REDISCOVERING LATIN AMERICA

A. Insurance And Reinsurance As A Political, Social And Economic Stabilizer

At 1:21 p.m. local time on January 8, 2008, an earthquake measuring 6.2 on the Richter scale occurred in the Central American country of Costa Rica. It left 18 people dead, 40 missing and hundreds injured. The earthquake also caused landslides that blocked a number of roads, displaced approximately 1,200 residents and damaged several hotels and major businesses. As I have read about the earthquake in the following days, three things have struck me: (1) how human tragedy can bring together even the most bitter of rivals, as evidenced by the Nicaraguan government's offering of assistance to Costa Rica despite the nations' ongoing disputes over immigration and ownership of the Rio Coco; (2) the immediate response of the Costa Rican insurance industry to mobilize engineering and lost adjustment efforts to allow the funding of rebuilding efforts (BN Americas reports that Costa Rica's Instituto Nacional de Seguros began receiving claims the day after the earthquake and expects to report initial insurance loss estimates by the end of the month, much of which is likely reinsured by international companies); and (3) the number 6.2 -- it sounded so eerily familiar.

At 12:29 a.m. local time on December 23, 1972, an earthquake measuring 6.2 on the Richter scale occurred in the Central American country of Nicaragua. The similarities end there.

The earthquake in Nicaragua killed 20,000 people, injured another 20,000, left 250,000 people homeless (between 60% and 80% of the capital city's population), and essentially displaced the entire population of Managua, as only 10% of the city had running water or electricity more than a week after the quake. The earthquake destroyed 13 square kilometers at the heart of Managua's business district, left 53,000 homes uninhabitable, destroyed all fire fighting equipment in the city and left all 4 main hospitals unserviceable. 90% of the city of Managua was destroyed. In the aftermath of the earthquake of 1972, foreign aid poured into Nicaragua in the form of money and materials from some 27 countries, as well as private organizations. As a result of mishandling and corruption, little of this aid ever reached the Nicaraguan people. Insurance for the damage to public and private buildings and infrastructure was basically nonexistent.

Thirty-six years later, the city center of Managua has still not been rebuilt, with the city instead characterized by business and office parks scattered around an epicenter of rubble and slums where the proud business center formerly stood. In the 1960s and 1970s, despite political instability, Nicaragua was one of the most developed countries in Central America. Since the earthquake, amid political, social and economic turmoil that followed and that has persisted to this day, Nicaragua has consistently remained the second poorest country in the Western Hemisphere, trailed only by Haiti.

On the other hand, although Costa Rica will certainly mourn those killed in the recent earthquake, it will rebuild its damaged roads and other infrastructure, and many impacted home and business owners will turn to insurance to fund the rebuilding of their properties and lives. There is little doubt that Costa Rica will remain the most vibrant economy in Central America in the coming years, and there is no reason to fear that mishandling of reconstruction and relief efforts will lead to revolution, much less 36 years of social and economic strife.

Although I certainly do not mean to claim that the availability of insurance is the only reason for the disparate impacts of the two earthquakes, neither can the salutory effects of proper risk management and the assistance of insurance proceeds be entirely discounted. There is no question that insurance is a stabilizing force for a country's economic and political condition, and that differences in the availability and liberalization of insurance and reinsurance markets are closely tied to the vastly different economic, political and social climates that exist within the countries of Latin America.

Having grown up in Nicaragua and Costa Rica, it is therefore with great pride and hope that I have watched a recent resurgence in international interest in Latin America as an alternative insurance market. Although this type of interest seems to come periodically, caused by developments in the local Latin American insurance markets and the global economy, and can be fleeting, it can have a long-lasting impact both on local economies and on the international companies that decide to invest in or pass on developing or expanding their role in the region.

The latest upsurge in attention can be traced to local developments, such as the opening of the Brazilian reinsurance market, the potential for liberalizing legislation in Chile and the opening of Costa Rica to insurance and reinsurance competition. It can also be attributed to global economic conditions, as many commentators predict that the Latin American nations and insurance industries will be better able to weather the global economic crisis than many of the major and other emerging markets.

B. Consistent Market Growth And Liberalization

The Latin American insurance market remains very small in comparison to those in developed countries, generally representing only about 2% of global insurance premiums, or about one-fifth the size of that of the U.K. The relative size of the market, however, must be considered in the context of the low insurance penetration rates and the developing consumer economies in the region. Insurance penetration rates generally run between 2% (Brazil) and 6% (Chile), with the majority of Latin American nations at or below 4% (including Argentina and Mexico). At the same time, steady economic growth in the region, coupled with greater exposure to consumerism and the concept of insurance, indicates tremendous potential for growth in many of the Latin American insurance markets.

This trend has been evident in recent years, as gross written premiums have experienced annual growth rates exceeding 15% in many nations, including Brazil, Argentina, Costa Rica, Chile, Venezuela, Colombia, the Dominican Republic and Uruguay. Indeed, commentators predict double digit annual premium growth in many of the jurisdictions in the region in the coming years. For example, Brazil's Superintendency of Private Insurance (SUSEP) recently reported annual premium growth of 17.6% for 2008 and predicted growth of 16.2% for 2009 and 11.4% for 2010, while Fitch reported that Costa Rica's insurance market grew by 28% in the past year with similar growth expected in the coming year.

In addition, as a result of internal demands and international trade commitments, the region as a whole has been steadily moving forward toward insurance liberalization. This trend continued in 2008, with Brazil opening its reinsurance market to local and foreign competition, Costa Rica ending its longstanding government monopoly on insurance and reinsurance and Chile introducing legislation to significantly liberalize and modernize its regulation of insurance and reinsurance. These initiatives not only bode well for companies doing or considering doing business in these particular countries, but also for the prospects for continuing liberalization throughout the region.

C. Interest Spurred By Global Economic Crisis

As the economic crisis has deepened in many of the major and other emerging markets around the world, interest in Latin America as an alternative has increased not only among insurance and reinsurance companies, but also among the international businesses that drive much of the insurance demand in these emerging economies. In particular, many commentators have predicted that Latin American nations are likely better positioned to weather the economic crisis than many others, both in the insurance realm and more broadly.

As an initial matter, the tighter economic conditions in many of the major and other emerging economies have caused international players in significant industries to reevaluate their interest in Latin America. For example, a survey of 326 senior executives recently commissioned by credit insurer Atradius and conducted by the Economist found that more than 50% of companies had recently considered expansion in Latin America, with 83% of respondents citing market growth as a reason for entry or expansion. Furthermore, approximately 60% of respondents expected their annual revenue and profit to increase by more than 6% in the coming three years, and reported that they had seen no significant impact on their Latin American operations from the economic slowdown in the United States. Brazil and Mexico were of particular interest, as 69% and 48% of respondents identified these countries as important targets for expansion.

The potential growth in the Latin American economies, both in terms of domestic development and foreign investment, is of course a positive sign for insurers and reinsurers. First, foreign companies are more likely to seek insurance coverage both for their own operations and for the local companies in which they invest. Second, as the size and sophistication of local companies grows, such entities are more likely to appreciate the role of and seek out insurance coverage. Finally, as the local population becomes more professionalized and connected to consumer culture, such individuals are more likely to seek out personal lines coverage such as life, health, auto and property insurance.

In addition, local and international commentators have noted that Latin America's insurance and reinsurance markets are themselves well-insulated from the economic crisis in Europe and the United States:

  • In Brazil, the Superintendencia de Seguros Privados (SUSEP) recently stated that it does not believe the Brazilian market is at risk to the factors at play in the U.S. crisis. In support of its position, SUSEP noted that the investment of reserves of Brazilian insurance companies is rigidly and strictly controlled by SUSEP and such reserves may not be invested in "high risk" products. SUSEP also noted that the strong growth in the Brazilian insurance market that has been seen since the beginning of the year continued in August, with premiums (excluding health) in the first 8 months of the year totaling 17.3% more than the same period the prior year.
  • In El Salvador, the executive director of the Asociacion Salvadorena de Empresas de Seguros (ASES), Raul Betancourt, recently noted that technical reserves had increased 11% in the first half of 2008 and further commented that he did not believe the financial crisis would have a significant affect on the insurance market in El Salvador. Mr. Betancourt explained that the Salvadorian insurance market makes up only a small part of the national economy and engages a disproportionately wealthy client base in the country that is largely isolated economically from the majority of the population. As a result, he believes, existing insureds are able to withstand economic pressures and are unlikely to cancel policies even when money becomes tight for much of the population. Therefore, ASES expects the insurance market in El Salvador to continue to grow this year at a rate of 5-6%.
  • In Paraguay, the director of the Superintendencia de Seguros, Diego Martinez, recently stated that he believes the global financial crisis will have little impact on the Paraguayan insurance market because Paraguayan insurers hold very limited amounts of foreign assets. Pedro Flecha, the president of the Asociacion de Administradores de Fondos de Pensiones, likewise stated that the crisis should have little affect on the country's private pension system.
  • In Argentina, Fitch Ratings recently reported that, despite difficulties due to inflation and a decrease in investment returns, the insurance market has grown by an average of 12.8% annually over the last four years. The Fitch report likewise states that prospects for Argentina's insurance market in general look bright in large part due to insurers' increasingly transparent policies and procedures, the unveiling of new and varied insurance products, and a geographic spreading of risks.
  • Regulators and commentators in Bolivia, Colombia and Ecuador have also predicted that the global economic crisis will not take a major toll on their domestic insurance markets, citing strict regulation of insurance companies' reserves and investments and continuing strong growth trends.

Taken together, these factors indicate that Latin America may be one of the few areas in the world where insurance and reinsurance companies can seek increased revenues and profits while the economic crisis continues to play out elsewhere.

D. A Word Of Caution

Not to be lost in this enthusiasm, however, is the fact that many of the limitations and risks that have previously discouraged some insurers and reinsurers from making significant investments in Latin America still remain. Political and economic turmoil remains an issue in many countries in the region, including Venezuela, Ecuador, Bolivia, Nicaragua and even Brazil and Argentina. Significant protectionist regulations (both formal and informal) also still exist in many Latin American countries, as evidenced by the limitations placed on this year's market liberalizations in Costa Rica and Brazil (as discussed in detail below). Finally, given the fluid economic and political situations in many of the region's jurisdictions, any steps forward in terms of liberalization can be quickly reversed upon a change in power or significant political, economic or natural event.

Therefore, as insurers and reinsurers reevaluate their operations in Latin America, local and global developments offer both tremendous opportunities and significant risks for companies that choose to expand their presence. While the Latin American insurance markets remain characterized by consistent growth and ever-developing potential, they are likewise notorious for their often idiosyncratic local restrictions, requirements and traditions. On the other hand, companies that opt to effectively pass on the region risk unnecessarily ceding large potential profits to their competitors. International companies are thus well-advised to carefully evaluate their existing and potential operations in Latin America and consider how recent local and global developments should impact future plans in the region generally and in particular jurisdictions.

CONCLUSION: CAUTIOUS OPTIMISM

Trends in the Latin American economies generally and insurance markets specifically indicate that insurance and reinsurance companies with a dedicated strategy and experienced advisors can take advantage of tremendous opportunities in the region. On the other hand, however, the undertaking of activities in the region without a coherent plan or full understanding of the local regulations and markets can lead to unprofitable operations and significant potential enforcement issues with local regulators.

For example, with stock market turbulence and industry consolidation in 2008 have come financial strength rating downgrades for more than 100 insurers and reinsurers. While such downgrades can result in numerous consequences, one potentially unrecognized consequence is non-compliance with regulatory reporting guidelines in numerous jurisdictions in Latin America.

In order to obtain regulatory authorization to conduct insurance and reinsurance business in many countries in Latin America and elsewhere, companies must file, among other things, a certified copy of their financial strength rating. In addition, to remain in compliance with registration requirements, many countries require companies to periodically or continuously update such filings to reflect any change in financial strength rating. For those countries requiring continuous updates, such as Honduras, the company is often required to provide an update within three months of the downgrade or face penalties, including potential deregistration. It is therefore of great importance for companies facing downgrades to review the regulatory requirements of their jurisdictions of registration to ensure that any necessary updates have been properly filed.

Given these sorts of local idiosyncrasies in many of the Latin American markets, and the frequent fundamental changes such as those seen in the past year in regulatory requirements, failure to understand and closely monitor market and regulatory developments can impact both a company's profitability and its continuing right to conduct business in the region's jurisdictions. It is therefore imperative that insurance and reinsurance companies operating or considering expansion into the region obtain the assistance of experienced and knowledgeable advisors.

If you would be interested in learning more about these issues and/or insurance and reinsurance developments in specific Latin American countries in 2008, we would like to invite you to our free webinar on January 21, 2009 entitled "(Re)emerging Mercados: Significant Recent Developments in the Latin American Insurance and Reinsurance Markets." To view an invitation and register for this event, please click here: http://www.insurereinsure.com/BlogHome.aspx?entry=1279.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.