets need to come together and decide how they want to share data because it is in their benefit. That would be a good way of accessing alternative capital solutions. Long term, more capacity would be available at more reasonable prices.”

One of the biggest topics in the global reinsurance market is the influx of alternative capital into the industry. But Diaz says indigenous Latin American insurers are not able to access that yet.

“The change you will see in the future is the capital markets coming into Latin America. That will happen as the purchases become big enough to become interesting. One of the concerns is if you start to depend too much on investors for your cat capacity. Investors are not reinsurers, they are not used to losing all their money in any given year and when they start to lose money they will pull out. It will not be a secure place to put your risk going forward,” he said.

Click here to view the top 25 insurers in Latin America and the top 25 cedants in Latin America by 2012 premiums

By Michael Loney – mloney@euromoneyny.com

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