11 November 2013 Insurance

Latin America is 'the place to be'

Latin America is now ‘the place to be’ for many international insurers and reinsurers which are attracted by the region’s bullish growth prospects compared with other parts of the world, according to Vyvienne Wade, managing director of Latin America, Canada, Europe and the Caribbean at Arthur J. Gallagher.

“It is seen as a strong growth option, almost ‘the place to be’,” she said. “We expect to see a number of new entrants emerge and, just as significantly, a strengthening of some of the recent arrivals’ operations.

“One important dynamic in Latin America and the Caribbean is the anticipated surge in investment in infrastructure, meaning global reinsurers are lining up to offer capacity for major construction projects.  This will have a dampening effect on rates.”

Matt FitzGerald, managing director of reinsurance at Arthur J. Gallagher, agrees, also noting that another driving force is changing regulations and attitudes to insurance across the region.

“As regulation eases and insurance penetration grows across the region, reinsurers will come in their numbers to access new premiums,” FitzGerald said. “Also, with the capital markets consuming so much of the traditional reinsurers’ business, particularly US natural catastrophe, they are actively seeking fresh revenue streams from geographic areas where these new competitors are not as structurally well positioned.”

Potential price reductions will undoubtedly be a big talking point at FIDES, FitzGerald said, along with the impact of capital markets inflows. “Those less familiar in this area are busy getting up to speed on the products.”

Wade agreed that pricing will be an issue, along with “the profitability of carriers, increased cedant retention levels, new reinsurer entrants, broker acquisitions and new products”.

Wade said the dynamic between pricing trends globally in reinsurance and Latin America is an interesting one.

“Undoubtedly there is significant global pricing linkage when it comes to reinsurance and retrocession, but variations also continue to exist both within as well as between regions. However, these may be more muted than might be expected by the levelling nature of global influence. For example, Chile’s recent claims experience did not have a marked effect on the region,” she said.

“Overall, the excess of traditional global reinsurance capacity has resulted in stable prices and slight reductions throughout Latin America. Generally, benign worldwide catastrophe activity during 2013 has also helped keep prices stable in the region.

“The fact that Latin America still enjoys a favourable position, when viewed in the context of the global economic situation, has also seen it receive ‘priority’ status from reinsurers, who are opening – or reopening – operations within different countries and/or in Miami.

“Another trend has seen reinsurers becoming increasingly interested in getting closer to the end clients and understanding their markets better, while the larger reinsurance companies are also becoming much more involved with government to provide sophisticated catastrophe solutions.”

In terms of the impact that the influx of alternative capital into the global reinsurance markets is having on Latin America, Wade said it is limited at present. “We do not anticipate a major trend towards use of alternative risk structures, despite growing interest among larger clients in exploring captive solutions.  We do, however, see increased levels of traditional reinsurance capacity being attracted to Latin America and away from some more mature markets,” she said.

FitzGerald agreed that the effect is limited. He added that the difficulty that capital markets face in Latin America is that the modelling of natural catastrophe perils is not yet advanced enough.

“Alternative capital also tends to deal in zones with a price of 3 percent or more rate-on-line, due to the cash collateral nature of the security. Much of Latin America’s capacity is earthquake risk (where cedants cannot buy enough) and is written at sub 2 percent rate-on-line,” he said.

“However, the new capital may put some pressure on the more primary layers and, with the knowledge of capital markets spreading through the region, I don’t think it will be long before we see a cat bond issued in Peru or Chile. To date, Mexico has been the leader in the region at using alternative capital.”

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