Alternative capacity is having an indirect impact

The influx of alternative capacity into some parts of the reinsurance markets globally is having little effect on Latin America, according to Gino Smith, regional chief underwriter of XL’s reinsurance operations in Latin America, who argues that the very different market dynamics mean the business model cannot be easily replicated.

“Product innovation in mature markets is being spurred by the need for companies to increase revenue in a competitive rating environment and a market flooded with traditional and non-traditional risk transfer alternatives,” Smith said.

“It is simple economics – continued increases in capacity accompanied by no material increase in insurance penetration is leading to a reduction in prices. It leads capacity providers to become more creative given that price is a major determinant of who makes the final sale.

“The alternative capital business model cannot be easily replicated in Latin America given the low insurance penetration rates and high investment yields. Traditional reinsurance products are still a very attractive buy for our insurance clients. This is precisely why international companies see Latin America as a growth engine and as an area where they can continue to leverage their global expertise, export their traditional product lines and replicate their business model overseas.”

He said that as the economies in Latin America improve and the population moves up the socio-economic ladder, insurance penetration rates will increase. Consequently, more opportunities for growth will be created.

“More homes and factories will be built and more insurance will be required. We see cat reinsurance as a major vehicle for growth,” he said. “Chile, Colombia, Mexico and Peru are driving the demand for cat reinsurance in the region given their size, insurance penetration and expected growth. We have targeted these countries for growth and are focusing on building a diversified cat excess portfolio across the region.”

He said alternative capacity is having some impact on pricing – but indirectly. As more capacity floods mature markets leading to limited organic growth opportunities, companies are either forced to grow through mergers and acquisitions or recoup lost revenue by expanding into other territories such as Latin America.

“This, in turn, increases the supply of reinsurance in the region and puts pressure on rates. This is where our opportunity lies. XL has been in the region for over 15 years and during this period we have established strong relationships with clients and brokers. We have supported our clients through the good and bad years and helped them maintain business continuity. This is our competitive advantage and places us in an excellent position to capitalize on the growth opportunities available throughout the region.”

He believes that emerging markets as a whole are taking on increased importance within international reinsurer global portfolios. He notes a high correlation between economic growth rates and insurance penetration rates. Countries like Panama, Peru, Chile, Colombia and Bolivia, for example, saw GDP growth rates in 2012 that exceeded the regional average of 3.5 percent, he said.

“As penetration rates increase, global capacity will naturally migrate to areas where the demand exists” Smith said. “We are ideally placed to take advantage of this trend. We have worked hard over the years to understand our clients’ business needs and are known throughout the region for our solution-based approach. We have three local offices in Latin America and have built teams comprised of people who think globally and act locally. We have built extensive client networks that enable us to quickly identify and meet market needs and trends.”

In terms of where he anticipates the biggest growth, he said XL has projected its five year revenue growth primarily in Chile, Colombia, Mexico and Peru given the sheer size of their insurance markets and anticipated economic growth. “Having said this, diversification is a key part of our strategy for the region and we have also targeted Central America and the Spanish speaking Caribbean for growth,” he said.