Reinsurance hardening creates opportunities in Latin America

International reinsurance groups are adapting their strategies to Latin American markets as the impacts of the hardening market have trickled down to the region.

Reinsurers have been more careful when participating in Latin American property programmes, especially for natural catastrophe-exposed risks, making less capacity available than in the past, Pedro Farme, chief executive of Guy Carpenter Brazil, says.

Instead of leaving the segment altogether, however, they are trying to diversify their exposure by looking at opportunities in the still fledgling casualty lines in the region.

“With the hardening cycle, reinsurers no longer want to work only with property risks in Latin America. A holistic vision is now the biggest driver of the market,” Farme tells Insurance Day during Fides, the Latin American insurance and reinsurance conference in Rio de Janeiro. “They now offer property capacity with the condition they can also enter the client’s casualty lines in search of a balanced portfolio.”

“With the hardening cycle, reinsurers no longer want to work only with property risks in Latin America. A holistic vision is now the biggest driver of the market”
_{Pedro Farme
Guy Carpenter}

In addition to catastrophe-exposed risks, surety bonds, which are key for the region’s infrastructure markets, have also suffered from capacity restrictions, he says.

One of the lines that has gained more capacity as a result is cyber, according to Farme, as insurers try to replicate in Latin America the American model of providing cyber coverages for small and medium-sized clients. The strategy is a means to avoid leaning too much on large corporate coverages, which often result in the largest loss events for cyber insurers. Financial lines, such as directors’ and officers’ liability covers, have also drawn the interest of reinsurers.

Evolving mood

Brokers also point to a change in attitude towards Latin American risks in recent months. The solid rates of economic growth expected in countries like Mexico and Brazil is one factor contributing to this evolving mood. Another is a more beneficial environment for some kinds of risks that are not exposed to natural catastrophes.

One such segment is mergers and acquisitions, according to Fernando Villaseñor, head of the southern zone at Liberty GTS. The insurer has increased capacity available to representation and warranty and other transaction liability insurance lines in the past few months, reaching limits up to $200m per transaction. The Liberty Group unit has also expanded its target markets from Brazil, Mexico, Colombia, Chile and Peru, the countries where GTS started to operate, to include Argentina, Paraguay, Uruguay, Costa Rica and Puerto Rico.

“We are broadening our appetite and have lowered our rates, premiums and retentions. We have also deleted a couple of exclusions for certain Latin American countries, as we try to be more proactive and expand the product,” Villaseñor says.

“We are broadening our appetite and have lowered our rates, premiums and retentions. We have also deleted a couple of exclusions for certain Latin American countries, as we try to be more proactive and expand the product”
_{Fernando Villaseñor
Liberty GTS}

In contrast, on the property side of the market reinsurers are adopting a more conservative approach, according to brokers. They have been frightened not only by global catastrophe losses, but also by unexpected local losses that have generated insecurity in the market. Strikes, riots and civil commotion covers are a case in point. Patricio Prieto, a Santiago-based insurance lawyer, says before 2019, underwriters used to offer the cover for free in Chile, as the country benefited from a reputation as stable, quiet and reliable market. However, a series of riots that year generated significant losses that upended the offer of capacity for the risk.

This kind of move by reinsurers that have traditionally made capacity available in Latin America has allowed other players to muscle their way into the region’s market. Local reinsurers have filled some of the gaps, while companies from other parts of the world that are not traditionally strong in the region are making a play for it.

“We have started to see, especially since the second quarter of 2023, a number of smaller European, eastern European and Asian reinsurers looking at Latin America with the goal of diversifying their portfolios,” Farme says. “This is a region where insurance penetration is very low, so the outlook continues to be for capital to come to Latin America. It is also a region that offers more stability than several parts of Asia, which is an advantage to attract capital.”

Low penetration rates

Increasing the participation of insurance in the region’s economy is exactly one of the challenges that, in the view of Rodrigo Bedoya, president of Fides, the market still has to tackle in Latin America. He linked the region’s dismal penetration rates to the lack of education about insurance that prevails among the population and a relatively low presence of inclusive insurance products in the market.

Other headwinds highlighted by Bedoya include the challenges of digitalisation and the spate of natural catastrophes that have hit the global market in the past few years.

“Natural catastrophe events help to boost demand for insurance, but they also force underwriters to restrict coverage as they protect their businesses,” Bedoya says. Even countries that have historically been free of such risk have suffered in the past few years with events like floods and droughts, spooking underwriters that have maintained a dim view of secondary perils.

Natural catastrophes also serve as a reminder of why Latin America needs more insurance capacity and higher penetration rates. And consumers also need to be reminded of the benefits brought by higher levels of protection. Dyogo Oliveira, the president of CNSeg, Brazil’s insurance association, says the sector needs to learn how to communicate with the broader public to gain greater visibility in the economy.

To achieve that and to increase the potential for media coverage of the Fides event, CNSeg invited local luminaries like a Brazilian Supreme Court judge and the president of the upper house of Congress to attend the opening ceremony of Fides. Former UK prime minister Tony Blair and Economics Nobel prize winner Paul Krugman were also called on to help put the spotlight on Fides this year.

In fact, host Brazil illustrates well the challenges the industry faces to fulfil its potential, even though it is one of the region’s most developed markets. Armando Vergilio, president of Fenacor, an association of insurance brokers, stresses even in Brazil the insurance sector represents merely 4% of GDP, compared with 10% in more mature economies.

Vergilio laments the fact Brazilians spend only $300 a year on insurance, while in more developed economies the number is “four or five times higher”. That, in his view, constitutes an opportunity to achieve growth. However, talk of Brazil’s insurance potential has been a staple of every insurance or reinsurance conference in the country for decades, despite which the results have been less than impressive so far.

In real terms, premium growth has stagnated in the country for some years already, Vergilio says. CNSeg has launched an ambitious plan to boost investments in Brazil’s insurance market so premiums could reach 10% of GDP by 2030.

Regulatory missteps

To achieve that kind of growth, however, Brazil will have to avoid any missteps, such as a bill currently making the rounds in Congress that reimposes wording rigidity and other old practices that could stifle innovation. The bill in question, which was presented two decades ago and was buried in the archives of Congress before being resuscitated earlier this year, also has a bias towards state interventionism in the market that goes against global insurance trends, critics say.

Perhaps not coincidentally, then, during the first day of Fides market participants expressed concern about the regulatory stretch of the state and the consequences it could have for the industry. “Regulators and the judiciary need to have a differentiated approach to the market,” Ivan Luiz Gontijo, chairman of Bradesco Seguros, one of Brazil’s largest insurers, says.

He urges regulators to provide more freedom for insurers to offer the products consumers demand and for judges to show flexibility when analysing market techniques that could boost insurance penetration, such as the sale of covers along with other products like cars or white goods.

If regulators are flexible, insurers can then develop the markets fast-changing consumer habits demand, Gontijo says. “Insurers need to be more creative not only in terms of covers, but also of the assistance they provide to policyholders,” he points out.

“Insurers need to be more creative not only in terms of covers, but also of the assistance they provide to policyholders”
_{Ivan Luiz Gontijo
Bradesco Seguros}

This concern is not restricted to Brazil. Bedoya says regulation often makes it hard for insurers to introduce innovative solutions that could help to improve market penetration. That remains an issue even if some countries have started to remove hurdles to the integration of new technologies and the development of insurtechs.

One positive example is Chile. Prieto says the government has finally regulated the sale of parametric insurance covers in the country. The legal certainty provided by the decision could help underwriters to offer a broader range of products to raise protection against risk like droughts and wildfires that have hit Chile in recent years.

And the state surely has a role to play, if kept within reasonable limits. Clarisse Kopff, a member of the board at Munich Re, says governments can help the insurance market to grow by adopting policies like risk-transfer partnerships like the one seen in Mexico, where taxpayer money has helped to subsidise the spreading of catastrophe insurance.