26 October 2015 News

Size and analytics key to LatAm success

With competitive conditions now a major issue all over the LatAm region, merger and acquisition (M&A) activity is increasingly forcing out smaller insurance players, says Salvatore Orlando, head of high growth markets for PartnerRe.

“Size is becoming so important and purely local insurers are finding it difficult to offer the same service level as multinational companies or larger national companies,” he said. “M&As continue to be important in many countries in LatAm, particularly Brazil, Colombia and Mexico. That means that only a few local insurers are remaining in play.”

Meanwhile, reinsurance rates continue to be under pressure—to a point that Orlando believes is unsustainable, with an increasingly unbalanced relationship between exposure and premium in all LatAm countries causing a number of insurance companies to announce poor results.

“This situation isn’t expected to turn any time soon, barring a large event. Yet the fact remains that there’s more to buying reinsurance than getting the lowest price. What’s of utmost importance is being sure that the reinsurer handling a renewal will be around to pay the claims after an event,” he said.

On a more positive note, he said the region continues to present attractive growth potential. “We are talking about single-digit growth, which compared to the slowdown in mature markets is still very attractive. However, the risks and opportunities are becoming more complex based on market situations in specific countries.”

Latin America is a diverse region with marked differences between large countries such as Mexico, Brazil and Colombia and other areas where the political and economic situation is becoming more complex. The country-specific regulations in many of these countries are changing, creating a heterogeneous environment across LatAm and limiting cession of specific lines of business abroad, said Orlando.

“In this context, what’s setting certain reinsurers apart from the pack is a high level of responsiveness combined with the ability to provide expertise in the increasingly complex local legal and regulatory environment—all this on top of effective solutions that meet the client’s needs.”

“It is interesting to see that while the potential initial public offering of IRB Brazil has started to liberalise the insurance market, Argentina and Ecuador are trying to put more emphasis on keeping the reinsurance premiums in their countries.”

The trend towards protectionism is also common in other high growth markets, he added—and wherever it happens it creates the need to ensure that politicians and regulators understand the importance of reinsurance and of diversification.

“The protectionist tendency starts from a political desire to keep more premium inside the country, often losing sight of the fact that international reinsurers contribute significantly to rebuilding local economies following major events. As an example, the 2010 Chilean earthquake resulted in $8 billion in losses, 95 percent of which was paid by reinsurers outside Chile.”

The need for greater understanding is also seen in the fact that many ceding companies in high growth markets currently lack the models and analytics that can cultivate a more sophisticated approach to buying reinsurance. However, Orlando says, this situation is changing in LatAm, with analytics becoming more widely used.

“Lessons also come from events in other high growth markets such as the Tianjin explosion in August which tragically highlighted the need for coverages to be more closely aligned to the accumulation of risks and wealth.”

Despite its challenges, the region is ripe with opportunities. Orlando perceives particular areas of growth in motor insurance—driven by the growing middle class—plus liability and life coverages. Health and mortgage business lines are also increasingly in demand.

“From a reinsurance point of view we are offering capital relief and optimisation solutions to help local reinsurers face the increased burden of Solvency II-type regulations,” he added.

A key difference between mature markets and high growth markets is that the high growth markets still look to their reinsurers for advice in setting up their reinsurance programmes, said Orlando.

“They also need capacity, meaning that capital is an issue and reinsurers are addressing a clear need that is essential in high growth market.”

He also noted that LatAm is generally still not in a position to take advantage of capacity from the capital markets because most of its countries do not have the models needed to be able to negotiate terms and conditions with capital markets.

“This is likely to change in the next couple of years as companies continue to improve on the technology and level of information they are able to provide.”

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