Balancing risk and reward

25-04-2017

Balancing risk and reward

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Increasing interest is being shown in the Latin American market by re/insurers, including some Bermuda players. So why is the area so attractive? Bermuda:Re+ILS investigates.

More companies are taking a good look at Latin America, in some cases creating new offices in the region, headed by new appointments, or in others buying up existing companies.

Some of the companies that have followed this trend in recent years include Aon, which bought up Admix, a health and benefits brokerage and solutions firm based in Brazil; Integro, which entered into a reinsurance partnership with HR Latinoamerica; and AlphaCat, which created the first cat bond to cover Latin America risks.

At the start of 2017 re/insurance law firm Kennedys expanded in Latin America, with a new office in Mexico and three new partners being appointed to lead it.

“It is a developing region hungry for insurance in connection with civil infrastructure projects, generation plants, property cover, and more recently a development of liability and financial lines including cyber,” says Alex Guillamont, head of the Latin American and Caribbean practice at Kennedys.

“All of that produces claims every now and then and that’s where we come in,” he says.

“We exist to service carriers wherever in the world they need legal advice and support. The benefit of doing it consistently and with a long-term approach is that clients realise you are committed for their long-term success and not just looking for a one-off opportunity.”

Since 2010 Kennedys has expanded significantly in the region and now has offices in Argentina, Brazil, Chile, Colombia, Mexico and Peru in addition to the regional hub in Miami it started with.

“We will consider opening local offices in other jurisdictions based on client need for our services,” he adds.

Global reach

Difficulties in the region appear in the form of changing economic political events. Standard & Poor’s (S&P) March 17, 2017 Insurance Industry And Country Risk Assessment: Global Property/Casualty Reinsurance report points out that in a reversal from last year, Latin American economies have benefited from rebounding commodity prices. In Brazil, an improvement in industrial production, a recovery in business confidence, and strong export growth have helped
Latin America’s largest economy recover. Brazil’s GDP could now expand by 0.9 percent in 2017 versus an estimated contraction of 3.3 percent in 2016.

For Mexico, the region’s second-largest economy, S&P expects growth to reach only 1.8 percent in 2017 from 2.3 percent in 2016, as uncertainty regarding trade and immigration policies with the US could postpone investment in the country.

Despite this, Latin America has become a relevant market, says Carlos Caputo, CEO of Markel Latin America.

“With the infrastructure Markel has in the region, we are well placed to respond to these opportunities. Penetration rates and insurance expenditure are still lagging behind many developed markets, so there is a lot of scope for continued development of the insurance market across the region.”

According to Caputo, Markel’s focus has been on the larger economies—Brazil, Argentina, Colombia and Mexico—as these countries have the largest insurance markets and offer good growth opportunities.

“Markel has historically been very good at identifying and developing market niches,” says Caputo. “We see opportunities to leverage Markel’s considerable expertise and brand which provide a platform for us to introduce a new concept of insurance business to the region.

“The gaps in the market require a long-term approach and this is completely consistent with Markel’s long view of its business.”

New risks

“Within our line of business enquiries come from territories facing risks such as terrorism, strikes and riots,” says Craig Curtiss, class underwriter for political violence at International General Insurance (IGI).

“Countries in Latin America face these risks and subsequently businesses operating within this territory have sought political violence coverage.

“Latin American business complements the risks we have in other parts of the world. We’ve consistently written a book of Latin American business and built up some good relationships with clients and brokers,” Curtiss says.

“We are open to business from any country within Latin America subject to our underwriting appetite.”

Fast mover

Brazil has often been mentioned as among the fastest-developing countries in the world. The March 2017 report on the Brazilian reinsurance sector produced by S&P, Brazil’s Reinsurance Sector Is Resilient In The Face Of Economic And Political Turmoil, highlights that Brazilian reinsurance companies have grown and prospered in recent years despite that country’s struggling economy, turbulent politics, and ongoing competition from global reinsurers.

According to S&P, the Brazilian reinsurance industry remains fiscally healthy because it has been able to maintain a solid market position in Brazil, successfully expand into other Latin American countries, and therefore reap the benefit of high domestic interest rates on Brazilian government securities.

However, S&P does have a caveat: “Even as Brazil’s reinsurers find new opportunities domestically and in the rest of Latin America, where they are developing new markets and angling to insure some major infrastructure projects, the fierce competition from large global reinsurance groups and the weak regional economy will continue to threaten the sector in the short to medium term, jeopardising premium growth and underwriting results.

“Nevertheless, we expect Brazilian reinsurers to maintain adequate profitability because of the country’s high interest rates, even as pricing continues to be pressured by international rivals.”

S&P believes that the local reinsurers in Brazil have been building a solid market position in the region and will find opportunities to grow in the underpenetrated local insurance market.

S&P also points out that the Brazilian congress is debating whether to increase the required guarantees for government-financed infrastructure projects, bringing opportunities to Brazilian surety companies because they would need more reinsurance.

Increasing concerns about the solvency of health insurers in Brazil could lead to new opportunities for reinsurers, as this sector has very low reinsurance coverage.

No place for beginners

The complications in Brazil are a good reason for Caputo to stress that Latin America is not a place for beginners when it comes to re/insurance, because of the multifaceted nature of the challenges.

“It requires specific skillsets and experience which our local teams have in abundance and which enable us to conquer these challenges,” he says.

“The portfolio approach we have adopted brings a balance which helps minimise volatility. For example, a few years ago Brazil experienced incredible growth while Argentina, simultaneously, was in deep recession. More recently, the reverse has occurred and Brazil has been in recession while investment and growth opportunities are being seen in Argentina.

“The recent developments with peace negotiations have raised hopes and expectations of further growth and prosperity in Colombia. This is a market we know and serve very well and have high hopes for,” he concludes.

 

Balancing, risk, reward, reinsurance, Latin America

Bermuda Re