Economic recovery in LatAm boosts re/insurance growth

An economic contraction in the Latin American region during 2016 of 0.7 percent, according to data provider FocusEconomics, has impacted particularly the non-life business which is strongly linked to the economic development and to the disposable income of households and businesses. The non-life business contracted 3.1 percent across the board in 2016 in dollar terms.

Motor as the main segment in non-life, representing 19.2 percent of total premium, contracted 4.9 percent year on year.

Latin America is going through a difficult moment of recovery, said Luis Sonville, managing director at Talbot Underwriting. But the outlook is improving.

In 2017, GDP is expected to expand by 1.4 percent, in 2018 by 2.4 percent and in 2019 by 2.7 percent, according to estimates by FocusEconomics.

The recovery is going to boost demand for construction insurance products, Sonville said. He also sees opportunities in the small and medium-sized enterprise (SME) business.

As major economies recover, the life business is expected to see particularly fast growth. In the non-life business, the growth pace may be more moderate.

“What we see in many countries and what we foresee in Brazil is that the share of the life business will be growing faster than the non-life, even though both will be growing,” said Manuel Aguilera, general manager MAPFRE Economic Research.

At the same time, experts believe that technology will help to reduce the significant protection gap in the Latin American region.

Despite the economic contraction, in 2016 the Latin American region has seen overall premium growth of 1.2 percent, the first expansion since 2013, Aguilera said. The improvement has been driven mainly by a recovery of the Brazilian and Argentinian economies, he explained.

The expected economic expansion in the Latin American economies in 2017 and the following years is set to create growth opportunities for the insurance industry, which is expected to expand at a faster pace than the economies overall, Aguilera suggested.

In Mexico, the economy is expected to grow by around 2.4 percent in 2017, and in 2018 GDP growth is likely to be at around 2.2 percent. The insurance industry of the country, however, is expected to grow at around 6-7 percent annually in the coming years, according to MAPFRE.

While improvements in economic activity boosts non-life insurance demand in Latin America following investments for example in infrastructure, the increase in personal income and wealth of the population will drive demand for life products even faster, Aguilera said. He referred not only to demand for traditional death cover, but also for life insurance as an alternative mechanism to manage savings.

Bermuda-based PartnerRe is one of the companies seeking growth in the life & health business in Latin America. The firm sees opportunities particularly in relation to private pension plans and the risks associated with a growing middle class. Driven by economic growth, an expanding middle class is looking for risk management solutions, said Humberto Cabrera, PartnerRe head of Latin America. In addition, risks associated to infrastructure projects will drive demand for reinsurance. Partner Re is optimistic about the growth potential in surety, construction, property, cat protection as well as marine, Cabrera said.

Premium income in Latin America grew 1.2 percent to $146.7 billion in 2016, of which 54.8 percent was non-life and 45.2 percent life business, according to a report by Mapfre Foundation titled “Elements for the insurance expansion in Latin America”.

LatAm becomes more sophisticated

Phil Mayes, senior class underwriter at Talbot, believes that cyber is one of the key growth areas in the Latin American region. “What we will see in Latin America over the next 12 to 24 months is an assessment by insureds and a realisation that they have a genuine exposure,” Mayes said. “The challenge will be to ensure that the policy is appropriate for the client,” he noted.

Chaucer, which operates as a reinsurer in Latin America from its London and Miami offices, sees a similar trend developing in the cyber business.

Clients have been buying some form of embedded cyber coverage within their property programmes or energy programmes, but once they have properly recognised the risk they tend to look to buy a wider standalone policy, said Edward Lines, active underwriter Latin America at Chaucer.

“We are seeing the exposure management models improve for Latin America,” Lines noted.

Terrorism is another line of business which is developing into a standalone cover in Latin America.

After terrorism risk had been broadly excluded from policies in Latin America following the 9/11 attacks in the US, the risk had slowly been included again in property contracts. But now, underwriters are increasingly demanding standalone terrorism cover, Lines said.

“We are seeing new opportunities for terrorism business in many markets where it used to be included in property all risks policies,” Uwe Fischer, Chaucer general manager, explained.

Jorge Beltran, executive vice president & head of treaty at Validus Reinsurance, added that

the industry in Latin America is improving the cat modelling and data quality. Reinsurers are receiving more data from cedants, beyond the usual on pricing, rates and commissions, Beltran said. The data is helping reinsurers to more accurately assess the risks cedants carry in their portfolios.

Tough underwriting environment

But the underwriting environment is expected to remain tough in Latin America in the catastrophe market, despite the fact that major losses in the third quarter of 2017 are expected to result in rate increases.

Natural catastrophes such as hurricanes Harvey, Irma and Maria as well as earthquakes in Mexico may result in total insured losses of around $100 billion, according to estimates. A significant share of the losses from these hurricanes will be coming from the Caribbean region.

Nat cat rates have already been inadequate before the large losses in the third quarter, Lines noted.

“The industry has pushed itself in a position where we really aren’t charging any catastrophe premium,” Lines said. “The catastrophe premium we are charging is needed to pay for attritional losses,” he explained.

The London insurers and reinsurers for the Latin American region were not forecasting a particularly healthy profit for 2017 even if there hadn’t been any catastrophes, Lines noted.

Excess capacity in the market may diminish the potential for rate increases in property/casualty. Rates in nat cat have been under pressure for several years as investors targeted the market in search for yield. Despite the losses and low rates, the nat cat sector may remain attractive to investors, limiting the scope for rate increases.

“The third quarter losses are a market changing event, not a market turning event,” Lines said.

With a 5 percent rate increase the business would get back to levels seen at the beginning of 2017; a 10 percent increase would lead to 2016 price levels, Lines said. But event this might not be sufficient. “I think we need to get back to 2014 prices,” Lines noted.

There will opportunities to grow the portfolio following the third quarter nat cat events, Lines said. But while impacted areas and regions will see most of the price increases, rates elsewhere in the world will need to reflect the losses from the Mexico earthquakes of the third quarter and the Caribbean hurricanes as well, Lines said.

Theoretically, Latin America also offers great opportunities for growth as insurance penetration remains comparatively low. Insurance accounts for less than 3 percent of gross domestic product (GDP) in countries such as Mexico and Colombia and it is only moderately higher in Brazil and Chile, according to consultancy firm EY.

But closing the protection gap in the region will depend a lot on the development of the middle class, which is linked to economic growth, Beltran said. More disposable income allows for the purchase of insurance especially via smartphones and better internet connectivity and an increase in the use of technology. Closing the protection gap is going to be a slow but steady process, he suggested.