Re Opportunities Abound In Latin America

Re Opportunities Abound In Latin America

Over the last 10 years, Latin America has become one of the most economically vital regions in the world. Privatization, legal reforms and the elimination of trade barriers have opened the market to global companies.

Foreign insurers and reinsurers are now permitted to own 100 percent of local firms and have been given substantial freedom in product design, pricing and marketing. Risks have also emerged as a result of new construction projects, directors and officers liability, surety, bankers blanket bonds, and professional liability. In addition, the tendency by insureds and reinsureds to increase their risk retentions has generated an appetite for alternative risk transfer products as a means of stabilizing results.

Despite these promising opportunities for insurers and reinsurers, however, political instability in many of the Latin American countries remains a major obstacle to regional expansion. For this reason, most underwriters and brokers evaluate and monitor opportunities on an individual country basis.

Many countries in this region are catastrophe-prone, with earthquakes, hurricanes and floods constituting the driving forces behind the purchase of most property coverage. Such coverage is typically structured as catastrophe excess-of-loss treaty reinsurance. Although reinsurance against natural disasters is still generally available, rates are rising substantially for excess-of-loss treaties as well as for facultative reinsurance on large risks.

Local insurers have tried to avoid rising rates in the international facultative markets by having four or five local insurers participate on the policy as “coinsurance panels.” However, reinsurers are starting to clamp down on this practice.

Although market firming is not across-the-board, the power industry has been particularly hard hit, as many of Lloyds underwriters are withdrawing from this area. Heavy losses arising from machinery breakdowns have attracted much attention and will receive more as carriers take more conservative positions on unproven gas turbine technology.

Of course, the industrys results in the region vary widely by country:

Argentina. Sweeping deregulation came to Argentinas reinsurance market in 1991, marking an end to government subsidies, tariffs and guaranteed pricing. Underscoring these changes was the end of hyperinflation in the mid-1990s.

These changes had an enormous impact on the insurance industry, and many foreign investors were attracted to Argentina. Today, most of the local industry is in the hands of foreign, but locally established insurers, with few domestic firms remaining as serious players in the area of industrial/corporate insurance.

A new workers compensation law was introduced in July 1996. Complementing this law was an insurance regulation stating that the only way to write this business was to establish a monoline company or to self-insure. Local and international insurers rushed to establish these companies, with reinsurers responding as well, taking this line of business away from the multiline insurers.

Meanwhile, healthcare deregulation remains a highly political issue. Healthcare is controlled by unions, and free competition would threaten their biggest source of income. Deregulation will happen eventually, and when it does, the health insurance market will be the biggest area of opportunity for U.S. insurers and reinsurers.

The fact that Argentina has practically no insured catastrophe exposure has also increased its attractiveness to reinsurers.

Brazil. The reinsurance market conditions in Brazil remain largely irrelevant to cedents. This is because the most important event affecting the industry–the auction of a 45 percent stake in the countrys monopoly government reinsurer, Instituto de Resseguros do Brasil–has not yet taken place.

The April 25, 2000 auction date was cancelled, and a new date has not been set as of this writing (July 2001). Once IRB is privatized, its monopoly will end, although some form of legislation is expected to protect local insurers for a period of time.

The promise of privatization has brought to the country a number of foreign reinsurers and reinsurance brokers. They are fully prepared to operate in Brazil after the reinsurance monopoly ends, and their presence has already had an influence on the local market.

Chile. In 1980, Chile became the first country in Latin America to deregulate its insurance and reinsurance industries. The state reinsurance monopoly, the CAJA, began to operate as a private reinsurer, and foreign companies were allowed entry. Since that time, its insurance market has become one of the most sophisticated in the region.

Colombia. Colombia is one of the richest countries in natural resources in Latin America. However, the risks of doing business there are substantial. Communist guerrillas remain a serious threat, and kidnappings, robberies, hijackings and murders are common.

Opportunities have developed as a result of the passage in December 1993 of Law 100, which provides for pension and healthcare reforms.

Reinsurance buyers are extremely conscious of quality security, and with the amount of first-class reinsurance capacity available from the market, many Colombian insurers have improved the quality of their reinsurance security.

The insurance market in Colombia is still suffering the effects of the Andean economic recession, which has caused profits to fall. Profits have also suffered as a result of restructuring in response to government measures to strengthen the industry financially.

Mexico. Passage of the North American Free Trade Agreement has allowed foreign investments to flow into Mexicos insurance sector. At the same time, significant insurance industry reforms have strengthened the market and increased investor confidence.

Vicente Foxs election as president initiates a new era in Mexico, not only politically but also in the financial and industrial arenas. His free market orientation is likely to help privatize the government-controlled healthcare system, which will create a need for stop-loss and excess-of loss reinsurance to cover expensive treatments. Other opportunities will result from the privatization of those industries that are still government controlled, which will necessitate wider coverages than the ones that the government currently purchases.

The majority of small businesses and homes are not insured. This offers enormous growth potential in the property insurance line. As more and more property is being protected by insurance, insurers are turning to the reinsurance market to limit their exposure and increase their capacity.

After a number of soft years, the reinsurance market in Mexico turned sharply in 2000, with rate increases in the 50 percent range. This is due in part to the hardening of the retrocession market, on which Mexico has a heavy reliance.

Venezuela. Diminishing investor confidence in Venezuela as a result of political and economic instability has affected the local insurance industry. The stagnant economy has created little growth opportunities for companies. This, coupled with poor results of the carriers, has reinsurers taking a cautious underwriting approach.

Venezuela's status as a mono-export country makes their economy especially vulnerable to economic fluctuations, as their role on the world petroleum stage remains both a blessing and a curse.

Meanwhile, nearby, insurance growth in the Caribbean is focused primarily on the property sector. The hardening property-catastrophe market has had an exponential effect on the islands, with their rate increases more substantial than in Latin America. Capacity for the Northern Caribbean (the half that has suffered all the recent losses) is scarcer than in the Southern Caribbean, which, by contrast, has had low loss activity. This disparity is reflected in rates, with prices for the Northern Caribbean approximately double that of the Southern island chain.

Despite pockets of instability in the region, there is considerable optimism for growth. Overall foreign investment is expected to continue, signifying important opportunities for insurers and reinsurers seeking to diversify their global portfolios.

Kathleen Smith is a managing director of Guy Carpenter & Company in Miami.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

Contact Webmaster