Growth-Hungry Insurers, Latin America Beckons

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1 Growth-Hungry Insurers, Latin America Beckons What You Need to Know to Succeed By Marcela Abraham, Karla Estavillo and Mauricio Ruiz For insurers beleaguered by low interest rates and mounting competition, Latin America may punch up your growth prospects if you know what you need and what different countries in the region can provide. Overall 2013 performance was better in Latin America than in other emerging regions, demonstrating its growing appeal for insurance companies. Low interest rates and mounting competition in developed economies are fueling the insurance industry s search for new markets in which to grow, diversify and mitigate risks. Developing countries offer low costs, high growth potential and expanding middle-class markets for insurance products. Despite the region s recent growth rate deceleration, emerging markets in Latin America are becoming increasingly attractive to insurance companies. In recent years, Latin America has received substantial foreign investments, and its remarkable economic growth has made the region an interesting and more stable business destination. Moreover, regulatory reforms over the last decade have created a more business-friendly financial environment for the insurance industry. However, given the region s heterogeneity, each country has to be perceived as unique, and assessing its degree of attractiveness requires country-specific insurance market and economic outlook analyses. Annual premiums and market concentration levels must be considered along with business indicators such as political stability, economic policy continuity and talent market risk factors. We explore both the insurance market (size, regulations, distribution channels and competition) and economic considerations (ease of doing business, talent and costs). Global Insurance Industry Rebounding from the financial crisis, the global insurance industry showed positive growth rates (2.9% in life and 2.5% in non-life) in Similar to last year, the market s growth was led by emerging countries. Life business grew 6.2% in emerging markets versus 2.3% in the developed world, while non-life business grew 7.8% and 1.4%, respectively. Overall 2013 performance was better in Latin America than in other emerging regions, demonstrating its growing appeal for insurance companies. The life market drove this growth with a 10.8% increase, while non-life grew by 7.3%. 1 A Formidable Market Latin America is a formidable market for all industries, and the insurance market is no exception. The region generates more than US$160 billion in annual gross written premiums, more than Central and Eastern Europe, and the Middle East and Central Asia combined. 2 Moreover, with a population of nearly 600 million people and an emerging middle class, Latin America offers substantial market growth potential. At roughly US$66 billion in 2012, Brazil generates almost half of Latin America s insurance premiums. This is not surprising, as Brazil is the region s largest economy and the seventh-largest in the world. Its appetite for insurance is increasing, especially among its growing younger population. Premium volumes of other regional leaders include second-ranked Mexico (US$24 billion), third- and fourth-ranked Venezuela and Argentina (approximately US$14 billion), Colombia (US$13 billion) and Chile (US$11 billion). Peru s recent high economic growth rate has placed it among the top 10, although it still lags far behind the big players in market share. 3 Despite the region s attractions, however, potential entrants should also consider Latin America s heterogeneity. We focus on six of the most promising Latin American economies: Argentina, Brazil, Chile, Colombia, Mexico and Peru. 18 towerswatson.com

2 Figure 1. Volume and growth rates ( ) $ % $ % Growth Rates From 2008 to 2012, industry growth rates were significantly higher in Colombia, with a compound annual growth rate (CAGR) of 31% driven by factors including tremendous economic growth and the country s smaller industry base. Peru s market also grew at an impressive rate of 22%, followed by Argentina (14%), Chile (13%), Mexico (11%) and Brazil (9%) (Figure 1). By line of business, both life and non-life grew at similar rates. Only Argentina experienced higher non-life growth, with the opposite true for the other countries. Compulsory insurance policies, such as automobile insurance, are driving non-life growth, while expansion of the life market more closely tracks the development of capital markets, transformation of social security systems (where life and disability benefits are either totally or partially transferred to private insurers) and credit growth (with insurancerelated credits linked to it). 4 Argentina s high growth rates were due to growth in credit and health insurance, with CAGRs of 33% for each and a CAGR of almost 25% in occupational insurance. However, Argentina s double-digit inflation rates over the last few years might have also affected its real growth rates. Brazil s market growth stems from its economic boom as well, although it is the market with the slowest growth in the analyzed countries. Penetration and Density Latin America s growth rates are substantial, but account for only just under 4% of the world s total insurance premiums. 5 Moreover, penetration annual premiums over gross domestic product (GDP) is very low compared with developed countries (3% on average in Latin America versus 8.18% in the U.S.). Market density annual premiums per capita is also significantly lower in Latin America than in developed countries, with an average of US$282 in the region versus US$4,047 in the U.S. These numbers highlight the region s low insurance awareness. 6 $30 $20 $10 $ Argentina 23.8 Brazil 3.9 Chile Colombia Both penetration and density rates are highest in Chile, showing a more developed financial culture, compared to Mexico and Peru, which ranked fifth and sixth, respectively, in both rates (Figure 2). Latin American insurance markets are far from saturated, holding out immense growth opportunities for insurance companies Mexico n Volume of non-life premiums (in US$ billions) n Volume of life premiums (in US$ billions) CAGR non-life CAGR life Peru Source: Towers Watson calculations based on data from ASSAL and the countries insurance authorities (Chile and Colombia); data as of December 2012 Figure 2. Insurance density and penetration $700 $600 $500 $400 $300 $200 $ $0 Argentina Brazil n Insurance density Chile Colombia Insurance penetration Mexico Peru Source: Towers Watson calculations based on data from ASSAL, World Development Indicators and the countries insurance authorities (Chile and Colombia); data as of December % 0.30% 0.20% 0.10% 0.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Emphasis 2014/2 19

3 A growing trend of e-commerce as a distribution channel is consistent throughout the region. Marcela Abraham Latin American insurance market and market-entry analysis. Mexico City Karla Estavillo research and innovation. Montevideo Mauricio Ruiz research and innovation. Montevideo Distribution Channels During the last decade, sales in all distribution channels in Latin America showed positive growth in gross written premiums, benefiting from the market s expansion. However, channels in demand vary by country depending on regulation, customer preferences and market practices. As the growth rate of each of the distribution channels did not differ significantly within each market, the market share of these channels remained relatively stable. Nevertheless, a growing trend of e-commerce as a distribution channel is consistent throughout the region. Although e-commerce doesn t currently hold significant market share, its growth foreshadows a potential structural change, especially for personal lines and automobile insurance. Regulation Growth opportunities for insurance companies are strongly linked to a country s regulatory and legal framework. In the early 1990s, most Latin American economies eliminated entry barriers for the insurance industry. These markets generally have fewer barriers to foreign investors than other emerging regions, such as Asia Pacific, but still have more barriers than developed economies. Developed insurance markets are adopting more rigorous insurance requirements, and Latin American countries are willing to align their insurance regulations accordingly. The entire region is adopting Solvency II-type principles, although each country is at a different stage in the process. Argentina illustrates how constrictive regulation impedes business. In Brazil, however, tax incentives for some life insurance products helped by a large domestic market have expanded the insurance industry. Both Mexico and Chile are introducing new solvency requirements to create a clearer, more effective insurance regulatory framework. But stronger regulation requires a complementary compliance framework and the continued efforts of Latin American regulators. While insurance regulation is increasing in some countries, there is not always the local capability to develop and implement new regulations. These waves of new requirements are creating a major learning curve among insurance companies as they go live. Compulsory Insurance The share of premiums for mandatory coverage continues to grow and fuel industry development in Latin America. Compulsory insurance varies by country. In all countries, employees are entitled to workers compensation insurance, and all these countries also have mandatory auto liability or accident insurance. Although these products are mandatory in most of Latin America, they have not nurtured actual market growth in countries such as Mexico. But other countries, especially Argentina, Venezuela and Chile, have insurance markets that are strongly driven by mandatory life insurance products. Competition Argentina has the highest number of insurance companies per capita, with almost five insurers per million people, followed by Chile, with more than three per million. Colombia, Mexico, Brazil and Peru lag far behind. The reverse is true for concentration levels, which are measured as market share held by the top five insurance companies. Peru s concentration rate is above 80%, followed by Colombia, Brazil and Mexico, with more than 50%, and finally by Chile and Argentina, with less than 40% each. 7 Latin American insurance markets are highly concentrated, with a small number of players that are predominantly domestic or of Latin American origin. Lower concentration levels imply greater competition and lower prices, with relatively uniform rates. While quality might differentiate new entrants, gaining market share in low-concentration markets could be difficult. Moreover, a plethora of small companies in a limited market could increase a company s solvency risks and limit its growth potential. But higher concentration suggests less competition, higher prices and fewer incentives to improve products an opportunity for new entrants to offer more appealing products at lower prices. Higher concentration can also signal existing barriers such as restrictive regulation or limited profitability. 20 towerswatson.com

4 Ease of Doing Business A sound macroeconomic environment and ease of doing business are essential for the insurance sector. Political stability, changes to tax and labor laws, and property rights strongly affect profitability. Long-term financial investors should monitor market shifts to mitigate potentially adverse business effects. Chile offers the region s most business-friendly environment, with favorable macroeconomic policies, and clear, consistent rules for financial and insurance companies. Peru and Colombia also rank highly because of sensible macroeconomic policies, a stable political environment and important regulatory improvements. Mexico has significantly enhanced its business environment, substantially improving safety efforts as well as its tax and investment regime to encourage investment. 8 Brazil s inviting macroeconomic environment is offset by rigid employment and tax regulations, which are unwelcoming to new companies. Lastly, the unorthodox macroeconomic policies and political instability of Argentina and Venezuela make them the least business-friendly environments. Restrictive regulation in Argentina may significantly affect future investments in the short to medium term, particularly in the financial sector. Talent Pool Rapid growth is creating a shortage of qualified talent for specific talent pools in Latin America. Engineers and actuaries are among those talent pools facing a shortage. Although Brazil and Mexico have larger talent pools than other countries, the percentage of highly qualified workers within the total population is much higher in Argentina, Colombia and Chile. The availability of local actuaries is critical for foreign insurance companies because it reduces the costs of hiring people from abroad. Most Latin American countries do not have actuary-specific tertiary education, but rather rely on in-house/industry-trained graduates with a suitable background, like mathematicians or engineers. Sales talent, on the other hand, is abundant in the region. Given the shortage of highly skilled talent for the insurance industry, a country s attractiveness to expats also becomes important. Costs Local costs are important considerations, especially those that are related to labor and real estate. Brazil has the highest labor costs, driven by a scarcity of highly qualified workers, particularly for executive positions. Towers Watson compensation data reveal that executive compensation packages in Brazil can be higher than those in developed countries. High inflation in Argentina (nearly 30%) has driven up labor costs, but economic turmoil and severe depreciation of the peso have reduced costs in dollars. Chile, Colombia and Peru have lower labor costs than developed countries but higher costs than other emerging markets in Latin America and Asia. Mexico has the lowest wages and compensation packages among our sample. Brazilian cities have our sample s most expensive real estate, particularly São Paulo and Rio de Janeiro. Rapid growth is creating a shortage of qualified talent in Latin America. Emphasis 2014/2 21

5 The Latin American insurance market has become attractive to new entrants. Nevertheless, insurance awareness, regulation, tax considerations and distribution challenges demand attention. A key challenge is lack of insurance awareness, a defi cit that can be offset with financial education. Inadequate regulation hinders market development by failing to establish the necessary parameters and stability, but overregulation (e.g., high capital requirements) discourages new entrants. Looking Ahead Insurance market potential differs among Latin American countries, distinguished by regulation, mandatory insurance requirements, literacy and insurance awareness. All strongly affect performance and growth capacity. Even so, the region s potential is evident from a greatly improved economic environment, more business-friendly regulations and higher incomes. With its huge market a population of almost 200 million and GDP of nearly US$2.5 billion in 2012 Brazil offers promise, despite its somewhat challenging business and regulatory environments. Regulatory barriers also make Argentina less attractive. Mexico s market size and significant growth possibilities make it extremely appealing for new entrants. Colombia offers similar growth potential as well as market stability. Although Chile leads in market concentration and penetration, pensions and annuities drive most premium volume. Non-life insurance is still in the relatively early stages of development, although a 2010 earthquake accelerated its growth. Moreover, an emergent financial culture and high per capita income make Chile an attractive option. Conversely, Peru s relatively small and highly concentrated market is its biggest obstacle to market development. Acknowledging the region s potential, insurance companies need only to work and shape the markets to find the growth, diversification and risk mitigation they seek. But they also need to realize that each country s investment prospects are different, with unique opportunities and challenges that need to be carefully analyzed to ensure the best strategic fit and fulfillment of a company s vision. In a decelerating economic growth environment, paying close attention to the factors outlined in this article will be essential to selecting the right market for further investment or development. Moreover, once specific locations or countries are identified, smart, well-informed market analytics within those countries are needed to target the right population segments, and design and deploy the right products. The next decade will bring stable, measured growth to Latin America, with disposable income and, hence, attractiveness for insurers, differentiated by population segments. Economic and political complexities and rapidly evolving demographics are forecast through Strong analytics and wellinformed, research-based insights will be imperative to securing a competitive edge. For comments or questions, call or Marcela Abraham at , marcela.abraham@towerswatson.com; Karla Estavillo at , karla.estavillo@towerswatson.com; or Mauricio Ruiz at , mauricio.ruiz@towerswatson.com. 1 Swiss Reinsurance Company Ltd., Global Insurance Review 2013 and Outlook 2014/2015, outlook_2014_15.pdf 2 Ibid 3 Towers Watson s calculations based on data from ASSAL, 4 The Role of Insurance in Latin America (Zurich: Zurich Government and Industry Affairs, April 2012), insurance-latin-america-en.pdf 5 See footnote 1 6 Swiss Reinsurance Company Ltd., World Insurance in 2012: Progressing on the Long and Winding Road to Recovery (Zurich: Swiss Re, No. 3/2013), documents/sigma3_2013_en.pdf 7 Towers Watson calculations based on data from the countries insurance authorities 8 The World Bank and IFC, Doing Business 2012 (Herndon: TWB and IFC, 2012) 22 towerswatson.com