A land of opportunity and challenges

It is a 10-hour flight between Gen Re’s two Latin American offices in Sao Paulo and Mexico City, a distance that highlights the fallacy of believing Latin America is one market. Clearly, this is not the case.

"In the last 10 years the Latin American insurance market has grown from approximately $42 billion to around $167 billion with an average annual growth of 17 percent."

There are enormous differences between countries in their sizes, economic development, insurance attitudes and even languages—and not just between Portuguese-speaking Brazil and the Spanish-speaking countries but between the latter, too. In treating Brazil and El Salvador, or Chile and Honduras as one market I am sure to make mistakes and for this I apologise in advance.

In the last 10 years the Latin American insurance market has grown from approximately $42 billion to around $167 billion with an average annual growth of 17 percent. Despite this growth rate, eyed enviously by Europeans and North Americans alike, Latin America still accounts for only 4 percent of global insurance premium. This is well short of its percentage of worldwide population or GDP, both of which stand at approximately 8.5 percent.

This relatively low average insurance penetration—2.7 percent—together with improving macroeconomic conditions and greater political stability, has led to insurance and reinsurance companies’ renewed and increasing interest in the region. This is exemplified most recently by ACE’s purchase of the large risk business of ITAU in Brazil, or AXA’s acquisition of Colombian company Colpatria.

Having been in the market for almost 40 years—our Mexico office opened in 1976—we would suggest that the insurance industry as a whole must be mindful of the number of challenges that need to be addressed if we are going to turn the many opportunities the market presents into solid growth and long-term profit.

Firstly, we need to work with governments, associations and other financial market participants to ensure greater access to the financial system and further develop an insurance culture. Central to this will be the introduction of products that are easy to understand and easy to distribute in order to reach members of the new middle class that has emerged over the last 20 years and has never purchased insurance before.

Once this has been accomplished the industry can continue to develop micro-insurance products to reach out to those whose incomes are still minimal so that as they move up the income scale they are already familiar with buying insurance products. Technological innovation potentially provides many new avenues for us to reach this goal.

Second, we need to ensure an adequate regulatory framework. As an example, Mexico is leading Latin America with a push to achieve a Solvency II equivalent. We welcome regulatory developments that help to create a solid insurance and reinsurance market but would ask regulators to be mindful of the effort and cost involved in meeting new requirements. We suggest that implementation needs to be phased appropriately and industry views taken into account to avoid over-engineering.

"we need governments and regulators to continue to foster their respective markets by opening them up and reducing protectionist measures as well as improving their legal systems."

Remaining on a legal and regulatory tack, we need to continue to develop obligatory insurance products and improve existing ones such as the various SOAT-type covers (obligatory motor accident insurance) into a true third-party motor liability cover to ensure adequate cover for those involved in accidents. This will not only help ease the economic burden for the victims and their families but also help the insurance culture to develop.

In addition, we need governments and regulators to continue to foster their respective markets by opening them up and reducing protectionist measures as well as improving their legal systems. We would suggest Brazil needs to continue to liberalise its reinsurance market and Argentina needs to open its market once again. The continuation of these efforts would improve insurance penetration, through greater product availability and access to sufficient insurance and reinsurance capital to support the increasing growth and investment in the region.

Third, the industry needs to get better at training and developing its people. All too often companies resort to poaching talent rather than attempting to nurture their own. We welcome the efforts of industry organisations such as Funenseg in Brazil, Fasecolda/INS in Colombia, and the Escuela de Seguros in Chile, but believe individual companies must develop internal programmes to support the professional development of their employees.

Data quality

Finally, but no less important, come some underwriting challenges. The first, in our opinion, is a need for improved underwriting quality with regard to pricing and risk selection. A requirement for this improvement is a collaborative effort to increase the quality and quantity of data available to market participants.

Access to more and better data would enable insurers and reinsurers to develop more sophisticated rating engines for all classes. This would be especially valuable in motor and property lines (given their relative market importance). Furthermore, in many cat-exposed markets improved data would help ensure that the best science available is put to good use when pricing the original risk rather than using modelling tools solely at the cat reinsurance purchasing stage

The second underwriting challenge stems from the very large losses that the Latin American insurance market can suffer and that we need to be prepared for. I speak not just to the challenge of market profitability but also to how to physically deal with resulting claims in a fair and efficient manner. In the property-cat arena, the Chilean earthquake of 2010 gives a good example of these challenges. It highlights the size of loss that a ‘non-peak’ cat market can incur (approximately $8 billion), consuming the profits made in the market over the previous 20 years, and is also a great example of efficient and fair claims handling.

Another example would be a repeat of the Mexico City earthquake of 1985 which we estimate could cause an insured loss well in excess of $10 billion. However, property and property-cat are not the only areas where large claims are possible, as exemplified by surety losses related to DIAN (the Colombian tax authority) or Brazil’s Grupo Bertin.

To conclude, Latin America presents a significant opportunity for local and international insurers and reinsurers, not just in the large regional heavyweights of Brazil and Mexico but also in Colombia, Peru and other smaller markets with solid economic development. But, this opportunity also comes with a number of challenges that we as an industry need to address to ensure insurance continues to provide its economic and societal benefits while rewarding the capital providers adequately. At Gen Re we remain available to our customers to help them navigate these challenges.