Global Reinsurance quizzed Salvatore Orlando of PartnerRe on the Latin American market.
Q: Could you please outline the major issues you see currently facing the Latin American market?
A: There are various issues that are currently influencing the situation in Latin America. On the one hand we have presently a very difficult social and economic environment, while on the other hand the pressure is increasing to adjust the local rates, covers and conditions to meet international market standards.
I think, however, that both the insurance companies and the insureds will understand that we have a new market situation following the events of 11 September and that reinsurers can only continue to cover the enormous risks that exist in Latin America if they receive an adequate premium.
Q: What implications are the events of 11 September having on the Latin American market?
A: There are various types of implications. First of all, each insurance company will need to find out whether its reinsurers will continue to operate in Latin America, and if so, how much capacity they are willing to put at risk. Many reinsurers will probably have to reduce their capacity, which of course will have far-reaching consequences.
Another important issue is volatility. I can well imagine that reinsurers will try to get more control over the volatility in their business and therefore will be trying to introduce event limits and cession limits for proportional treaties, as we had back in 1993. I can also imagine that reinsurers will, of course, be looking for much higher margins than they have had in the past few years, which generally were difficult for reinsurers.
Q: What are the main exposures in Latin America and what have been the most notable losses recently?
A: The main risks are clearly still the enormous natural peril exposures, such as earthquakes, volcanic eruptions and hurricanes. There is also an increasing concentration of values in Latin America, as well as a wider penetration of insurance, which of course lead to higher overall accumulations.
During the last few years we have had several earthquakes in Colombia, El Salvador, Mexico and Peru as well as large individual losses, with the result that both the insurance and reinsurance branches have been heavily affected.
Q: Could you outline the experience re/insurers have had in the market?
A: The reinsurance business has always been characterised by cycles, thus it has seen both good and bad times. In Latin America the last couple of years have been very difficult times for insurers and reinsurers, since their results have come under enormous pressure. It was not only the catastrophe losses, but also the high number of smaller losses that contributed heavily to the negative results. One can only hope that we can improve both the premium rates and the conditions to the point where it once again becomes attractive for both parties – the insurer and the reinsurer – to do business.
Q: What is your company, PartnerRe's attitude towards Latin America?
A: PartnerRe feels it has a responsibility to continue its engagement in Latin America as in the past. We will analyse the market very carefully and participate in those areas where we expect to achieve the best returns over the mid-term. We will of course treat our existing clients with priority, but are still interested in acquiring new clients in anticipation of future opportunities.
PartnerRe will therefore continue to be a leading provider of cat reinsurance capacity and agriculture solutions, and will furthermore be interested to expand its relationship with existing and new clients by leveraging our internal capabilities and expertise in life and non-life business.
Q: Will PartnerRe be changing its Latin American accounts as a result of the events of 11 September?
A: Not at all. What we will do is to sit together with our clients and have a realistic discussion of the various main points for this renewal. In my view, it will certainly be a renewal characterised by lengthy and difficult negotiations, but in the end we are all business people and it is our common interest to achieve a win–win solution, which will help our clients to continue to remain successful in their market and PartnerRe to get the right price for the assumed risk.
In addition, I believe that all participants in this market are now under pressure to start adhering to the much-repeated slogans such as ‘long-term relationship' and ‘continuity', which have always been core principals of PartnerRe.
Q: Certain countries in Latin America are well-known for unusual risks, for example terrorism exposures in Columbia. How are these being dealt with, and are re/insurers willing to provide cover for them?
A: Good question. I think that our industry will have to re-orient itself in certain aspects following 11 September. Cover for terrorism can no longer only be supported by private industry; governments will also need to help in order to spread these risks. I expect very serious discussions around this and other covers in the next months and I am convinced that we as an industry will be able to offer our clients a solution. For clients it would not be convenient if each reinsurer comes up with its own solution; a common market solution must be found for such issues.
Q: How has the internationalisation of major clients affected the Latin American market?
A: There are now only global markets in this world; therefore the internationalisation of clients naturally also has its consequences in Latin America. Economies of scale will become more important, especially in countries and markets where the cost structures of the national companies are very high. I think that in the future, all components of the value chain will be put under pressure to bring a significant added value. Only in this way will all parties be able to survive.
Q: Brazil's IRB still has not been privatised by the government. What impact has this had on the market?
A: Many reinsurers have been looking at Brazil and talking about a new reinsurance ‘El Dorado'.
It was the largest Latin American market, had many new opportunities and new sources of income, which were the prerequisites for large investments by some reinsurers.
Looking back now, one could say that nothing has changed, except the costs, since the market is still closed and it is not likely to be liberalised, even in the medium term. The small- and medium-sized reinsurers, brokers, consultants, etc. will have to go over their figures once more, as the ratio between costs and return will be decisive for all market participants following 11 September.
PartnerRe decided years ago to wait for the liberalisation in Brazil before making any decisions on investments in this market.Meanwhile we have, however, offered our agriculture expertise to some local companies, which has taken us to the position of the leading agriculture reinsurer in this market
Q: Latin American economies have been notable for their volatility. How has this affected the re/insurance community's attitude to transacting business in the region?
A: One should not only look at reinsurance prospects over the next few years; it is more important to look at the potential that is dormant in respect of insurance and reinsurance in Latin America. When you do a comparison, the ‘per person' expenditure for insurance in the US is around $2,800 as opposed to only $70 in Latin America.
For PartnerRe, this is an investment in the future, which will certainly pay off in time.
Q: What will be the role of ‘financial reinsurance' (ART) in the next few years in Latin America?
A: Basically there will be increased opportunities in alternative risk products due to competitive pressure and fluidity in the international reinsurance market, which will inevitably also have an impact on the Latin American insurance and reinsurance market.
We will probably see increase pricing trends and increased volatility in the supply and demand of traditional products. We will also see restrictions in cover as well as real capacity constraints in specific classes of business. At the same time insurers will need to satisfy the needs of their own clients and shareholders.
Consequently balance sheet management and not necessarily risk transfer per se may become an issue of growing concern. ART can, to some extent, respond and alleviate these concerns.
Q: And the future for Latin America?
A: As I mentioned before, this continent will experience an enormous development, since it has everything needed to survive in a global market. Considering that Brazil already today has a larger gross domestic product than Great Britain or Italy, and seeing how quickly the world is changing, I am convinced that Latin America will have a bright future.