The Brazilian insurance market, today and in the years ahead. Adapting to change in a continuously expanding world. kpmg.com/br

Transcription

1 The Brazilian insurance market, today and in the years ahead Adapting to change in a continuously expanding world kpmg.com/br

2

3 Index Introduction Executive summary Market composition, development and challenges Market composition Market development Market challenges Company Management Operational Management Management of results Investments...22 Acknowledgements... 23

4

5 Introduction The Brazilian insurance industry has shown consistent and significant growth over the past 10 years, always well in excess of GDP-growth. The pressures that the wider economy has been faced with over the past years, have not yet had a significant impact on this industry. Non-life business is the traditional pillar of the Brazilian market, but Life products have seen significant growth as well, and the health industry is seen as one of the most promising for the years ahead. Fear of increasing inflation may have an impact on the success of longer term products however. Profitability, especially in personal lines, remains impressive, with much more potential ahead with increasing average wealth per household and new clients entering the market as they migrate up the socio-economic scale. These changes bring challenges to distribution models and product portfolios and also bring responsibility for customer education. Competition in commercial lines is and remains tense, primarily due to pressure on pricing by new entrants to this market. In all lines of business, insurers continue to face significant challenges as they have to absorb the growth of their business into their systems and processes. As Brazil continues to offer attractive longer term growth opportunities, prominent foreign players continue to show interest in entering or in expanding their business. The high concentration in significant parts of the market, the complexities in distribution and the power of the broker community, make successful market entry a real challenge, as history has shown. On the regulatory front Brazil actively tries to tailor and incorporate global developments into local regulation. We invite you to explore in greater detail these and related trends in our review of the Brazilian insurance market. We take this opportunity to thank executives at leading insurers, reinsurers and brokers, who not only contributed their time to complete this questionnaire, but also shared valuable insights to enrich the quantitative results. As a result of their help this publication represents over 60% of the market in premium terms. We hope you enjoy reading this publication and invite your feedback and comments. Luciene Teixeira Magalhães Partner, Head of Insurance KPMG Brazil Erik Bleekrode Partner, Insurance Practice KPMG Brazil

6 6 6 The brazilian insurance market today and in the years ahead

7 The brazilian insurance market today and in the years ahead 7 1 Executive summary For the purpose of measuring the market expectations of the main Insurers, Reinsurers and Brokers, we conducted a series of interviews and sent out electronic questionnaires to the main executives of the industry. In total, 12 interviews were conducted and 16 questionnaires were answered. 75% of companies that answered the questionnaire are not linked to financial institutions. The chart below shows in which segments the organizations that took part in the electronic survey are active: Lines of Business Microinsurance 3 Corporate 13 Bancassurance 5 Affinity 6 Mass markets 9 Participants revenues 19% 25% Less than BRL 500 million Between BRL 500 million and 1 billion 13% 6% Between BRL 1 and 5 billion Between BRL 5 and 10 billion 37% More than BRL 10 billion

8 8 The brazilian insurance market today and in the years ahead Market growth and trends in development The annual average growth of 10% in nominal premium terms per year in insurance and 14% in reinsurance supports an optimistic view for the coming years; premium growth and improved profitability will continue to be the main focus of most of the participants in this survey. The Brazilian insurance market continues to be very concentrated, with 10 major insurance groups representing approximately 85% of direct premiums in The market expects this concentration to continue in the coming years. Despite the fact that the insurance market gained weight in the overall GDP, it is still not very representative when compared to more mature economies such as the United States and many European countries. Most respondents believe that the market will maintain the current growth rates through 2015, believing also that VGBL (an individual incentivized pension and savings product) will resume the growth rates presented through Operating efficiency and better management of results Most participants believe that the main areas to be optimized are claims management and investments in advertising and marketing, with increasing focus on radio and TV campaigns, and specialized newspapers and magazines. Street advertising campaigns are headed in the opposite direction and should not have the same relevance as in prior years. Improvement in legal claims management, pricing processes and managing service providers are considered as priority actions to reduce operating expenses and increase efficiency gains. Market dynamics Most of the participants believe that the five largest groups will continue to enlarge their market share in the coming years, mainly due to organic growth, since mergers and acquisitions amongst larger companies were foreseen only by 25% of respondents. International players are expected to continue to show interest in the Brazilian market. Executives expect that distribution channels, income per product and claims ratios will behave the same as in 2013, with changes in specific lines such as financial risks, for which the market expects a small deterioration of claims rate. Further to the details underlying the outcomes as illustrated above, we have also included throughout the documents our insights and observations on a number of key themes, these being Brokers, Health Insurance, Retail market, Commercial and Industrial market, Reinsurance and Market entry/m&a.

9 The brazilian insurance market today and in the years ahead 9 2 Market composition, development and challenges Market composition Premium growth and improved profitability of operations are two of the main focus areas for insurers, reinsurers and brokers in the near future. 1 - Total volume of insurance premiums BRL billion % Total Volume of Premiums 2013 Sources: Susep and ANS 2 - Total reinsurance premium BRL billion % Total Volume of Reinsurance Premiums 2013 Sources: Susep and KPMG Analysis

10 10 The brazilian insurance market today and in the years ahead 3 - Evolution in market share composition BRL billion 180 CAGR 6% 8% 6% 9% -2.5% 15.0% 100 9% 8% 86% 85% 10.9% 83% average 10.2% Top 10 Top 11 to 20 Outside Top 20 Sources: SUSEP, ANS and KPMG analysis Over the period , it is remarkable that the growth rate of the Top is significantly above the other categories. Furthermore, the smaller players are struggling to find growth. 4 - Direct premium by major segment in % VGBL 20% 20% Motor 37% 15% Life and Accident 14% Health 15% 7% Property 1% 4% Other 2% 4% 7% 14% 2% Transport 1% Financial Risks Sources: SUSEP and Sincorsp

11 The brazilian insurance market today and in the years ahead Direct premium growth dynamics per segment BRL billion VGBL Motor Life and Accident Health Property Other Transport Financial Risk Sources: SUSEP, ANS and KPMG analysis When looking at individual lines of business, Motor and Health stand out positively, while VGBL has suffered a reduction in its growth rate in Top 10 insurance groups in 2013 BRL billion Bradesco Banco do Brasil - Mapfre SulAmérica Porto Seguro Itaú Zurich/Zurich Santander Allianz Caixa Seguros Marítima-Yasuda Tokio Marine Sources: SUSEP, ANS and KPMG analysis

12 12 The brazilian insurance market today and in the years ahead Market development 1 - Our view on penetration of insurance in GDP Despite the fact that insurance participation has gained relevance in relation to GDP, it is still less representative that in more mature economies. For example, when we compare the participation of general insurance, which in 2013 was equivalent to approximately 1.2% of the Brazilian GDP, to economies such as Chile (1.5%), Portugal (2.5%), Belgium and United States (3%), we can see that insurance still represents a very relevant opportunity for growth. The chart below illustrates the evolution of general insurance penetration in GDP from 2006 to 2013 and our projections for the development of this penetration against GDP up to This graph shows the expected growth in penetration of the Brazilian non-life market as a percentage of GDP; penetration pattern has been calculated based on developments experienced in countries within the nascent, emerging and matured stages Non-Life Penetration (%) of GDP 17k 34k 4.5 Switzerland France Germany Austria 3.0 Belgium United States of America United Kingdom 2.5 Bulgaria Portugal Italy Ireland 2.0 Czech Republic 1.5 Thailand Chile China Indonesia Peru Turkey Mexico GDP per capita on PPP basis US$ ` Nascent Emerging Matured Brazil insurance penetration, 2006 to 2020 Insurance penetration, 2012

13 The brazilian insurance market today and in the years ahead Expected annual growth per segment Average Life and Accident 61% 31% 8% 13% Motor 14% 72% 14% 10% Property 21% 50% 29% 11% VGBL 21% 50% 29% 11% Financial Risk 21% 65% 7% 7% 10% Transport 21% 72% 7% 9% Health 15% 54% 31% 11% 0 to 5% 5 to 15% 15 to 20% >20% Survey participants believe that practically all segments will maintain a yearly premium growth above 10% in 2014, except for transport insurance. Life and personal accident insurance are expected to present the most relevant growth. We note that the growth percentages should be assessed in the context of 6-7% expected inflation for BROKERS The broker market remains very fragmented and very, and perhaps too, focused on short term products due to their high profitability. Although some players are searching for consolidation opportunities, this is difficult to achieve given the small size of the great majority of players in the market. The Commercial market is dominated by the large global players, who want to extend their business to the SME market but find it hard to enter forcefully for similar reasons, while the agency model has not yet taken off in Brazil due to regulatory and labor laws. All brokers see their position under pressure due to pricing in the market, increasing transparency through the use of the internet and upcoming aggregators. Though lagging Europe in its development, internet is undoubtedly going to speed up disintermediation in Brazil as well. The key challenge for brokers will be to define their added value to the market in the future and how to achieve that.

14 14 The brazilian insurance market today and in the years ahead 3 - Expectation of the development of the combined ratio per segment Health 11% 67% 11% 11% Transport 33% 50% 17% Financial Risk 8% 25% 42% 17% 8% VGBL 10% 90% Property 8% 42% 50% Motor 27% 55% 18% Life and Accident 64% 27% 9% Significant negative change Moderate negative change No change Moderate positive change Significant positive change HEALTHCARE INSURANCE Healthcare is number two on the wish list of Brazilians but the healthcare industry is underdeveloped and cannot accommodate the requirements of the population. It has not kept pace with the migration of many Brazilians to more affluent wealth classes. Only some 25% of the population are currently insured. This means that the potential for development of this market is enormous, but so are the risks. Apart from global issues such as the general inflation of health costs, the debate around capital requirements for healthcare activities and the debate around socially acceptable returns on commercializing healthcare activities, the political and regulatory risks in Brazil are above average given the pressure on the government to provide the Brazilians with healthcare at an affordable price. The challenge for the market will be to find and develop solutions that are commercially viable within the existing uncertainties.

15 The brazilian insurance market today and in the years ahead Expectations of the change in loss ratio per segment Health 11% 78% 11% Transport 33% 59% 8% Financial Risk 8% 42% 33% 17% VGBL 10% 90% Property 25% 42% 33% Motor 27% 55% 9% 9% Life and Accident 73% 27% Significant negative change No change Significant positive change Moderate negative change Moderate positive change REINSURANCE The number of market participants in the reinsurance industry has increased significantly to 106 post market liberalization in This has increased pressure on pricing and profitability with the top 10 players combined ratio averaging 108% in IRB continues to dominate the local reinsurance market, although new local reinsurer entrants are increasingly capturing GWP. Regulatory restrictions discourage the cession of risk to admitted and occasional reinsurers while intragroup restrictions continue to impact foreign players in the market. Although some believe that Brazil should strive to become a hub for reinsurance business in Latin America, others are less positive about this due to the relative immaturity of the market and the regulatory constraints compared to other countries in the region. 5 - Expected annual growth Average Top 10 7% 72% 21% 11% Top 11 to Top 20 86% 14% 11% Outside Top 20 21% 29% 43% 7% 13% 0 to 5% 5 to 15% 15 to 20% >20%

16 16 The brazilian insurance market today and in the years ahead 6 - Drivers for market growth Economic Growth 71% Income increases in C, D, E classes Increase in insurance culture in general population 50% 64% high priority Infrastructure investments 43% Credit Growth 36% medium priority Regulatory Changes 21% Expansion in product offer 7% low priority Economic growth and increased income of C, D and E classes are considered by most respondents as the main factors that will influence market growth. With ever more pessimistic growth expectations for the Brazilian economy, it is not clear for survey respondents if this growth will be sufficient to continue to drive insurance and reinsurance market at current rates. RETAIL MARKET For the longer term, the retail market is seen as the key driver for profitable growth, with most opportunities in motor, health and mass market (insurance sold through retailers) business. Growth will be driven by existing customers that grow their average household income and therefore the value of their insurable assets. The new customer who is entering the financial market will be the main driver for innovation in distribution and products. Fear for inflation may put some pressure on long term products. We believe that the mis-selling debate that has impacted primarily European insurers will at some point also reach Brazil. Despite all consumer protection laws and the focus on short term products, there is an enormous pressure on sales with commission rates that in some cases are prohibitive. We see a large responsibility for the industry participants to improve the financial literacy of the retail customers in order to ensure they understand the products they buy. COMMERCIAL AND INDUSTRIAL MARKET With the commercial segment accounting for around 30% of the non-life direct market in 2020, we expect this to be a USD 15 billion GWP business by then. Growth in this segment is generally aligned with GDP growth and, among other things, will be driven by the enormous infrastructure investment programs that, although often delayed, will happen at some point over the next 5-10 years. However, profitability in this segment has been very low in recent years and is expected to stay at low levels due to the pressure on pricing through new entrants that use pricing to conquer a share of the market. With the high inherent claims risk and the strain on capital requirements, bancassurers may strategically revisit this line of business in the future. New entrants will need to find a sustainable business model that will allow them profitable growth in a complex market.

17 The brazilian insurance market today and in the years ahead Growth of major groups market share in % 0% to 2% 8% 2% to 5% 46% > 5% Negative increase 31% Respondents believe that the already concentrated market will become even more concentrated in the five largest groups. Most participants believe that new international players will enter the market. 8 - Expectations of Mergers & Acquisitions Entry of new foreign players 69% Sale of one or more leading Brazilian insurers Mergers and Acquisitions among major Brazilian players Withdrawal from the insurance market of one or more foreign players None of the above 31% 23% 15% 23% MARKET ENTRY / M&A There have been many new entrants into the Brazilian market and there will continue to be. However, the number of potential partners or acquisition candidates is low due to the structure of the market and the already existing partnerships. And since one of the key success factors for market entry is the distribution model, finding the right partner is essential for success. Perhaps future success will more and more lie in the ability of a new entrant to bring something to the Brazilian market that it does not yet have, for example products, systems, direct distribution or risk management solutions.

18 18 The brazilian insurance market today and in the years ahead 2.3 Market Challenges 1 - Priority development areas in 2014 Improving profitability 88% Premium Growth Development of new products 56% 69% high priority Brand strengthening 50% Growing corporate lines Risk management, including the actuarial and underwriting functions Reduction of administrative and acquisition costs Optimizing distribution 38% 38% 31% 31% medium priority Growing retail lines Mergers and Acquisitions 19% 25% low priority When looking at the key areas that need to be improved within the insurance companies we note that the key issues are all related to commercial activities and not to (the rationalization) of back office activities. 2 - Key challenges to the Market in 2014 Economic growth 64% Regulatory requirements 43% Solvency 43% Premium collection 21% Interest rate 14%

19 The brazilian insurance market today and in the years ahead 19 3 Company Management 3.1 Operational Management 1 - Areas that will require significant change Solvency 58% Modification and monitoring of regulatory requirements related to technical provisions Pricing policy 42% 42% Investment policy 33% Financial reporting 25% Modification and monitoring of fraud and AML Relationships with and remuneration of intermediaries None of the above 17% 17% 25% Growing global concern with risk and capital management requirements to comply with Solvency II make executives of the Brazilian market believe that capital and solvency requirements will be the main focus of regulatory changes in the near future. When asked about distribution channels, respondents believe that channels tend to maintain their current relevance, although alternative channels such as retail companies and internet will become more relevant. 2 - Changes in distribution channels Retail 38% 47% 15% Brokers 46% 31% 15% 8% Motor dealerships 67% 17% 8% 8% Banks 50% 42% 8% Internet sales 46% 46% 8% No change Moderate increase Significant increase Moderate decrease

20 20 The brazilian insurance market today and in the years ahead 3.2 Management of results Most respondents believe that main areas to be optimized are the management of claims and investments in publicity and marketing. Reduction of acquisition costs surprisingly appears as the item that was found the least important. 1 - Components of the bottom line to be optimized Claims 77% 23% Marketing 77% 23% Acquisition costs 31% 69% Administrative Costs 54% 46% Higher focus Lower focus Enhancing the management of legal claims, the pricing process and management of service providers are considered as priority actions to reduce operating expenses and increase efficiency gains. 2- Preferred methods for reduction of claims costs Enhancing legal claims management 77% Segmentation of pricing using additional risk factors Improving relationships with partners (auto service centres, health care clinics, etc.) Tougher management of fraud 62% 69% 69% Utilization of shared data bases 38% Exchange of information between Insurance companies 31%

21 The brazilian insurance market today and in the years ahead 21 When reading graph 3, it should be noted that there is an overlap between the development of direct channels and the development of internet sales. 3 - Preferred methods of reducing acquisition costs Optimizing contractual relationships with intermediaries 54% Growing the tied agent network 54% Development of direct channels 46% Development of internet sales 38% Regarding administrative costs, a relevant portion of respondents intends to invest in shared service centers and in reduction of personnel costs. 4 - Methods aimed at reducing administrative costs Implement shared services 43% Reduce employee costs without outsourcing 21% Reduction of rental costs Reduce employee costs through the outsourcing of certain functions Head Office relocation 14% 14% 21% Growth and efficiency 7% Not planning to significantly reduce the above costs 29%

22 22 The brazilian insurance market today and in the years ahead 3.3 Investments 1 - Changes in marketing costs Specialized newspapers and magazines 46% 46% 8% Street advertising 15% 54% 31% TV/ Radio advertising 46% 46% 8% Internet 42% 50% 8% Increase Maintain Reduce 2 - Investments in Information System Policy issuance and administration 67% Claims management and payment 58% Client Relationship Management (CRM) 50% Accounting and finance 50% Statistical information 50% Risk Management System 42% Enterprise Resource Planning (ERP) 25% Approximately 85% of survey participants estimate that their investments in technology will remain at the same level of 2013, and policies issuance and claims management systems will be those to receive most attention.

23 The brazilian insurance market today and in the years ahead 23 Acknowledgements We thanks the following persons (in alphabetical order) for their willingness to help and openness in our conversations: Edson Luis Franco President Zurich-Santander Elmo Avellar President AON Benfield Eugênio Paschoal President Marsh McLennon Hyung Mo Sung President of Zurich Minas Brasil (until June, 2014) Jayme Garfinkel Chairman of the Board of Directors Porto Seguro João Francisco Borges da Costa President HDI Brasil and ABCSI Leonardo Paixão President IRB Marco Antonio Rossi President CNSEG/Bradesco Seguros Marco Castro Managing Director Lloyd s Brasil Patrick Lucas Chairman of the Board of Directors Sul América Tarcisio José Massote de Godoy President Bradesco Auto RE Wilson Toneto President Mapfre

24 Contacts Luciene Teixeira Magalhães Partner, Head of the Insurance segment Tel.: +55 (11) Erik Bleekrode Partner, KPMG Brazil Insurance practice Tel.: +55 (11) Lucio A. A. Anacleto Partner, Head of Insurance Advisory Tel.: +55 (11) André Neder Rocha Senior Manager, Insurance Advisory Tel.: +55 (11) Celso P. Alcantara Partner, Tax Tel.: +55 (11) David Bunce Partner, Corporate Finance Tel.: +55 (11) Ricardo Souza Anhesini Partner, Head of Financial Services Tel.: +55 (11) Oliver Cunningham Partner, Advisory Financial Services Tel.: +55 (11) kpmg.com/br / kpmgbrasil App KPMG Brasil available on ios and Android App KPMG Publicações available on ios and Android App KPMG Thought Leadership for ipad 2014 KPMG Auditores Independentes is a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss cooperative. All rights reserved. Printed in Brazil. October, The KPMG name and KPMG logo and cutting through complexity are registered trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.