Latin America Still Attracts Reinsurers

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International Editor

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Despite the turmoil in some Latin American countries and theresultant slowing of investment by some multinational companies,traditional reinsurance industry leaders remain committed to theregion, according to several reinsurance industry executives.

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Insurance and reinsurance companies, which are dedicated toLatin America over the long-term, “are riding the wave,” saidKathleen Smith, managing director of Guy Carpenters Americasdivision in Miami.

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Reinsurers that have a history in the region are there for thelong term, which has helped them measure their performance “andgiven them positive results which they expect to maintain for theforeseeable future,” she said.

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Ms. Smith noted that companies like Swiss Re and Munich Re mightperiodically reassess their strategies, but remain committed to theregion because of the growth opportunities they expect there.

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Nevertheless, she said, the region has seen slowing of foreigninvestment by Fortune 1000 companies. Some companies have eithershut down plants or are taking a wait-and-see attitude beforecommitting further resources to operations in certain countries inthe region, until they see some stabilization returning, shesaid.

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Such a drop in investment is noticeable only because there wassuch a huge amount of investment during the 1990s, Ms. Smithsaid.

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“It goes without saying that to do business in Latin America,one has to combine a pioneering spirit with a long-term perspectivespanning decades, as well as giving consideration to the short- andmedium-term benefits and risks,” said Stefan Mosel, executivemanager, department Latin America-South, for Munich Re in Munich,Germany.

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“While the 1980s were defined as an extremely critical phase forLatin Americas economy, the 1990s, conversely, demonstrated astrong tendency towards stability,” he said. “These days, itdepends more than ever on how the largest Latin American economies,such as Mexico and Brazil, achieve their growth and inflationtargets, and how their policies affect their neighbors.”

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Munich Re, as one of the leading global players in thereinsurance business, sees itself maintaining a strong presence inthe Latin American market, “even though we are fully aware that theregion is known for its high [natural catastrophe] exposures, and,in some cases, extreme currency fluctuations,” he said.

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“Our main priority, as observed in the last renewal period, isto focus on an adequate technical price level and transparency inour reinsurance treaties,” said Mr. Mosel.

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“Recent turmoil, such as the Argentine economic crisis in 2001,forced through some important modifications in the localreinsurance market. And should such events occur again in thefuture, Munich Re certainly will be prepared,” he said.

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Ms. Smith explained that some of the reinsurers have tightenedup their coverage in certain markets.

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In order to protect themselves against the economic andpolitical volatility of the region, Ms. Smith said reinsurers thatdo business in the region are highly selective in choosing theirpartnersboth ceding companies and brokers.

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“In addition, they perform regular audits of the cedingcompanies they reinsure,” she said. They also maintain localoffices and/or local contacts and relationships, “which keep themvery close to developing situations.”

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Because of their proactive approach and use of theirrelationships, none of the markets she has spoken with “have beenadversely affected by any of the political or economic developmentsthat have transpired in the region lately, namely the DominicanRepublic, Argentina and Venezuela.”

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Regarding market trends, Ms. Smith noted insurance andreinsurance property risk transfers still account for the majorityof business activity in Latin America.

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The reinsurance treaties for cedents in the region are very muchdependent on global reinsurance capacity, which can drive theoriginal rates and pricing, she added.

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In general, Ms. Smith said, 2003 prices for catastrophereinsurance in the region have stabilized or have dropped slightlyafter the large reinsurance rate increases seen in 2001 and2002.

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Although some of this may be due to the new Bermuda capacity,she emphasized that reinsurers are highly dependent on catastrophemodeling. Once a certain trigger price is attained in theexcess-of-loss area, capacity levels increase, she said.

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Excess-of-loss capacity has significantly increased, and pricingand terms have come down in general, she continued.

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However, in the area of property proportional reinsurance, Ms.Smith said capacity remained available, although terms remainedtight.

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“In many markets, the key focus of proportional renewalnegotiations continues to be original rate levels,” she said. “Itsa delicate balancing act. Ceding companies must remain competitivein their local markets, and at the same time, cover the cost ofreinsurance.”

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While reinsurance is dictated by global conditions, there arelocal considerations for ceding companies, she said.

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Ms. Smith noted that reinsurers are requiring more informationfrom ceding companies to underwrite a proportional account.

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Further, she said, buyers of insurance and reinsurance in LatinAmerica are a lot more conscious of security ratings than they werein the past.

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Ms. Smith said that ceding company clients insist that a certainpercentage of their placement is with a reinsurer of a specificrating. “We now get guidelines from them which they never wouldhave given 10 years ago.”

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Further, insurance brokers in the region and the risk managersof large companies are also a lot more involved in the whole risktransfer process than they were 10 years ago, she said.

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“Risk managers will say, We want 70 percent of our business tobe X type of security,” she said, although the requirements varyfrom company to company.


Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 1, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.


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