Global insurers have reduced market’s potential for reinsurers

The increasing presence and competitive nature of global insurers in the Latin American insurance markets has served to actually decrease the market’s potential for reinsurers as an increasing portion of premiums are being retained by these groups or placed through bigger international reinsurance deals.

That is the view of Ingrid Carlou, chief executive of Patria Re, who said that over the last ten years, globalization has meant that almost 50 percent of insurance premiums are now written by companies linked to international groups.

“This has also decreased the potential of the Latin American reinsurance market because these premiums are now being retained, to a larger extent, by the insurers or their groups, or they are placed through global or regional treaties making access to country specific risks more difficult,” he said.

She said this increased participation of international players in the region is also being driven, in part, by the influx of alternative capacity into the US and Europe. She notes that most Latin American markets have not reached a seize that allows easy access to international capital markets and securitization and the use of insurance-linked securities in the region has so far been limited to a cat bond being issued in Mexico.

“But the region is not immune to developments elsewhere. Securitization of re/insurance is displacing capacity of large players who are seeking to substitute the lost premium,” she said.

This trend has also led to price reductions in some markets – something that will be a big talking point at FIDES.

“The insurance market’s main concern is the rapid deterioration of operational margins driven by heightened competition due to the penetration of international interests and to the growing quantity of undisciplined reinsurance,” Carlou said. “Another issue will be how to grow penetration´s rate and avoid destructive competition.”

On the reinsurance side specifically, she said that the facultative market has been soft since 2004 and thanks to a number of trends including increased retentions, the growth of co-insurance, and more competition, it is far from seeing any change.

Despite this competition form global players, however, a group of traditional markets still have a leading role amongst the national and regional reinsurers, he said.

Returning to the overall influence the influx of alternative capital into global reinsurance markets is having on Latin America, she compares its effect to the consequences that colonization in North America and the subsequent Gold Rush had on the indigenous ethnic groups.

“Many tribes were wiped out by disease before any white man ever put a foot on their hunting grounds. Others were pushed into Northern Mexico and the South West by migrating groups that were being displaced by the pale faces,” he said. “Alternative capital has so far had a very limited access to Latin American risks but they are coming this way.”

The extent to which many markets in the region will grow in the coming years will very much depend on how the current financial crisis unravels, what the effects of limiting quantitative easing will be and what will happen when the US starts tapering liquidity on interest rates, Carlou said. “We already saw some of the effects of the short lived wish to do this and there is a general feeling we should see more of it next year.”

She also adds that the political and social environments of countries must not be forgotten, and these cannot always be harnessed in a way to serve economic and trade interests.

“The region is plagued with problems that have not been resolved, from poor education to unequal wealth distribution and downright misery,” she said.

Yet she is positive on the prospects of some markets. “Latin America is without a doubt well placed for growth and if everything goes well I would feel Chile, Peru, Colombia and Mexico should play an important role,” she said.

“Brazil is going through a bumpy period but should manage a good recovery if they can consolidate the growth they have seen over the last decade. Central America as a block could come up with surprising results.”