1 October 2012 Reinsurance

Latin America: fertile ground for growth

We outline some of the statistics, challenges and opportunities associated with a selection of the region’s diverse insurance and reinsurance markets, starting with Brazil, Mexico and Chile.

As far as prospects for growth in the insurance and reinsurance markets go, few present more exciting possibilities than Latin America. A report by Standard & Poor’s (S&P) published in May 2012 found that low insurance penetration—on average below 5 percent—gives insurers a huge opportunity to capitalise on potential growth in the market.

However, while Latin America presents many opportunities for those seeking to expand, other issues must be considered. The region is incredibly diverse, with every country presenting its own opportunities and challenges. Therefore, it is essential international companies invest in local talent to help them understand the nuances of the markets. Other challenges include fi nding attractive products for lower-income individuals and pricing them correctly, and building distribution channels.

Many of Latin America’s markets have been liberalised in recent years, but there are still myriad restrictions placed on both domestic and foreign carriers, and some policies are still criticised as being protectionist. They are passed off by those in authority as efforts to protect domestic carriers, but some still cause controversy.

Brazil

The passing of Resolutions 232 and 225 in Brazil drew significant criticism from the insurance world in 2011. In brief, Resolution 232 prohibits a domestic insurer from ceding more than 20 percent of its insurance premium to an affiliated, intra-group reinsurer located abroad. Resolution 225 means that at least 40 percent of ceded premiums have to be placed with local reinsurers registered in Brazil.

International reinsurers have, however, been finding ways to avoid falling foul of these laws, according to Michael Hennessy, associate at law firm Kennedys. For example, some have become eligible as a ‘local reinsurer’ in the eyes of the Brazilian regulator, an action taken by international reinsurers including Munich Re, ACE and Mapfre.

Despite these challenges, Brazil is heading in the right direction, according to AM Best’s Global Reinsurance Market Review, published in September 2012. The report found that the Brazil reinsurance market is worth $5.7 billion and, under the open market system enacted five years ago, it continues to expand. While this represents a 23 percent increase over 2010, a change in the accounting treatment of commissions makes an exact comparison misleading, according to the report.

At one time, the reinsurance market in Brazil represented a single staterun entity. Now, the market consists of 10 local reinsurers, 29 admitted reinsurers registered with Brazil’s regulator, and 59 ‘occasional’ reinsurers.

The report also said that while the market lacks a distinct renewal period for reinsurance, indications are that reinsurance rates softened by about 10 percent in the early part of 2012.

Brazilian insurers are well positioned to achieve a greater market penetration in the near future, according to the S&P report. The rating agency said this was due to Brazil’s favourable economic growth prospects, insurers’ good capitalisation levels and the insurers’ strategic importance for their parents, along with robust lending dynamics, which are helping to bolster the industry.

Mexico

During 2011 Mexico continued to meet economic expectations with its GDP growing by 4 percent, according to a 2012 report by Marsh titled Navigating the risk and insurance landscape.

Key factors in this achievement included the fact that credit is readily available, along with continuing substantial foreign investment. Economic stability at the end of 2010 laid the foundation for a strong 2011, and this was maintained throughout the year.

Although Mexico is the second largest insurance market in Latin America, it is still underdeveloped. As a percentage of its GDP, it ranks number 11 globally, with this figure standing at 1.8 percent, according to Marsh.

Mexico has strict a regulatory environment. Insurers cannot operate in the country without being licensed by the Ministry of Treasury. Consequently, non-admitted foreign insurers are generally prevented from covering risks in Mexico, according to a 2012 report from Zurich, The Role of Insurance in Latin America.

“Marsh finds Chile to be an attractive business environment and considers it one of the top business-friendly environments in the world.”

Reinsurance is also restricted. Only insurance companies that are authorised to undertake reinsurance operations, and foreign reinsurers that are registered with the General Registry of Foreign Reinsurers, can operate as reinsurers in Mexico. According to Mexican law, foreign reinsurers are not eligible for registration unless they provide evidence of their solvency and stability in the form of a certificate issued by an internationally recognised rating company.

Despite this, the insurance market in Mexico is relatively open to foreign players compared with other Latin American markets, according to a report in the June 2012 issue of KPMG’s iCircle magazine.

This is established from the fact that foreign subsidiaries account for a 59 percent market share of direct premiums, while Mexican-owned insurers contributed the remaining 41 percent, according to KPMG.

In addition, the Mexico insurance market is dominated by 10 big players. The foremost of these is Metlife Mexico, which had a 17 percent market share in 2010, according to a report by Mapfre.

Chile

Chile presents international insurers and reinsurers with signifi cant opportunities for growth. Marsh finds Chile to be an attractive business environment and considers it one of the top business-friendly environments in the world. The country’s insurance industry is part of that and the high level of trained professionals and transparent regulations contribute to the feeling of stability in the country.

According to iCircle, 60 percent of the Chilean market is made up of life insurance. By 2050, Chile is expected to have the largest percentage of old-age citizens in the South American region. Despite this, the report notes that a decrease in the life insurance segment and poor investment returns adversely affected the industry’s margins in 2011.

The Chilean insurance market is consolidated, with the top 10 players accounting for more than half (58.8 percent) of the market share. The biggest industry player is MetLife. The life insurance segment is also dominated by MetLife, with a 16.4 percent market share, while the nonlife insurance segment is dominated by RSA Seguros, with a 14.4 percent market share, according to iCircle.

Chile suffered an 8.8 magnitude earthquake on February 27, 2010, and as a result much of 2011 was spent rebuilding parts of the country that were affected. It is estimated that the earthquake cost a total of $30 billion. After the earthquake, 225,000 insurance claims were filed, of which 80 percent were related to damage claimed for homes. However, the strong involvement of foreign reinsurance companies helped limit the losses to an extent, reports iCircle.

Also a result, in the fourth quarter of 2011, property catastrophe lines were still increasing by up to 10 percent, according to the Marsh report.

Chile is experiencing growth over most lines of business. A report by Mapfre, The Latin American Insurance Market 2010–2011, found that the Chilean insurance market posted premium volume of €6,200 million in 2010. This represented an increase of 18.2 percent, compared to -1.7 percent in 2009, and stems from greater activity in both life and non-life insurance.

In the life segment premium revenue was €3,752 million, a rise of 19.8 percent, compared to -1.8 percent in 2009. This rise can be explained mainly by the major increase in sales of life annuities, in particular old age and disability annuities. The rise in old age annuities stems from the recovery of pension funds after the financial crisis was overcome, while the improvement in disability annuities is due fundamentally to a rise in premiums.

The non-life insurance sector posted revenues of €2,448 million in 2010. This represented a 15.9 percent increase on the previous year (-1.6 percent in 2009). Except for multi-peril, all lines of business rose in 2010.

The KPMG report in iCircle found that the insurance premium penetration rate of 4 percent is one of the highest in the region.

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