Latin America is one of the most exciting regions for the insurance and reinsurance market, providing large and small players alike with opportunities, and the occasional headache, as they seek to take advantage of a continent that, despite a recent economic slowdown in some countries, remains one of the most promising regions for insurers and reinsurers in search of growth.
According to Swiss Re's sigma, non-life premium volume in Latin America and Caribbean in 2012 was $96.9bn, up 7.8% year on year. That was equal to 4.87% of the world market and represented 1.72% of gross domestic product in the area. This compares with a world average of 2.81% and a penetration of 4.46% in North America. Premiums per capita were $161.90, compared with a global average of $283.10, and $2,219.50 in North America. But it was the growth rate that appeals to today's market. That 7.8% was exceeded only by the 13.0% recorded in the other major hotspot – Emerging Asia. It compares with 1.7% growth in North America and a 0.4% contraction in Western Europe.
In the life sector, premium volume in Latin America and the Caribbean in 2012 was $71.8bn, with growth of 16.8% year on year. Premiums per capita were $120.0, compared with a global average of $372.6.
The conclusion was simple; Latin America was growing fast and, given the still-low average level of penetration, it still had far to go.
Sigma observed that, although 2012 saw a pronounced declaration in Brazil, domestic demand remained "robust" in most Latin American countries, "supported by easy financing conditions and high commodity prices". In 2013 that growth was expected to have resumed, with growth "close to trend pace".
The resilience of the Latin American sector was something of a contrast to emerging Asia, where the rapid rates of growth up to 2012 somewhat slowed, particularly in the life sector.
In Latin America, the reverse was the case. The 16.8% rate of growth in life was almost twice as fast as had been recorded in the previous year, with Brazil the main driver (22% growth year on year). Brazil contributed 62% of life premiums to the sector. The 17% growth rate compared with a 10% average over the previous decade. The growth rate also exceeded that of the economy as a whole, thus representing a genuine increase in insurance penetration, rather than one just mirroring growth in GDP.
However, the domination of Brazil serves to illustrate that the Latin American market is not just Brazil, but that whatever happens there will have a large impact on the continent as a whole. In 2012, life premium growth was also more rapid than 2011 in Mexico, Chile, Venezuela and the Dominican Republic. But elsewhere in Latin America it decelerated. This is something of a "glass-half-empty" way of looking at things. In Colombia, the growth rate was still more than 10%, but down on the previous year's rapid growth. Although there was premium growth in Panama and Peru, those two countries are the fastest growing economies in the region, with real GDP growth in 2012 of more than 6%. For this reason, life premium growth was lower than economic growth. That resulted in a decline in relative insurance penetration.
In non-life, the 7.8% growth recorded in 2012 was 1.2 percentage points lower than in 2011 – a reflection of the economic slowdown. Motor business grew significantly in Brazil because there were tax breaks on new vehicle sales and there was also an increase in premium rates. That growth was not expected to have continued through to 2013.
Premiums grew strongly in liability, rural and special risks, but they contracted in engineering. Colombia saw strong growth in workers' compensation.
For 2013 growth was expected in Mexican motor (see accompanying feature) while Venezuela and Bolivia continued to suffer in most insurance sectors because of political difficulties.
The "base" for Latin American business tends to be Miami, a choice that appears to be based more on the ease with which underwriters can be recruited than a logical choice of geography. It's 4,158 miles from Miami to Rio, and an 8 hours 40 minutes flight. You might as well set up London as your "local" base for business emanating from Colorado.
One London player told Reactions that this was one reason they put staff on the ground in Santiago, which is a "mere" 1,800 miles away. But all this serves only to emphasize one simple fact; Latin America is a big place. Looking at it as a homogeneous region is a serious mistake.
Indeed if we take a more granular approach to the Latin American market, four axes of measurement stand out: Size, penetration/maturity, rate of growth and regulation/politics.
In terms of size, Brazil dominates the continent and, with a 1.78% of the world market, is the only country that insurers and reinsurers would want to be in for reasons of balance as well as for reasons of future prospects. Its $82.2bn in premiums in 2012 – up 4.6% in nominal US dollars, gives it a ranking of 13th in the world – just above Spain and just below Australia.
After that comes a block of five, each with their own individual characteristics. Mexico has premiums of $23.98bn in 2012, up 4.9% year on year in US dollar terms. Then came Argentina ($15.5bn) and Venezuela ($14.2bn), both of which have suffered economic and political problems since. The final two of the "second tier" are Chile ($10.5bn) and Colombia ($8.89bn). In absolute terms, this is not large – one thirtieth the size of the UK market and less than 1% of the US market. But the countries punch above their weight. One London source told Reactions: that it was impossible to categorize the area as one business. "Chile has a strong consistent interaction with the market because of the need to buy earthquake cover". But he noted that there was a lot of other development in Chile, with many companies moving from local to international. Many operations now had units and subsidiaries in other Latin American countries, and some had expanded via merger into Europe.
The Maule earthquake in Chile in early 2010 brought the quake threat to Chile to the fore, but, as several London players noted, this was slightly misleading. The recent pair of quakes in northern Chile had far less effect – despite occupying a land mass slightly smaller than Montana, the country is 2,600 miles from top to bottom – a strangeness of political shape dictated by geological events that took place tens of millions of years ago, when the Andes were formed. While down in Valparaiso Concepcion there was a concentration of industry, in the north it was far more thinly spread. Thus the smaller quake was talked of at the time as "one of the largest non-US events in the history of the global reinsurance market", while the 2014 event hardly merited comment.
The corollary of the Andes is a tectonic plate boundary that runs parallel to the Pacific coast of South America. As one London player told Reactions, it's a bit like the game of pin the tail on the donkey. A quake could happen anywhere along that boundary, but, depending on where you pin the tail, the insured losses could be minimal or huge.
That high profile is also, in a way, slightly dangerous. Brazil, for example, has a significant degree of flood exposure. Darren Powell, active underwriter at Allied World's Syndicate 2232, felt that this was perhaps underestimated as a risk. "We hear so much about Brazil, that it doesn't have the same cat exposure as Chile, so it doesn't get the same level of demand. But Brazil has a lot of flood exposure, and I think the market in the main underestimates the flood exposure to some extent."
This also raises the point of the modelling. None of the "big three" catastrophe modellers would claim that the degree of cover in Latin America is on a par with the level of granularity available for the North Atlantic seaboard. The matter for debate here is, to put it in Rumsfeldian terms: "do we know how much we don't know?" The quake vulnerability in Colombia is one area where the underwriters are not in full agreement. There are some players in the London market who say, although not in so many words, that the modellers have got it wrong, and that if a quake should hit Colombia, the insured losses would be significantly lower than is currently predicted by the models. The alternative, of course, is that the risk is underpriced. One thing is certain; if as an underwriter you are prepared to state that the modellers are overrating the risk, you are going to have less competition when it comes to writing that risk.
A common theme that emerged from discussions with the market was that they were keen to work with businesses locally – possibly setting down local roots via representative offices, or even branches, with underwriters and staff whose knowledge of the field goes beyond being able to speak Spanish and/or Portuguese. Darren Powell of Allied World said: "Many of our current underwriters are Spanish or Portuguese, from the Latin American region. Hiring local underwriters is tremendously beneficial and we continue to actively recruit Latin American underwriters for all lines of business as we continue to look for meaningful opportunities in this market."
As well as having underwriters on the ground with local knowledge, any player with a serious interest in the region needs local legal experts. Indeed the fixed cost of coping with the minefield of South American regulation and legislation cannot have failed to slow the growth of foreign insurance interest in some of the smaller countries on the continent.
The liberalisation of the Brazilian reinsurance market is a saga that has lasted longer than the careers of many people currently working in London.
Court rulings in South America can also be unpredictable. For example, in 2010 a Brazilian court ruled that Air France should pay the equivalent of $1.16m to the family of a victim of the Rio de Janeiro to Paris Air France crash in June 2009. The Rio civil court ordered the payment on the grounds that the crash was in large part due to the negligent conduct of Air France, even though no evidence had been found that showed Air France to have been culpable.