Latin American market scales new heights

Transcription

1 Latin America special report Latin American market scales new heights Latin America Awards Alternative capital 37 Latam facts and figures 38 Latam infrastructure projects 39 Latin American market 40 Miami Gateway 42 Brazil 44 Reactions July/August

2 Latin America Awards 2014 David Roig, business development and client care chief at Kennedy s, picks up the award for Latin America Insurance and Reinsurance Law Firm L A T I N AMERICA AWARDS 2014 Andrea Keenan, managing director for AM Best América Latina, receives the award for Latin America Rating Agency from Reactions David Samuel and Chris Munro LatAm leaders Leaders of the Latin American insurance and reinsurance industries gathered in Miami at the end of May for the prestigious Reactions Latin America Awards. Christopher Munro reports. The winners of Reactions second-ever Latin America Awards were unveiled on May 29 to a packed audience at the Eden Roc hotel in Miami, with a host of both domestic and international re/insurers handed prizes. An audience made up of the leading players in the Latin American re/insurance market took their seats following a day of debate and discussion during Reactions 3rd Annual Latin America (Re)insurance Forum. But the considerations of the day were set to one side as the attendees waited to hear which companies and individuals would walk away with the evening s prizes. Of the local Latin American players, Itaú Unibanco, Grupo Nacional Provincial (GNP) and Patria Re all received multiple awards. On the international front, companies such as Munich Re, Swiss Re and broker Marsh were also multiple winners. Itaú Unibanco won two awards on the night; the first for Best Latin America Investment Bank and the second for Best Brazil Insurer Overall. In what can be regarded as a sign of strength of its insurance operations, Ace has since signed a deal to buy Itaú Unibanco s corporate insurance book for $684m. The deal will make Ace the largest commercial property and casualty insurer in Brazil. Back to the awards, and GNP was given prizes for both Best Latin America Advertising Campaign and Best Mexico Insurer. 30 July/August 2014 Reactions The prize for best Overall Latin America Insurer was handed to Colombia s Suramericana the second year in succession the company has won the award, while Overall Latin American Reinsurer was awarded to Mexico s Patria Re. On the broking front, Marsh scooped Best Overall Latin America Broker, with Marsh & McLennan Companies affiliate Guy Carpenter awarded the prize for Best Overall Latin America Reinsurance Broker. But there is little doubt that Munich Re was the big winner of the evening, as the German reinsurance giant was the beneficiary of four prizes. Munich Re won Best Colombia Reinsurer, Best Chile Reinsurer and Best Venezuela Reinsurer. Agustin Gutierrez, director general of Munich Re in Mexico, was also named the winner of the Latin America Lifetime Achievement prize. Latin America Insurance Chief Executive of the year was handed to ASSA s Eduardo Fabrega, while Ron Diaz of Everest Re was given the reinsurance industry s equivalent award. On the broking side of the market, Marsh s Ricardo Brockman won Latin America Insurance Broking chief executive of the year, with Alejandro Galizia of Aon Benfield presented with the prize for the reinsurance side of the broking industry. Horst Agata, from Gen Re, was named Latin America Influential Individual. l

3 Latin America Awards 2014 Reactions Latin America Awards 2014 Region-wide Awards Best Latin America Insurer: Suramericana Best Latin America Reinsurer: Patria Re Best Latin America Broker: Marsh Best Latin America Reinsurance Broker: Guy Carpenter Most Innovative Country Regulatory Body: Colombia Best Latin America Microinsurance firm: La Positiva Best Latin America insurance and Reinsurance Law Firm: Kennedys Best Latin America Rating Agency: AM Best Best Latin America Technology Vendor: SISTRAN Best Latin America Investment Bank: Itau Unibanco Best Latin America Consultancy: Towers Watson Best Latin America Risk Modeller: RMS Best Latin America Loss Adjustment Firm: Crawford & Company Best Latin America M&A Deal: Axa Colpatria Best Latin America Reinsurance Deal: IRB Privatisation Best Latin America Advertising Campaign: Grupo Nacional Provincial Individual Awards Latin America Insurance chief executive of the year: Eduardo Fabrega, ASSA Latin America Reinsurance chief executive of the year: Ron Diaz, Everest Re Latin America Insurance Broking chief executive of the year: Ricardo Brockman, Marsh Latin America Reinsurance Broking chief executive of the year: Alejandro Galizia, Aon Benfield Latin America Influential Individual: Horst Agata, Gen Re Latin America Lifetime Achievement: Agustin Gutierrez, Munich Re Country and region Awards Best Brazil Insurer: Itau Best Brazil Reinsurer: Swiss Re Best Brazil Insurance Broker: Brazil Seguros Best Brazil Reinsurance Broker: Willis Re Best Mexico Insurer: Grupo Nacional Provincial Best Mexico Reinsurer: Patria Re Best Colombia Insurer: Suramericana Best Colombia Reinsurer: Munich Re Best Chile Insurer: Magallanes Best Chile Reinsurer: Munich Re Best Venezuela Insurer: Caracas Liberty Best Venezuela Reinsurer: Munich Re Best Argentina Insurer: San Cristobal Best Argentina Reinsurer: Hannover Re Best Central America Insurer: ASSA Best Central America Reinsurer: TransRe Best Insurer in the Rest of South America (inc. Peru, Ecuador, Bolivia, Uruguay and Paraguay): Rimac Best Reinsurer in the rest of South America Reinsurer (inc. Peru, Ecuador, Bolivia, Uruguay and Paraguay): Hannover Re José Ríos, chief executive of Sistran, is handed the award for Latin America Technology Vendor Antonio Trindade, executive director for Itaú Seguros, receives the award for Latin America Investment Bank and Best Brazil Insurer Marcela Abraham, a senior consultant with Towers Watson, picks up her company s award for Best Latin America Consultancy Patricia Grossi, senior director for global earthquake modelling at RMS, receives the award for Latin America Risk Modeller Reactions July/August

4 Latin America Awards 2014 Eduardo Kimsi, Crawford & Co s chief executive for Latin America, is handed the award for Latin America Loss Adjuster Philippe Jouvelot, Axa s president and chief executive for Brazil and Latin America, collects the award for Latin America M&A deal Jesús Zúñiga, chief investment and risk officer for Grupo Nacional Provincial, collects awards for Latin America Advertising Campaign & Best Mexico Insurer Carlos Boelsterli, the head of Swiss Re s Miami office, picks up the award for Best Brazil Reinsurer Tony Phillips, joint MD of Willis Re s treaty reinsurance business in Latin America and the Caribbean, takes the award for Best Brazil Reinsurance Broker Patria Re s chief executive, Ingrid Carlou, took to the stage to collect the awards for Best Latin America Reinsurer as well as Best Mexico Reinsurer Gonzalo Pérez, Suramericana s president, takes to the stage to receive the Best Latin America Insurer and Best Colombia Insurer Camillo Khadjavi, Munich Re s client manager executive for Latin America North and the Caribbean, took the awards for Best Colombia and Venezuela Reinsurer 32 July/August 2014 Reactions

5 Latin America Awards 2014 Martin Heinz, managing director of Hannover Re for Latin America and the Iberian Peninsula, collects the award for Best Argentina Reinsurer Eduardo Fabrega of Assa Compania de Seguros was named Latin America Insurance CEO, while his company received Best Central America Insurer Juan Carlos Roa, senior vice president for underwriting at TransRe, accepts the award for Best Central America Reinsurer Marsh s Ricardo Brockmann was named Latin America Broking CEO, while his company also picked up the award for Best Overall Latin America Broker Aidan Pope, CEO of Guy Carpenter s Latin America and Caribbean operations, took to the stage as Best Latin America Reinsurance Broker Everest Re s Ron Diaz was announced at Latin America Reinsurer CEO of the Year during the event in Miami Alejandro Galizia, Aon Benfield s chief executive for Latin America, was awarded the prize for Latin America Reinsurance Broking CEO The award for Latin America Influential Individual was given to the director general of Gen Re in Mexico, Horst Agata Reactions July/August

6 Patria Re Staying relevant during competitive times Ingrid Carlou, CEO of Patria Re, talks about the company s future plans and how it is a modern insurer adapting to a new world order. In the face of increasing competition from multinational players, how does a company such as yours ensure it stays relevant? Bearing in mind some of the comments that have recently been made about how only the so-called tier one and two reinsurers (essentially those with a large global reach) will survive, how can a company such as Patria Re, which as far I m aware is a regional LatAm player, stay at the forefront of the industry? I understand you were looking to move into other territories in the future. Is that still the case? Does Europe continue to hold your interest? Increased competition is coming from many fronts. In the reinsurance industry it is coming from ILS and capital markets but also from collateralised deals. Excess capital like never before is putting pressure on top lines worldwide, so everyone is becoming concerned about distribution and market access. However the situation is not only limited to reinsurance, with insurance companies becoming larger and larger, with concentration increasing on every front (broking, insurance and reinsurance) the reinsurance market becomes more and more commoditised. Which in fact is an elegant word to say reinsurers are less needed than before. Reinsurance was invented as an effective solution to a lack of capital in the context of smaller companies. So a first question we should ask ourselves is, in this context, should reinsurers be getting bigger or smaller? There is this myth that growth is a sustainable process that goes on forever. This has prompted people to think we must all grow, 34 July/August 2014 Reactions first to reach critical mass, but then just for the sake of it, and then we turn this into absolute truths like bigger is better. Should we be bigger or should we be the right size? And what is the right size? We believe the answer lies in the real needs the market has, and not in needs some companies try to force in the market to induce consumption in order to justify their worthiness. Being a large multinational reinsurer is no longer enough to stay at the forefront. Growth will come from real innovation, opening new markets and increasing the size of current ones, at least as long as interest rates and economic recovery remain low in the US and Europe. We do not believe low interest rates are a passing fad, but the result of deep structural realities in the world economy. A new industrial revolution would have to come in order to promote growth in the developed markets. But as we have said in the past, and these are not our ideas, how many times can you increase productivity exponentially through creativity? As marginal growth decreases and economies decelerate to a level we could classify as cruising mode it is clear that world productivity will come from promoting the development of new markets. However, emerging markets will hardly substitute the size of developed markets, and even to become really representative as part of the world market it will take time. In this context, what is the excess of offer doing today? Innovation and breakthroughs are more likely to come from those reinsurers who manage to identify early factors that will

7

8 Patria Re Being a large multinational reinsurer is no longer enough to stay at the forefront. Growth will come from real innovation, opening new markets and increasing the size of current ones, at least as long as interest rates and economic recovery remain low in the US and Europe. Ingrid Carlou, CEO of Patria Re later disrupt the status quo, and who stay close to insurers who are also driving change. Scale helps, but it does not provide a competitive advantage per se, experience, being close to your markets and analytical capacity does. It is actually interesting to look at recent comments that have been made about the relevance of size in the market. This year the comments are geared towards the disappearance of third tier reinsurers. Last year it was second tier reinsurers. So apparently, if we follow the logic of these comments, only first tier reinsurers will make it! I find it rather funny, because this is the same story we have been hearing for the past 20 years, and one thing we have noted is that the list of the top 10 reinsurers has changed substantially during that period. Let s go back to some of the questions we asked above. What do we see that is going on in the current market in Latin America? Prices are falling; ever more sophisticated covers are being offered in the reinsurance treaties; capacities on a proportional basis are increasing; conditions are relaxing; reinsurance companies are buying their clients or they are trying to secure the business from the base. Who is driving this? It is certainly not coming from specialised third tier reinsurers in Latin America; it is not coming from ILS or cat funds either. However this strategy is effective, a few of the large industrial very large risks might need such sophisticated covers and conditions, but most don t. You could think of it all as the crystal beads and mirrors coup. On the one hand it creates wonder and appeal in the users. On the other, smaller and less aggressive competitors are filled with forbearance and will shy away. This strategy does not increase the size of the pizza, but only the size of the pieces some of the guys are taking. However, in one sense we do agree that the world only has space for first tier reinsurers. Where we differ is in what constitutes a first tier reinsurer. Some like to think it is all a matter of size, we believe it is a matter of relevance, of quality of service. Patria s client base is well-positioned to drive new market 36 July/August 2014 Reactions trends, and we have stayed close to them for many years and are supporting and many times guiding their innovation efforts. That is actually one of the key drivers of our strategy today. While some reinsurers have decided to source their income directly from the base and compete with their clients, we are investing in order to help the insurance companies that are the real specialists in Latin America to level the playing field and become more competitive. Regulatory changes in many parts of the world open a new set of standards and practices that will need to be optimised if insurers are to keep their growth trends. We have developed important skills and can act as an adviser in risk management and regulation, since we rapidly have had to optimise them ourselves, both because we are a public company and because we made it a point to start working on this issues as early as possible so we could then lend a hand to others. A substantial part of the support we provide to our market is to advise on product change and innovation, and on risk transfer structures required to compete in the new solvency capital environment that the Solvency II type changes are triggering in many of the countries in which we participate. Nevertheless, Patria is a modern reinsurer and is adapting to the new order. We will assess new market trends, promote innovation and look for geographical spread. Our European venture will help us diversify our portfolio and it will allow us to keep in rhythm with the industry in order to maintain adequate and healthy levels of performance and source the services, products and skill that we need to develop. Is being A-rated important? If so, why? And if not, why? Ratings are only one of many measures in the market. Indeed, Patria seeks to underwrite solid and solvent business and hence strong solvency and liquidity are important, but many of the services we provide to our clients are not valued in terms of our rating, but rather, by the quality and experience of our team. The market is moving from a purely strong risk absorption capacity to a strong risk management capability framework, something in which we have always believed. If we put it in less fancy words, we believe the quality of capital, the capacity and willingness of payments are amongst the factors that drive the appraisal of the service, ratings try to measure this. To think that rating is more important than the substance is like putting the bull behind the cart. For us what really counts is to invest our mind and heart and roll our sleeves to work with our business partners growing with them in confidence and trust, synchronising our time horizons. l

9 Alternative capital Alternative capital boom While the alternative capital market has played a small role in Latin America so far, that situation is expected to change as modelling capabilities improve and investors become comfortable with exposures. Christopher Munro reports. Alternative capital will have a growing role to play in the evolution of the Latin American re/insurance market as some of the current limitations such as modelling capabilities improve over time. That is the opinion of Chris Lefferdink, a director with reinsurance broker Aon Benfield, who told delegates at the Reactions and Euromoney Seminars hosted Third Annual Latin American (Re)Insurance Forum that the future in Latin America could be very bright for those companies involved in the so-called alternative capital arena. There has already been some participation from the alternative capital sector in Latin America, both directly and indirectly, Lefferdink explained. The direct participation has been through a couple of catastrophe bonds and a few collateralised reinsurance transactions, he said. The amount of catastrophe bond in activity in Latin America has been limited, with one of the few exceptions being MultiCat Mexico. This catastrophe bond provides the Mexican government s natural disaster fund FONDEN with a multi-year, fully collateralised reinsurance protection for both earthquakes and major hurricanes. On top of that, the number of examples is limited. AIG s Tradewynd Re bond protects the US insurer against losses from named windstorms in the Caribbean, as well as US states. The number did increase earlier this year however, with Guy Carpenter s GC Securities arm placing the first catastrophe bond issued by the World Bank on behalf of the Caribbean Catastrophe Risk Insurance Facility (CCRIF). This bond provides the 16 Caribbean countries that participate in CCRIF with three years of annual aggregate protection against hurricanes and earthquakes. Then indirectly, we ve seen a great deal of capital coming in through sidecars in the last year or so. We ve seen a bit more impact from that than on the direct capital, said Lefferdink. The lack of involvement on the direct side can partly be explained by limitation in modelling, Lefferdink explained. Catastrophe bond investors tend to be a lot more technical and very model dependent relative to traditional re/insurers. They look at pricing on a very technical basis and are very uncomfortable adjusting the models. Despite investing in the re/insurance space, these funds and individuals see themselves as finance people who, in the words of Lefferdink, dabble in insurance. When it comes to these capital investors, their involvement in a catastrophe bond represents just two to four percent of their overall portfolio, meaning only a small proportion of their assets under management are put into insurance risk. Consequently, it can be hard to justify the expense of dedicating the time and resources needed to understand the models fully and consider making some slight amendments to them and therefore adjust the technical pricing of the catastrophe bond so the transaction makes sense to them. As a result, [investors] rely really heavily on modelled probabilities, and the pricing in Latin America is still a little bit light on an unadjusted technical basis [Models are] a starting block or a framework [for re/insurers and] many people do make those adjustments, but catastrophe bond investors are a little bit hesitant to do that, Lefferdink said. However, with the differential between pricing from a re/insurance standpoint and that of the catastrophe bond market narrowing, Lefferdink said he expects the alternative capital sector to increase in prominence in the Latin American market. We ve seen a few catastrophe bond indications that have been within 30 or 50 basis points of traditional pricing in Latin America, so it s getting a lot closer. I certainly think if we were to see a model updated or changed and the pricing is made a little bit more attractive, we would see a big impact and a large increase in direct capital. Consequently, Lefferdink believes there will be a heightened involvement from the alternative capital sector in Latin America on both the direct and indirect sides of the market. As indirect investors build their portfolios, diversification is going to become more important to them, and Latin America will become more attractive to them. The majority of indirect investors are looking for equity returns in the low to mid-teens which is very tough to generate, but I think we will see some funds that will be focused on emerging markets. So just like in the financial world, where everyone became very highly concentrated on US risk and then the emerging markets grew because they needed diversification, I think we will see the same thing happening in the indirect capital markets. However, Lefferdink predicted that it will become tougher for catastrophe bonds to make greater inroads into the Latin American market, owing to the modelling hurdle. When it comes to catastrophe bonds, I do think it will require some adjustment to pricing, whether that s a model change that moves the technical rate a little bit, or an event that moves pricing up or down. I do think that it s going to take something along those lines before you see a big impact from catastrophe bonds. l By Christopher Munro christopher.munro@euromoneyplc.com Reactions July/August

10 LATAM facts and figures Global influence The re/insurance market in Latin America has continued to expand and will continue to do so, although at a slower pace, as the rate of economic growth starts to slow. Christopher Munro reports. Latin America s re/insurance market has increased its share of the global industry by 2.3% over the last decade and the region s influence on the international stage is expected to continue to rise in the coming years, albeit not at the same pace. The entire Latin America region accounted for just 1.5% of global re/insurance premiums in By the end of last year that had jumped to 3.8% as companies within the area increased their market penetration and more projects came on line that required cover. A relaxation of regulations in some countries within Latin America has also played no small part in the region s re/insurance expansion, explained LatinoInsurance s executive president, Juan Fernando Serrano. Latin America s re/insurance written premium volume grew to almost $178bn in 2013, a huge increase compared with the close-to $50bn generated in Ceded premium from the Latin America region has also increased substantially over the past decade. The $19.7bn ceded in 2013 is a marked increase on the close to $7.4bn ceded in In terms of the global companies, regional players and local businesses, the top 25 firms account for 66% of gross written premium. The next 25 have only a 16% share, meaning the top 50 firms were responsible for 82% of Latin America s total gross written premium. The remaining 540 insurance groups have only 18% between them, [and] that s where most of the locals can be found, Serrano said. The share of the globals has reduced by five or six percentage points since Three of those points were picked up by the locals, while the other three were by the regionals. Over that period, the global firms have increased their share in Ecuador by 15 percentage points, while in Mexico it is four percentage points. In the Central America region, it s three percentage points and in Bolivia and Paraguay it is two percentage points each. But these global firms have not enjoyed consistent success in Latin America, as their share of the market in Peru has reduced by 30 percentage points and in Venezuela by seven. In Brazil they have lost four percentage points of market share, and in Argentina and Chile they have suffered three percentage points of market share loss. In Puerto Rico and Uruguay it s minus one. 38 July/August 2014 Reactions The locals have been growing faster than the globals a 20% compound average growth rate versus 16%, Serrano explained. They also have a better return on equity. But globals make better financial profit, at 8.5% of written premium, compared with 7% for locals and 6% for regionals. Brazil accounts for far and away the largest amount of written premium volume, with the country representing 45.5% of the overall total in And it has grown in prominence in the region compared with a decade ago when it accounted for 33.6% of Latin America s total written premium volume. Brazil s increased influence on the Latin American re/insurance market has been to the detriment of Mexico however, with the Central American country accounting for 15.5% of the overall region s $178bn in 2013, down from 25.2% it held back in In 2013, Venezuela, Argentina and Chile made up the remainder of the top five largest markets with shares of 9.3%, 7.9% and 6.6% respectively. While the Latin American re/insurance market continues to expand, Serrano explained there is little doubt the growth of the region s industry has decelerated in recent years as more projects are completed and what had been significant year on year gross domestic product increases are no longer as large. Latin America continues to grow with double digits, but it is slowing down. Written premiums grew by 15% in 2013, but it used to be 16% in 2012, said Serrano. By line of business, pension/workers compensation and accident are the fastest-growing classes in Latin America, with both sectors enjoying compounded average growth rates of 20% from 2004 to 2013, Serrano explained. Some of these growing lines have also benefited from considerable profitability, with accident, surety, credit and life all making good returns for those companies offering these products in Latin America. In 2013, the net combined ratio for accident business in Latin America stood at 62%, while surety and credit and wider property and casualty (p/c) business boasted figures of 63% and 78% respectively. Looking at which companies are performing particularly well, Serrano said global re/insurers have a higher share in motor vehicle and accident and p/c business, whereas the local players are more dominant in the pensions and workers compensation, life and health, and surety and credit markets. Locals have been growing faster than globals, although the international insurance companies have found it easier to record larger profits, explained Serrano. Profits across the region have generally been healthy. There are healthy profitability indicators we have [a return on equity] of 15% as an average and a combined ratio of 74% gross and 90% net. When it comes to M&A activity, the number of actual deals is more or less the same with 32 taking place in the five years to 2008 and 35 between 2009 and But according to Serrano, the value of these transactions has more than doubled from $3.1bn in the five year stretch to 2009 to $6.8bn between 2009 and With 12, Mexico has seen the highest number of M&A deals, while 11 have taken place in Brazil, nine in Argentina, eight in Chile and six in Peru. l By Christopher Munro christopher.munro@euromoneyplc.com

11 LATAM Infrastructure projects Infrastructure surge As governments in Latin America push ahead with several huge infrastructure projects, re/insurers operating there will benefit from a host of submissions as international counterparts miss out. Christopher Munro reports. The vast number of infrastructure projects planned in Latin American over the coming years will present numerous opportunities and challenges for re/insurers in the region while those in the international market are likely to miss out. Attendees at the Fourth Latin American Investment Forum which took place earlier this year heard that around $1trn of infrastructure projects are scheduled to begin in the coming years. The majority of this sum is from Brazil, with the country planning to spend $900bn on infrastructure projects before the end of the decade. At the same time, Mexico s new government has set its sights on pushing through fundamental reforms of its energy and telecommunications sectors over the next four years, projects expected to cost in the region of $200bn. On top of that, Colombia is looking to spend about $25bn on road construction over the next seven years, while Peru has plans to invest some $80bn on energy, transportation and sanitation. Peru is expecting to spend close to $6bn on construction of Lima Metro s Linea 2 and $4bn on a natural gas pipeline. Many of these projects will require significant involvement from the re/insurance industry. However, it is not simply a matter of re/insurers just reaping the rewards of this inflow of business, as, although these investments no doubt provide plenty of opportunities for carriers, they also bring challenges. As Katia Luz, head of construction and operational risk at Odebrecht Captive Insurance Broker the company-owned insurance broking facility of Brazilian construction and engineering firm Odebrecht explained, very few construction projects are now undertaken purely with public owners. Increasingly these projects now involve several stakeholders such as public entities, banks, commercial ventures and such like. Managing the various interests can be difficult, and insurers are receiving inquiries from all of them as they seek to offset some of the financial risk associated with their investment. We really need more sophistication and innovation from all parties in order to be able to place the insurance for these projects, Luz explained. At the moment, we have some challenges placing a couple of projects because they involve tunnels, wet works and are in places with catastrophe exposure. We are not only the contractor, but also an investor. So then we need delay in startup coverage too, so it becomes more complex. Philippe Jouvelot, the president and chief executive for Axa Corporate Solutions in Brazil and Latin America, fully expects more construction all risk, erection all risk and project cargo coverages to be sold in the region in the coming years as these infrastructure projects take life. In terms of insurable cost, it s not only the damage itself, but also business interruption and delay in startup which is the biggest amount we have to cover and is probably the most interesting part of this line of business, Jouvelot said. However, there are several supplemental coverages likely to interest cedants aside from those directly related to construction. The risks are not only on the construction itself, but there s also a larger set of risks such as the climate, earthquake, political risks, instability of the government, untrained staff all those risks need to be considered by the stakeholders, Jouvelot explained. Whereas in the past many of these projects will have found themselves in the hands of major international specialist re/insurance companies, with the growth of the local regional market that is increasingly no longer the case. And even though many of these planned infrastructure projects will require vast amounts of insurance capacity, they are expected to be placed locally. Today we really do have a global market. In the past, it was very difficult in Brazil to place business with good conditions, even five or six years ago, said Luz. We preferred to go to London to place some of our risks because if I go to a company in London, the underwriter there would give me better conditions and pricing than an underwriter for the same company in Brazil. But this is probably over today. I see the global companies having the same type of capacity and authorities in Brazil and Latin America as elsewhere. London is losing its place and the risks are being placed in Latin America. As Luz explained, that is good news for companies such as hers, because local underwriters have a better understanding of the business they are presented. I believe the people working in Latin America know the risks better. They have a better feel for the environment and what the real risks are. There s plenty of capacity and I think it s a really good moment for insurance buyers. Luz added: It s a global world, and it doesn t really matter to me if I have to go to China, Japan or wherever to get the best quality. We have projects in Abu Dhabi and in Africa, so if I need to go to New York to get coverage, it doesn t matter. But today we are able to find quality insurance in Latin America we are able to find in Miami or in Brazil people who are capable, know the business and can underwrite a large project and give us what we need. That s happened because they realised either they would wake up and see they needed to change, or they would lose out to London or somewhere else. London is a transactional place for us. [We have] a portfolio of projects, not single ones, and that s why we need long-term relationships. l By Christopher Munro christopher.munro@euromoneyplc.com Reactions July/August

12 Latin American market Insurers keep their eye on the ball After the drama of the football world cup in Brazil, most people s attention has shifted away from Latin America. This is far from the case in the insurance industry, writes Allied World s Darren Powell, who considers some of the opportunities and challenges of doing business in the region. The Latin America market offers rich growth potential. Since 2012, insurance premiums on average have grown at double-digit pace across the region, well above the rate of most other parts of the world, and insurance penetration rates still remain low in many countries. Although economic growth in Latin America has slowed from an average of 4.3% in the period from 2004 to 2011 to 2.6% last year, the International Monetary Fund forecasts that this figure will hold steady for 2014, before rising to around 3% in In an area of such size and diversity there are inevitably market variations between countries but the overall outlook, particularly in the medium term, is very positive. Common characteristics A number of countries share common characteristics which are helping to drive the growth of the insurance industry. For example, relatively youthful populations and a burgeoning middle class who will increasingly buy insurance to cover their newly-acquired assets, while people on lower incomes are driving demand for micro-insurance products. Credit growth most notably automobile and residential and commercial property lending has also become an important source of both insurance and reinsurance premium in the region. Banks are set up to evaluate and assume credit risk but they are much less inclined to absorb property catastrophic risk as well, hence the exposure is often transferred to the insurance industry by requiring potential borrowers to purchase auto or property insurance. The introduction of higher minimum capital requirements for local insurers has increased solvency margins and confidence in the industry, and the increasing interest from both domestic and international players will probably lead to more competitive terms and conditions despite increasing demand in the region. Finally, much of Mexico, Central America, the Caribbean and South America is exposed to substantial loss exposures from hurricanes, tsunamis, earthquakes and flooding but the level of cover purchased for catastrophic risks is always lower than it could be, creating opportunities for insurance and reinsurance growth. 40 July/August 2014 Reactions The challenges However, despite this positive outlook, those entering the market face a range of risks and challenges. There have been some interesting losses in Latin America, for example with surety in Brazil and PI in Colombia, which are making people more aware of the exposures they face in the region. Factors such as the upcoming federal election in Brazil and Argentina s on-going debt problems are likely to make market entrants proceed with greater caution, as will inflation and currency exchange rate risks. In 2010, after the Chilean earthquake, that country s currency the peso spiked due to the influx of resources needed for the rebuilding. This further inflated the value of the claims. One common issue that market entrants need to contend with is a more restrictive regulatory environment, where insurance superintendents are looking more closely at investments, catastrophe protection and reinsurance. Another feature is the interplay between international insurers, who may benefit from lower insurance costs, and local insurers who may have more flexibility and stronger local contacts. Finally, the extensive use of coinsurance has led to higher treaty reinsurance capacity and less need for facultative support outside of specialty areas such as energy and aviation. In addition, in certain territories such as Brazil and Argentina, governments have adopted policies to ensure a strong local reinsurance presence which for certain risks has raised the cost of insurance. Significant investment Against this backdrop, those looking to enter the market must be prepared to make a substantial investment. It can be quite costly to start an operation, due to the registration and approval process in a number of countries. Meanwhile, those considering the acquisition route will find bargains few and far between, with local insurers tending to demand a high multiple of their book value. That said, there have been a number of high-profile deals. Swiss Re Direct Investments Co bought a stake in Brazil s Sul America SA for US$334m in January of this year and a few months later

13 Latin American market Companies will expect their insurance providers not only to understand the market for which they are writing risks, but to combine this with deep technical expertise. Darren Powell, active underwriter for syndicate 2232 at Allied World Colombia s Seguros Colpatria SA was a target for France s Axa in a similar-sized deal. We at Allied World have chosen to go down a different route to structure and grow our operations. We have been writing Latin American treaty business out of our Miami office for some time, where we were one of the first so to do. The city is now growing as a hub for Latin America business and people across the market are pulling in resources. However, it is vital to focus on human capital before investing in the physical capital, and Allied World has been hiring people in Miami who don t just know the language but who are Spanish and Portuguese speakers from the region, with genuine insight and knowledge of the cultures and the markets for which they are writing business. This has enabled us to build a solid team of underwriters and even extends to our catastrophe modeller, who focuses solely on Latin America, drawing on their local experience. Companies will expect their insurance providers not only to understand the market for which they are writing risks, but to combine this with deep technical expertise. Looking forward, insurers will need to continue to develop and introduce products that cater to the changing needs of the market. For example, a number of countries will benefit from significant near-term infrastructure development. In Brazil this is driven in part as the country readies itself for the Olympics in 2016, while Mexico s National Infrastructure Plan commits to an investment of US$400bn over five years, offering plenty of opportunities for foreign re/insurers to enter the country since there is not currently sufficient capacity in the domestic market to cover the large risks that these projects will entail. We believe Allied World is well placed to respond to this demand, having recruited a respected and well known underwriter to lead our on-shore construction risk team, a significant new offering in light of the infrastructure investment the region is seeing. A two-way street At the other end of the spectrum, the pace of development and economic growth in the region is fuelling the rise of a new breed of large and ambitious Latin American businesses that are increasingly looking beyond their local and regional borders for opportunities. As they do so, they are demanding risk partners who understand international markets, the exposures they face and their product requirements. For example, businesses looking to enter the US need to understand that their board members are subject to greater regulatory scrutiny and requirements than perhaps anywhere else in the world. The importance of having directors & officers insurance is obvious, but an insurer with sufficient capacity to offer larger limits is required. Policyholders also need to be comfortable that their insurer has the international knowledge and experience to deal with the myriad of technical issues that need to be addressed, whichever overseas market they are looking to operate in. Further consolidation We can expect that the insurance market will continue to grow across Latin America, and consolidation will remain an on-going trend. This will be driven in part by international players looking to expand their global footprint and in part by domestic insurers merging or divesting assets for a number of reasons, including the need to comply with changing capital requirements. Indeed, in a very interesting recent development at the time this article went to press, it was announced that Ace had agreed to buy the property and casualty business of Brazilian bank Itau currently the country s largest insurer subject to contract conditions and regulatory approval. At the time of the announcement Itau said the sale was part of its strategy to focus on mass market insurance policies that are more associated with its core retail banking business. Future trends Despite significant events such as the Chilean and Mexicali earthquakes and the floods in Brazil, pricing remains soft and looks likely to remain so for the foreseeable future. Alternative capital has not been a significant driver of excess capacity in this market. Outside Mexico, catastrophe bonds have not been a feature in the Latin American market, partly because the accurate capture of insurance data (location, year of construction, number of stories, building materials, etc) is fundamental in ensuring adequate catastrophe protection. So, as models and data improve, cat bonds may become more prevalent. Indeed, up to now, it has been a similar story with insurance linked securities (ILS), which haven t yet gained traction in the region. This is mainly due to the fact that globally a significant proportion of the current volume of ILS is driven by US investors. At present they may not have the appetite to go elsewhere, especially as foreign exchange fluctuations is another risk that they need to factor in, but this may change as the quality and reliability of the information available improves. As part of its Vision 2025 Lloyd s has made clear its emerging market intentions and as it sets up licencing arrangements in more countries in the region, both confidence and opportunities will increase. Another possible entry route into the market will be via a consortium, as syndicates look for the greater capacity that will be needed to write some of these risks. Ultimately, it is difficult to predict exactly how the market will evolve in the next years, but one thing is for certain those who take their eye off the ball will likely be scoring an own goal. l Reactions July/August

14 Miami gateway Miami heats up as LatAm access point The city of Miami continues to attract companies from across the insurance and reinsurance spectrum as they seek new opportunities to access business from the growing economies of Latin America. Christopher Munro reports. Miami s expansion as a leading hub for accessing the Latin American re/insurance market shows little sign of waning, with yet more companies looking to set up shop in the city. Latin America remains a growth region for re/insurance, and with competition in the area increasing, underwriters are increasingly finding it worth their while to open up in Miami to avoid losing this business either to local competitors, or to the multinationals who are based in the market. As a result, the past year has seen a host of companies both on the underwriting and broking side opening up in Miami. Beazley opened up there last year while Aspen Insurance, Allied World, Brit, Swiss Re and PartnerRe are just a few examples of other companies who have set up operations or strengthened their capabilities in Miami in the past 12 months. Lloyd s insurer Chaucer, which is part of the US-based Hanover Insurance Group, is the latest to announce that it too will be opening an office in the Floridian city. While many other firms have opened up operations in Miami to better access business in Latin America, Chaucer has taken the interesting step of moving its current Latin America operation from the Argentine capital of Buenos Aires to the Floridian city. Like the office in Buenos Aires, the new Chaucer office will serve the insurer s Lloyd s syndicate 1084, bringing in business to the platform that may otherwise be lost to local players in Latin America. Fischer will not be making the move from Buenos Aires to Miami until November, with his colleague Alejandro Ferrin joining him early next year. Miami is becoming more and more important, and that s why we are opening an office there, Uwe Fischer, the general manager for Chaucer in Latin America, told Reactions. We are trying to get more business into the syndicate, but we also have delegated underwriting authority. This is complementary to the book of business we have in London we do not compete against them [as] it s the same capacity, but the idea is to get the smaller or medium sized business which does not necessarily make it to London. Another reason for Chaucer s decision to move its office is because of the economic and political issues that have arisen in Argentina. Buenos Aires has now been reduced to become a purely local reinsurance place, while other places like Miami and Bogota have developed a reinsurance hub for the entire region, said Fischer. While the decision made sense four years ago to move into Argentina, now things have happened like the change in regulatory environment, the import restrictions, the currency 42 July/August 2014 Reactions restrictions, and we have high inflation, all of which are negative factors when investing more in the future in Argentina, he added. This opportunity to access business that does not always make it as far as London, or indeed other major re/insurance hubs such as Switzerland, Germany or indeed the US, is another reason why companies are flocking to Miami. Aspen already had a reinsurance operation there, and the company has now also set up a specialist onshore energy and construction team in the city to write business coming out of Latin America. We have ambitions to expand into some new markets across different geographic locations and Latin America is one example. Aspen already has great teams and lines of business there, and we ve added to that with Tony Carroll and Gary Windsor, who will write onshore energy, explained Mario Vitale, the chief executive of Aspen Insurance. While energy is Aspen s latest focus on the Latin American market, the insurer already writes political risk and kidnap as well as kidnap and ransom coverage in the region. Kidnap and ransom insurance is another example where we have a great deal of expertise in the region, and we re looking at Miami to be a springboard for us to help us focus on that part of the world, Vitale said. For Aspen, the move to Miami is part of the company s previously announced strategy to expand its operations selectively in targeted market segments including Latin America and South East Asia. Aside from Miami, Singapore is also on the company s list of global markets to move into. We re also looking at Singapore as an area which is generating a lot of interest from us for some of our specialty products. Energy will be one of those key products for us in that area Singapore is a robust trading environment for that class. A lot of Asian business used to gravitate to London, but that is changing, so it s a great opportunity for us to get involved in South East Asia, Australia and even India. A great deal of energy business from that region is being placed in the Singapore market. Similarly to Aspen, Chaucer will use its new Miami hub to write energy and construction business, although it has plans to expand into others areas in the future. We have been writing facultative property for four years now, and we are also now looking to add some additional business lines, said Fischer. Miami is booming, so we took the decision to relocate there. We consider it a good place for the future and for a long term investment All the important brokers have offices there and

15 Miami gateway We have ambitions to expand into some new markets across different geographic locations and Latin America is one example. Aspen already has great teams and lines of business there, and we ve added to that Mario Vitale, chief executive at Aspen Insurance especially the treaty placements go through the Miami brokers so it s important to have an office there. We are all based on Brickell Avenue, so that will open up opportunities to see more business. The idea is to not only continue the business we are already doing. We are already looking for a treaty underwriter so we can open a treaty underwriting operation as well. Chaucer is also looking to bring over a political risk underwriter from London to write the class in the Miami office. On top of that, another future aim is to offer both casualty and marine coverages from the Miami platform. While Aspen has bolstered its operations in Miami and Chaucer is swapping Buenos Aires for the Floridian city, one new business has decided the coastal town is the perfect setting to open up in and access business in Latin America. Crandon Re has been set up Tony Matta, a former Hartford, Benfield and RK Harrison executive who in the past has worked with industry luminaries such as Ivan Vega, who now works for Navigators Re s Latin America and Caribbean operation, and Lancashire s chief risk officer Charles Mathias. Matta has now launched Crandon Re as a Miamibased independent facilities intermediary. The company opened for business in the middle of July. The operation, which is a managing general agent (MGA), has secured backing from three Lloyd s syndicates for three different facilities, all of which will cater to the needs of clients in the Latin American market. We decided to explore the world of facilities and realised there are some very interesting operations that can be in the same regions, time zones and language as the local originating brokers that would allow the locals to capture additional brokerage revenue and allow our backers to generate more premium, Matta told Reactions. Matta, who serves Crandon Re as its president, explained the new venture is not doing anything particularly revolutionary, although he believes it is something that has not been attempted from Miami before. I m not doing anything special or different, but it does bring more convenience to the local market. We won t have underwriting authority when we start out, but moving forward, we are looking to get binding authority for one particular line of business that we hope to announce in time for the 1/1 renewals, he explained. To begin with, Crandon Re will offer three different facilities: one dealing with marine open cargo and stock throughput, another targeting sabotage and terrorism business, while the final one will deal with third party/ general liability cover. Initially, Crandon Re will present business to its panel of backers who will then decide whether or not to provide cover. In the future though, Crandon Re will have delegated underwriting authority so it can accept risks itself. While Crandon Re will offer its products across Latin America and the Caribbean, Matta said he expects the majority of its business will emanate from several countries and regions: Mexico, Central America, Puerto Rico, the Dominican Republic, Colombia and Ecuador. That does not mean the operation will not take on business from elsewhere, but Matta does not anticipate seeing much from some of the region s larger economies such as Brazil, Chile, Argentina and Venezuela. There might be the odd opportunity, but I don t see us doing too much there, he said. Puerto Rico is quite soft now, but it s still very catastrophe driven and so there are opportunities. The same applies to Mexico. Brazil and Chile are as soft as can be though, while Argentina and Venezuela have their currency and other issues. With more insurers, reinsurers and brokers either setting up operations in Miami, or adding to their existing capabilities in the city, Matta said it is an exciting time to be looking to open up in the market. But he is adamant Crandon Re is bringing something different to the Latin American market. We are excited because we see new markets entering Miami, we see new brokers coming to Miami, but we haven t seen any MGAs or facilities the Pioneers and Aquas of the world. Those guys have not been coming to the market, he noted. I see a lot of people doing great things in Latin America, and there are some world class underwriters working in the region, but at the same time, I see a lot of people looking to produce a profit for their particular silo. I don t see as much cross marketing and cross selling as I would expect to occur. This, Matta feels, is something Crandon Re will focus on in the future. He wants to be able to have facilities in place so clients can come to him and have their various insurances placed with the operation. I want to be in a position where we can ask for a line on the general liability, property or sabotage and terrorism business on everything. We want to sell you more than one line if it makes sense to our backers. As we move to the MGA side, one of the things we are keen on doing is putting our money where our mouth is, and instead of saying our interests are aligned with those of our underwriters, actually trying to work exclusively for a profit commission instead of taking a fee up front. That way, we can look underwriters straight in the eye and tell them if they don t make money, then we don t make any either. l By Christopher Munro christopher.munro@ euromoneyplc.com Reactions July/August