1 November 2011Re/insurance

Regional re/insurance: Latin allure

The Chilean earthquake of 2010 helped to raise the profile of Latin American re/insurance, but the sector has been growing inexorably in size and sophistication for some years now. Opportunities abound right across the continent and Bermuda players have shown an increasing interest in Latin America’s potential as they have grown their global footprints.

XL Re, for its part, has been in the region since 1997—“a long history, which has taken in the full evolution of the market”, according to Philippe Rochaix, president and chief operating officer of XL Re LatinAmerica. The firm’s long-term presence has enabled XL Re “to build up an intimate picture of our clients, our commercial relationship and the market” and those risks and opportunities apparent in the region, he said. The firm now operates offices out of Sao Paulo, Brazil, Bogotá, Colombia and Buenos Aries, Argentina, covering the Brazilian, northern Latin American and southern Latin American markets, respectively. Brazil now accounts for 50 percent of XL Re’s business in Latin America, the northern region a third, while the remaining 20 percent represents the southern segment of its regional coverage, Rochaix outlined.

XL is not alone in its involvement in the region, Validus being another leading Bermuda player that continues to develop its operational presence in Latin America. The firm entered the region in 2007, but already conducts business across the whole of Latin America from the southern Caribbean downwards, operating out of offices in Miami and Santiago, Chile, utilising their Lloyd’s vehicle, Talbot. Addressing the potential for future expansion in Latin America, Andrew Downey, chief executive officer of Validus Reaseguros, said that Validus is already considering further growth, using its presence in Chile as a springboard to further develop its portfolios in the Brazilian and Argentine markets. Downey said that recent regulatory changes in the region may make it necessary to establish local offices, but that any steps to establish a local presence would form part of a wider strategic expansion by the group, rather than one mandated by local regulators. Regardless of the nature of potential drivers, it would seem that Bermuda players are confident that the potential of the region will likely prompt further expansion into the Latin American region.

Upward drivers

As one would imagine of an emerging region, opportunities abound. Brazil is the perhaps the most talked-about of the economies—largely due to its size and its presence among the BRICs (Brazil, Russia, India and China)—but both Downey and Rochaix were clear that enormous re/insurance potential is evident across the region. As Downey outlined, as emergent, commodity-driven economies, Latin American countries are in a strong position vis-a-vis their Western counterparts in Europe and the US, troubled as the latter are by the current debt crisis and an emphasis on the service economy.

Economic growth has brought with it an increase in insurance penetration, with clients expressing confidence that they will continue to grow their topline, Downey said, presenting significant opportunities for international reinsurers. “As an industry we are highly bullish about the region,” he added. Rochaix said that increased economic stability, a growing industrial base and the “strong growth of the middle class in the region, which has helped to drive the acquisition of property” have further deepened insurance penetration on industrialand personal risk, creating obvious opportunities for Bermuda players operating in the region.

Lines and appetites

Economic growth in the region is creating evident opportunities for reinsurers, but touching upon which lines show the most significant potential, Downey said that “property has always been the leading line and it will remain that way for the short to medium term”. He added that there were also significant opportunities presented by construction work across the region, backed by surety and bonds, with marine cargo and energy linked to such large scale projects creating further opportunities for the reinsurance sector. Rochaix echoed Downey’s views, indicating that at XL Re “around half our book of business is property, and a quarter is surety, with the remainder made up by other lines of business”.

Turning to the development of re/insurance in the region, Rochaix said that there is a trend towards local insurers increasingly retaining premium, but far from this being a concern for international reinsurers, he said that this “increased retention is a reflection of insurers’ confidence in their own underwriting. When they start to retain more risk it means that they are concentrating more on the fundamentals, on underwriting and on their risk selection”. Such developments have helped to mature the market and, as Rochaix made clear, lower levels of ceded premium will be more than offset by rising levels of insurance penetration and the opportunities presented by improving economic conditions. Such developments will enable the region to emerge as a truly developed re/insurance market, he said, with evident implications for those Bermuda reinsurers with boots on the ground.

Until the industry in Latin America fully matures, however, it seems that smaller accounts and proportional treaties will dominate the landscape. As Rochaix outlined, there has been a small move towards more excess of loss-type arrangements, but the region, like other emerging markets, continues to emphasise proportional treaties. Such an approach is due to “capital requirements and the financial strength of companies”, Downey explained. Nevertheless, it would seem that positive developments are in the offing.

Global knowledge, local application

New regions often encourage or even demand an alternative approach to doing business, and Latin America is no different. As Rochaix outlined, the relatively small size of accounts and the risk of aggregation on multinational books of business have encouraged XL Re to take a novel approach to its Latin American business—namely, client-by-client, rather than line-by-line. Individual underwriters are put in charge of dealings with individual clients, “with underwriting and claims management across multiple lines of business”, Rochaix said. And while the Latin American offices of XL Re have strong expertise on leading lines such as property and surety, they are at thesame time able to draw on international best practice “such as the know-how of marine experts based out of London, or surety leaders out of Colombia”. This enables XL Re to “leverage global best practice” when servicing clients all across the region. “And rather than use a centralised hub, we use local underwriters with an intimate knowledge of the market to tailor solutions to the needs of our clients,” he added.

"The additional capital provides us with the flexibility to either take advantage of the rate increases by writing more business or, alternatively, to buy back more shares."

To further strengthen the capabilities of its network of underwriters, XL Re sends “local underwriters to work with international teams writing alternative lines globally” in order for them to gain experience of renewals in other territories and to build relations across the company and across lines, Rochaix said. This enables Latin American underwriters truly to benefit from XL Re’s global footprint and knowledge, while presenting significant benefits to the firm’s client base. And it isn’t only one-way traffic. As Rochaix outlined, Latin America is attracting a lot of interest from international underwriters who view the region as a vibrant, emerging market. “Nowadays we are able to attract some very strong talent from outside Latin America; this has enabled us to diversify our sources of personnel, with evident implications for the kind of talent that we can deploy in the region,” he said.

Validus’s approach is rather different, Downey indicating that the firm has sought to hire experienced personnel from within the region. This enables the company to draw on local expertise and knowledge, complemented by a top layer of five senior managers who between them “have close to 100 years of experience in the industry”. Global knowledge is one of the key strengths that international reinsurers can bring to the region, according to Downey. Knowledge learned in leading markets such as Bermuda can help firms to “roll out new lines of business and work towards portfolio optimisation”, he said. “As global players we can play a leading role in product development” with economic growth and the expansion of industry and the region’s middle class all acting as upward drivers for re/insurance demand.

Touching upon opportunities to acquire local re/insurers to strengthen their presence in the region, Downey and Rochaix were both clear that local acquisitions did not align with their strategic ambitions in Latin America. “The way that we are structured, acquiring in Latin America does not really suit us,” Downey said. “Rather, it would make more sense for us to open up small representative offices in territories where opportunities emerge.” Rochaix concurred, indicating that while there are some opportunities for insurers to acquire smaller, family-led insurers in the region, there is little in the way of acquisition opportunities for reinsurers. “The growing needs of our clients, rather than acquisitions will be the key to our growing our market share in the region,” he said.

Impediments remain

Despite the region’s significant potential, impediments to growth and development nevertheless remain. For Rochaix “the biggest difficulty is the availability of data and its quality”. Shortfalls in data granularity present significant dangers, particularly when it comes to aggregationon the books of large multinational industrial groups, he said. And with surety being one of the leading lines in the region “you are going to be potentially faced with accumulations of risk across multiple countries”.

Downey, for his part, highlighted more macroeconomic concerns, specifically “regional economic stability” and the potential implications of the European and US debt crisis. He said that while there is some disconnect between the commodity-driven markets of Latin America and those of Europe and the US, the region does not operate in a vacuum. Contagion from Europe and the US could yet affect Latin America, he said, although Downey did make clear that Latin America had fared well during the financial crisis of 2008, and might prove similarly resilient in the face of a resurgent global recession. He also pointed to political developments in the region and what he termed a “lurch to the left” as being of potential concern, and one that might act as a brake on further re/insurance penetration.

A Chilean alarm clock

Finally, returning to perhaps the most significant event in the region in recent years, Rochaix described the Chilean earthquake of 2010 as a “wake-up call for the industry”, with losses from the earthquake being “far higher than most in the industry had expected”. Downey, similarly, described the catastrophe as a “game-changer for Chile” which prompted dramatic price increases and a closer examination of potential losses. He highlighted business interruption losses as having presented a particular concern, but added that pricing traction in the region never fully materialised to the extent anticipated since the event, largely due to an influx of new capacity.

Nevertheless, lessons have been learned, and as Rochaix indicated, “catastrophes such as the Chilean earthquake are an opportunity to develop our models and the granularity of our data and to drill down into our assumptions”. At the same time they have encouraged firms to “re-examine their exposures and their retrocessional arrangements”, he said. Chile helped to raise awareness of “significant exposures” in the region—to earthquakes in particular—“with pricing and capacity now more disciplined than it was in the past”. The final major lesson to have been learned from the event, Rochaix said, was that the industry “needs to develop capacity, but that it shouldn’t be done at any price”. Latin America evidently holds significant allure—the Chilean earthquake may just have tested its lustre.