Rates, cats and data are critical talking points

Rates, catastrophe risks and the quality of data will be the three biggest talking points at FIDES 2013, according to Mike Hughes, chief executive of Aon Benfield Latin America.

“The first will always be rates – especially the likely trends in the market next year,” Hughes said. “Secondly, I think Mexico will be under discussion in terms of the floods, the potential for loss development, and how that will impact reinsurance pricing.

“The third discussion point will be data quality and how it varies by region. In our view, the better the client’s quality of data, the easier it is to define the level of cover required and, in general terms, the better the rate we are able to achieve on their behalf. The ability to collect and analyse data effectively is a huge differentiator for Aon Benfield.”

Hughes said the trends influencing reinsurers globally are also present in the Latin American markets. But many of these issues are enhancing the importance of the broker – a good thing for Aon Benfield in many ways.

“Multinational insurers throughout Latin America are demanding the same advanced analytical services they receive in more mature insurance markets such as the US,” Hughes said.

“For Aon Benfield, our integrated network means we can deliver resources globally, but for the smaller, local brokers, it is difficult to compete in terms of being able to offer solutions including specialist catastrophe and financial modelling.

“In terms of rates, reinsurance in Latin America can be very cost effective, and the market is becoming increasingly sophisticated and increasingly intermediated. Local insurers, as well as the multinationals, find it cost effective to employ the services of an intermediary in order to reduce their own costs in developing new technology, and to give them access to a wide range of global reinsurance capital.

“Our role as reinsurance intermediary has changed. It is no longer just about the transaction; we have to present our clients with opportunities to grow. It’s a far more supportive and consultative role than it has been in the past.”

The market is very competitive at the moment as many global reinsurers increasingly target the markets in Latin America. But another consequence of this is that alternative capital has so far failed to gain any traction in the region.

“There is an aggressive push for premium growth and the large global reinsurers are now tending to write lower down the programs,” Hughes said. “This creates a competitive environment which is forces the incumbent to write even further down the program to gain more premium. Has the total available capital increased? It’s difficult to say but there’s definitely more available at the middle and at the bottom of programmes.

“But this means that reinsurance in Latin America is already very cost effective, and so we find that alternative capital, in the form of products such as catastrophe bonds, is not currently as prevalent in the region compared to markets such as the US. The returns commanded by Latin America reinsurers are below the returns threshold demanded by providers of third party capital, so the traditional reinsurance product tends to dominate.

“I can see this situation changing if traditional rates increase or perhaps interest rates decrease. There is slightly more interest in sidecars but even they are financed more by reinsurance companies than by alternative investment capital.”

Hughes is bullish on growth in the region. From a reinsurance perspective, he believes Brazil will continue to grow, but how that will flow through to other countries he is less certain. He also anticipates that Columbia will grow as will Peru as they have both signed a free trade agreement with the US. He adds that Mexico will be interesting due to regulatory considerations.”

But he also notes that increased participation by multinational insurers in the region is leading to less reinsurance being bought in some areas.

“In the insurance market in several regions in Latin America, you have multinationals on a very aggressive acquisition path, and the more local companies bought by the multinationals, the less reinsurance is demanded because the multinationals cede the business into their global and regional programmes,” he explains.

“That just happened in Mexico, where two acquisitions resulted in two reinsurance programmes leaving the market due to their consolidation into global programmes. If you look at Chile, around 65 percent to 70 percent of the insurance companies are now foreign-owned.

“As you work your way round the region, every single multinational – RSA, Zurich, Allianz, AIG, ACE – has a clearly stated intention to grow, and you have to balance that against local growth. There is a definite gap between the amount of written premium and the amount that is ceded.”