Latam growth: ‘region is not for opportunist, short-term capital’

“I don’t think that Latin America is a continent or a region for opportunist companies or opportunist, short-term capital. It is literally too risky for that.”

That was the opinion of Florian Kummer, head of Latin American markets at Deutsche Rück, as he discussed growth opportunities, barriers to that growth and structural development of the risk landscape in the region.

Kummer, who has 25 years’ experience in the reinsurance industry, took up his role leading the reinsurer’s expansion in Latin America in December 2020.

Re/insurance companies are increasingly viewing the region as an opportunity for growth, he said, explaining that it was because more of them see the positive long-term trends and how they are translating into a growing re/insurance market.

“The region is very interesting because of the growth potential, and it has a very attractive risk landscape as well, so it’s two things,” Kummer said.

He said economic growth and the re/insurance model growth in Latin America had happened in the last three decades. From 1990 onwards, the region started to liberalise and modernise its economies and societies.

“The region opened up its market and integrated aggressively into the world market. They had three decades of huge growth rates, they are a winner of globalisation,” he said.

During this time, the economies have grown and changed.

“They are now very competitive economies, and this has created huge re/insurance market growth as well.”

But he added, there is greater growth potential still for re/insurers.

By looking at insurance penetration, insurance premium and gross domestic product (GDP) for Latin America, Kummer said it is clear that the insurance markets there have grown at a higher rate than GDP—3 percent higher.

“Twenty years ago it was 2 percent, now it is 3 percent. But if you compare it with the average of the OECD countries, there the growth relationship stands at 9 percent. That tells you that Latin America still has a huge growth potential.

“On one hand you can see how extensive the underinsurance is. There’s a huge protection gap but if we are able to close it, that will relate to growth,” he explained.

In these same three decades, Latin America has become a middle class region, he said. The middle class became the  dominant socioeconomic group in Latin America for the first time in 2018.

“When this happens and consumption changes, people buy insurance to protect their families, their companies. This makes it so attractive for insurers.”

More recently, in the past two years, the region’s resilience has made it more lucrative for re/insurers.

Kummer said it is this resilience, despite being hit “very very hard” by the COVID-19 pandemic, that has attracted more attention from re/insurers.

“Latin America was coming out of a very deep recession in 2019 before the COVID-19 pandemic hit the region in 2020.”

But in the last two years he has witnessed how resilient the growth model and the emergence of the middle class are.

“The middle class is not a passing phenomenon, it’s very robust. Over the years more than 100 million people have been lifted out of poverty, although the United Nations has estimated that about five million have fallen back into poverty.

“That means that 95 million people have defended their social and economic status,” he added.

“When it comes to the marketplace, we have seen a cyclical phenomenon—we’re just coming out of a mid-year renewal in July 2022 and there was a sense that the market is turning.

Looking back over the last decade, a prolonged soft market began in July 2013. The rates went down significantly until 2017 and they stabilised more or less in 2018, 2019 and 2020,” Kummer said, commenting on prices in Latin America. But, he added, in the recent 2022 renewal there was a clear upswing.

“It’s an attractive situation when it comes to structure and cycle, so for the long and the short term, the picture is looking pretty good.”

Defining demand

Looking ahead to the next two years, Kummer said that demand for re/insurance in the region looks strong for natural catastrophe.

“The main risk in Latin America is nat cat, so there’s a huge demand for that, because of the financial volatility we are experiencing in the world.”

Other macroeconomic factors were having an influence on the region, such as rising inflation and interest rates, and more volatile exchange rates.

“I would say that the demand for cat reinsurance is going up considerably. Companies are trying to buy more cover, just to be protected,” he added.

“Very often reinsurance treaties are in one currency, US dollars normally, and then exposures and original policies are in the national currency. When you’re in an environment with a higher financial volatility then people want protection, they want a safety buffer. So there will be more demand on the nat cat side, definitely.”

He emphasised the importance of Latin America’s growing metropolitan areas, where wealth is accumulating, causing a growth in exposures.

Nat cat may be the “main risk” but he said there has also been more political risk, citing the riots and protests in Chile in 2019.

“Political risk cover is more sought-after, as well as all the other coverages we see in Europe and the US. Cyber is still in its infancy but it’s growing. The risk landscape is defining the demand.”

Huge volatility

There are, of course, challenges for insurance industry firms looking to expand in Latin America. Kummer was clear that the main issue is “dealing with the huge volatility” in the region.

“It’s a volatile environment, risks are huge and on the rise. But for reinsurance companies risk means business and more risk means more business. Higher volatility usually comes with higher margins.

“The key challenge is to understand it, and to identify the risks. If we take COVID-19, we didn’t have it on the radar worldwide. In Latin America we didn’t have political risk in Chile on the radar.”

But by identifying the risks, the structure, and then pricing it well, there is opportunity, he added.

“The true underwriting companies have a real opportunity in Latin America but that’s the challenge, understanding the risk properly.”

Kummer cited climate change as another example of why it is very important to understand the risk. Climate change weather-related events are on the rise, he stated, emphasising the impact of increasing frequency and severity of hurricanes in the Caribbean and Central America, and flood events in Mexico.

“The key to it is to invest in knowledge and talent,” Kummer stressed.

“I believe that a long-term approach, when it comes to partnerships with clients and brokers, is necessary the more complex and volatile the environment is. The idea is to earn money over the years and to diversify in time as well, and that is what Latin America needs. It needs long-term capital that comes with expertise.

“A key success factor for re/insurers in Latin America is underwriting expertise. It is a market that offers a lot of potential for underwriting companies, and not so much for opportunistic rent-seekers, let’s say,” he concluded.

For more on the future of the Latin America region and Deutsche Rück’s plans watch the full video interview

Florian Kummer is head of Latin American markets at Deutsche Rück. He can be contacted at: florian.kummer@deutscherueck.de