15 November 2017 Insurance

Re/insurers prepare for growth in LatAm

High growth potential for the Latin American insurance market has attracted global re/insurers and brokers to the region through mergers & acquisitions (M&A), despite weak recent economic growth, according to consultancy firm EY.

There have been more than $12 billion in M&A transactions and more than 57 deals since 2011, according to the EY 2017 Latin American Insurance Outlook.

In 2016, for example, Aon announced a deal to acquire Admix in order to build its position in the growing private health insurance market.

In 2015, AXA acquired SulAmérica’s large risks business for €40 million. The acquisition is set to fuel AXA’s expansion in the Brazilian market and increase its growth prospects.

In 2014, ACE signed an agreement to acquire Itaú Seguros Soluções Corporativas from Itaú Unibanco Holding for $686 million, making ACE the largest commercial P&C insurer in Latin America.

Despite the dramatic economic downturn in Latin America in the past three years, insurers in the region have remained pro table and are poised for growth.

Over the past few years, recessionary conditions have weighed heavily on key markets, particularly Brazil, Argentina and Venezuela.

In 2016, gross domestic product (GDP) in Latin America shrank 0.7% year on year, according to data provider FocusEconomics.

The insurance sector has weathered the economic storm in the region relatively well, although premium growth has varied widely across countries. For example, premium growth in Argentina has risen sharply over the years, increasing by 41% between 2014 and 2015, due mainly to inflation.

In contrast, slowing auto-insurance sales and increasing unemployment in Brazil have caused premium growth to fall between 2014 and 2016, from 11% to an estimated 10.3%. With its economy in crisis, Venezuela’s premiums dropped by more than 25% in 2015, and they are likely to fall further because of lingering economic and political concerns.

However, the regional economic downturn is expected to reverse in 2017. A turnaround in commodity prices on both fuel and non-fuel products will help drive that recovery.

In 2017, the Latin America region is expected to grow GDP by 1.4% and in 2018 by 2.4%, according to FocusEconomics forecasts.

With economic conditions likely to improve, international players may reinforce their positions, particularly in key markets such as Brazil.

The economic malaise of the past three years is expected to lift in Brazil, which represents about half of the insurance market in the region. A rise in disposable income will encourage consumers to insure more cars and homes and invest in life and health products, providing a boost to insurance markets. At the same time, new infrastructure and energy projects expected in some countries will bolster demand for commercial products.

The success of the insurance sector in Latin America in the past has been historically tied to high interest rates, rising disposable incomes and growing market penetration. While there are sharp regional variations in economic conditions and demand for insurance products, one common dominator is an underserved market in the personal and the commercial space.

Although insurance growth is relatively high in Latin America, most of the population is still uninsured. Insurance accounts for less than 3% of GDP in countries such as Mexico and Colombia. It is only moderately higher in Brazil and Chile.

Low penetration rates are a result of several factors. First, most of the population is low-income and unbanked, and not viable consumers of insurance products. Second, while the middle class is growing, many of these potential customers are still accumulating household assets and do not see the value of insurance. Finally, distributing and selling products at an affordable price point has been challenging.

All this is beginning to change. Indeed, almost half of insurers not currently serving the low-income market are planning to offer mass-market products, while 33% plan to offer microinsurance, according to the Microinsurance Network, an industry group.

Bancassurance is providing the greatest access to microinsurance to date. As most insurance products are purchased through financial institutions, bringing people into the financial system is ultimately the key to increasing insurance penetration.

At the same time, firms are developing third-party distribution models to connect with individuals who are neither financially connected to the banking system nor digitally connected. These include small brokers and banking correspondents.

Insurers will accelerate digital transformation to drive efficiencies, attract tech-savvy consumers and expand market reach as the economies in Latin America recover, according to EY.

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