Latin America - A Framework for Growth
The Latin American insurance market has grown at an average annual rate of 17% over the last 10 years, from around USD42 billion to USD167 billion. Yet Latin America still accounts for only 4% of global insurance premium, well short of the region’s share of global population or GDP, both of which stand at around 8.5%.
This relatively low average insurance penetration (of 2.7%), together with improving macro-economic conditions and greater political stability, is fuelling insurers’ interest in the region - exemplified recently by ACE’s purchase of the large risk business of ITAU in Brazil or AXA’s acquisition of Colombian company Colpatria.
But we shouldn’t lose sight of the work that needs to be done to make sure that insurance can continue to provide its economic and societal benefits and at the same time adequately reward capital providers.
First, the (re)insurance industry must work with governments, associations and other financial market participants to improve people’s access to the financial system and further develop an insurance culture among the emerging middle classes. This means offering products that are easy to understand and distribute. Once that is accomplished, the industry can continue to develop micro-insurance products to reach out to people moving up the income scale, helping them become familiar with buying insurance products.
Our industry must also ensure an adequate regulatory framework exists from which to create a solid insurance and reinsurance market. At the same time, regulators must remain mindful of the effort and cost involved in meeting new requirements and that implementation needs to be phased in carefully.
Obligatory insurance products should be introduced and existing ones improved, such as the various SOAT-type covers (obligatory motor accident insurance). This will not only help ease the economic burden for victims and their families but also aid the development of an insurance culture.
Governments and regulators can help foster their respective markets by reducing protectionist measures, as well as by improving their legal systems. Efficient access to insurance and reinsurance capital will support increasing growth and investment in the region.
Also vital is that the industry commits to developing its people. All too often companies resort to poaching talent rather than attempting to nurture their own. We welcome the efforts of industry organisations, such as Funenseg in Brazil, Fasecolda/INS in Colombia, and the Escuela de Seguros in Chile, but believe individual companies must develop internal programmes to support the professional development of their employees.
Additionally, there are underwriting challenges to tackle, of course. Underwriting quality in relation to pricing and risk selection needs to be improved. It will take a collaborative effort to increase the quality and quantity of data available to market participants. But access to more and better data will enable (re)insurers to develop more sophisticated rating engines for all classes.
A second challenge stems from the Latin American insurance market’s susceptibility to large losses. The Chilean earthquake of 2010 highlights the size of loss that a "non-peak" Cat market can incur (approximately USD8 billion), consuming the profits made in the market over the previous 20 years. Should we see a repeat of the Mexico City earthquake of 1985, we estimate the insured loss could be well in excess of USD10 billion. Clearly, Property and Property Cat are not the only areas where large claims are possible, as exemplified by surety losses related to DIAN (the Colombian tax authority) or Brazil’s Grupo Bertin.
Latin American countries, both large and small, have a lot to offer local and international insurers - and vice versa. The big challenge for our industry is to help nurture sustainable long-term growth that benefits everyone.
This blog is a synopsis of an article that originally appeared in intelligentinsurer.com.