Re/insurers face growth opportunities in Latin America

In Brazil, further liberalisation of the reinsurance market offers growth opportunities for the sector. Brazil’s state-controlled IRB-Brasil Resseguros (IRB) had a monopoly over the Brazilian reinsurance market until 2007, when Congress ‘opened’ the market to international reinsurers, classifying the IRB as a local reinsurer, law firm Holman Fenwick Willan (HFW) says in a report titled Brazilian Regulatory Changes good for International Reinsurers. But the market liberalisation continues.

Under legislation passed in 2015, Brazil has now in place a five-year time frame for scaling down the intra-group prohibition and the mandatory cession rule.

According to the legislation, the maximum limit for intra-group transfers, namely from an insurer or local reinsurer to a company belonging to the same financial conglomerate, will gradually be increased to 75 percent by 2020 from 20 percent, HFW explains.

Also, applicable percentage of each facultative or treaty reinsurance cession to be placed by insurers with local reinsurers is to be gradually reduced to 15 percent from 40 percent, allowing foreign reinsurers to underwrite more business.

“It’s a gradual drive to a much freer market. This has been very well received by international markets,” says Carlos Caputo, CEO of Markel Latin America.

Latin America’s largest economy is, however, not an easy market for re/insurers. Since the liberalisation of the reinsurance sector started a few years ago and helped by strong economic growth, the country became a very competitive re/insurance market as international re/insurers piled in, Caputo explains.

“In some classes of business you are already seeing very low or even negative technical margins,” he says.

While the country is currently experiencing a recession, prospects are brightening up as the new government under President Michel Temer is expected to introduce reforms which are set to boost investors’ confidence, Caputo adds.

Brazil’s gross domestic product is likely to shrink by 3.14 percent in 2016, according to a recent central bank survey among economists, following a contraction of 3.80 percent in 2015. But for 2017 experts forecast an economic expansion of 1.30 percent.

Demand for re/insurance in Brazil is likely to come from financial lines such as directors and officers (D&O) liability insurance, professional indemnity liability insurance and errors and omissions insurance liabilities, driven by cases such as the investigations involving a corruption scandal around the country’s state owned oil company Petrobras, Caputo says.

According to reports, Petrobras’ directors collaborated with contractors including large construction companies to line their own pockets. Dozens of businesspeople have been tried for inflating public sector contracts and misappropriating around $13 billion from the oil company, according to news articles.

“Although there haven’t yet been many claims paid out yet, there is a lot of speculation about what will be the final effects of all these investigations on the D&O coverage market,” Caputo says.

Markel itself is looking into ways to expand its insurance operations in Brazil. Specialised in niche products, Markel is exploring which products are most suitable for the Brazilian market and for Latin America in general.

As part of its expansion strategy, Markel hired Arjan Van de Wall as director of development, Americas. In his role, Van de Wall will assist with business growth across the US, Canada and Latin America, developing strategic broker relationships, targeting large customer opportunities and broadening the product range.

When looking for re/insurance growth elsewhere in Latin America, Colombia is also in the sights of the industry. For Caputo, this is largely due to a peace agreement signed between the Colombian government and the country’s largest rebel group, ending five decades of fighting which resulted in some 220,000 lives lost and more than five million displaced, according to news reports.

“It’s hoped that the agreement will boost economic growth in Colombia which will reflect on the insurance market,” Caputo says. Already prior to the agreement, international groups have started investing in Colombia, he notes.

Colombia’s gross domestic product is forecast to expand 2.3% in 2016, and accelerate to 2.8 percent in 2017, according to a panel of economists by FocusEconomics.

A NEW BROOM

Argentina is another country where expected economic growth is likely to boost insurance and reinsurance demand. This is due to structural reforms by the new government under Mauricio Macri, who came to power in last year’s elections, Caputo says.

Macri’s government lifted controls on currency exchange and transfer rules, providing a degree of welcomed certainty by foreign re/insurers involved in Argentina, Hernán Cipriotti and Daniel Baron from US law firm Zelle LLP argue in Argentina’s New Leadership and How it Affects Insurance.

Difficulties involving currency issues in money transfers relating to reinsurance contracts (premium and/or claims payments), have disappeared due to the new exchange policies in place, the authors explain.

Among immediate fiscal advancements undertaken by the new administration, Argentina paid its “holdout” creditors approximately $9.3 billion—an integral part of a strategy to normalise relations with international markets. This act put an end to a 15-year-old judicial dispute.

An easier operating environment, increased demand for re/insurance, and an improving regulatory climate make Argentina an insurance location to watch, Cipriotti and Baron write.

In light of the new government’s approach to open markets, local insurers and onlooking international reinsurers are expecting a gradual transition towards a free reinsurance market, the authors say.

Monetary and fiscal policies implemented by the new administration will foster economic growth of about 1.9 percent in 2017 and 3 percent in 2018, the World Bank estimates.

Markel is among re/insurers looking to take advantage of growth opportunities in Argentina. “We are evaluating all possibilities, we are talking to people, finding out which opportunities there are, but we still haven’t made a definitive decision,” Caputo says.