Hugh Powell reports on the Argentine and Brazilian markets and finds plenty of potential.
South America is viewed by many in the reinsurance business as an area of great promise. In this article, we review the outlook for the two largest countries on the sub-continent.
The insurance and reinsurance industries in Argentina have undergone many changes in the 1990s. Prior to the deregulation of Argentina's reinsurance market in 1991, operating a local insurance company was relatively simple. Prices on all lines of reinsurance were guaranteed by tariffs, which were enforced by the superintendency, and INDER - the local, government-owned reinsurance monopoly - was required to provide easy access to government-funded reinsurance on every line of business, whether profitable or not. This environment made it simple for non professional insurers to set up insurance companies by taking advantage of what was essentially a covered subsidy.
In 1991, all of this changed. Reinsurance was no longer subsidised by the government. Tariffs were eliminated, and prices were no longer guaranteed. The market was not only deregulated, but it was also opened up to non tariff competition. Later on the registry was opened to new insurance companies, and any foreign investor that wanted to operate in Argentina did not need to buy a running company. Underscoring these changes was the end of hyperinflation during the mid 1990s.
These changes had an enormous impact on the insurance industry, and many foreign investors were attracted to Argentina. Suddenly, local insurers were thrust into the global marketplace. Deprived of access to automatic reinsurance on all lines, they had to look for reinsurance in the open market. They also had to compete for business against larger, better capitalised multinational insurers. This was a great time for brokers - particularly London market brokers - to set up offices in Argentina in order to service a market starving from reinsurance knowledge.
To compete in this new environment, Argentine insurers have had to restructure and capitalise their companies to comply with open market rules. The superintendency has imposed higher capitalisation requirements, which we at Guy Carpenter consider to still be too low.
This very slow but steady move towards a stronger market has eliminated many of the non professional players. It has also created a very difficult environment for the few truly professional local insurance companies/mutuals, who are forced to compete with large global insurers. In the industrial arena, market premium is now concentrated into fewer, better prepared, better capitalised insurers. Today, most of the large local industry in Argentina is in the hands of foreign investors. Very few local insurers remain as contenders in the area of industrial/corporate insurance. Instead, this business is handled by foreign locally established insurers and is controlled primarily by brokers.
Currently to operate in Argentina, all that foreign reinsurers need is to register at the superintendency. Obviously, they must meet minimum capitalisation requirements, but that is not a problem for the likes of a Swiss Re, Munich Re, Gerling, Transatlantic Re, SCOR, Copenhagen Re, and so forth. Therefore, rather than incurring the cost of establishing a domestically incorporated company in Argentina, most foreign reinsurers have simply registered themselves.Some companies deal exclusively through reinsurance brokers, preferring to let the brokers handle all of the costs of producing the business.Other reinsurers have simply set up representative offices in Argentina, but do most of their underwriting back at their home countries. Because they are not domestically incorporated reinsurers, the security is not local security. When we place an account with a Munich Re, for example, we are not actually placing it with Munich Re Argentina - although we deal with Munich Re Argentina. Rather, the security under our slip is Munich Re Germany. The same thing holds true when we deal with Gerling, Employers, Swiss Re, Transatlantic, and so forth.
To be locally established - and only two global reinsurers currently have local subsidiaries -the reinsurer needs to deposit $5 million for general lines and $10 million for life. When we do business with that reinsurer, the security then becomes that of the company's Argentine subsidiary.
In general, there have been no strong price increases in any lines that have not been hit by claims frequency. In spite of the international hardening, price increases in the Argentine market are yet soft in the property/casualty arena, especially on the property side since Argentina is mostly non-catastrophic. Having said this, the higher pricing for reinsurance protections, together with the poor results affecting the stock price of insurance and reinsurance carriers and recent natural catastrophes, will shortly be noticed even in Argentina.
When the government ran Social Security, it was one of the largest areas of corruption. It was not unusual for an employee to put money into an account for 30 years and then get nothing upon retirement, given that the accounts had been so poorly and corruptly managed. Thus, one of the greatest achievements of the previous government was the reform of the Social Security scheme and its privatisation. This was and still is an opportunity for brokers and life reinsurers to write new treaties.
A new workers' compensation law was introduced in July 1996. Complementing this law was an insurance regulation that stated that the only way to write this business was to establish a monoline company or to self-insure. Local and international insurers rushed to establish these companies, with reinsurers responding as well; effectively taking this line of business away from the general insurer. This was another good move by the previous government. Legislation was improved, with a strong emphasis on workers' safety regulations and enforced under the insurance policy conditions.
The deregulation of healthcare is a highly political issue. Healthcare is, to a large extent, controlled by the unions and free competition would threaten one of their largest historical sources of income. Three years ago, healthcare reforms allowed union workers to choose the health coverage they wanted from other unions. But it did not change the control of this area. Deregulation of this market will occur probably sooner than later. Legislation has been under review for a few years already and currently discussed at congress. The striking power of unions is still very strong in Argentina and thereby slows down this process.One can be optimistic about the future of reinsurance in Argentina. As the professionalism of the market continues to improve, and certain expected developments take place, opportunities for the well prepared, well capitalised reinsurers will continue to grow. On the reinsurance broking side, intermediaries have to prove added value by means of significant investments on local resources accessing global technology or will simply not be competitive.
Brazil is currently the largest insurance market in Latin America. With the impending privatisation of the government-run reinsurer, IRB, now scheduled for this year, and the opening of the workers' compensation market, the country offers huge possibilities for brokers, insurers, and reinsurers looking to expand into the region.
The single most important event affecting the marketplace has been the move to privatise the government-run reinsurer, IRB Re Brazil. Since 1997, news of the impending privatisation has brought to Brazil a total of 22 foreign reinsurers as well as a number of reinsurance brokers, including all of the three major broking firms. Many of these reinsurers are already fully prepared to operate in Brazil after the reinsurance monopoly ends, and their presence will bring the global markets to local insurers.
The IRB, which was founded in 1939 as the Instituto de Resseguros do Brazil, has held a monopoly on Brazil's reinsurance market for 60 years. The first step toward its privatisation was taken in 1996, when the National Congress of Brazil passed a law to break up the monopoly and open the market to competition. The following year, the Instituto was transformed into IRB Re Brazil, a joint stock company that was 51% owned by the government. The remaining 49% is held by national insurers in proportion to the amount of premiums ceded to the IRB.
Several steps still need to be taken for the IRB to be fully privatised. Efforts have been delayed for a number of reasons, including the economic crisis caused by the devaluation of the real, the restructuring of insurance market regulations, and different viewpoints on how the privatisation should take place.
Most recently, the IRB privatisation auction scheduled for mid October 1999, at which 100% of its stock was to be sold off by the government, was postponed until sometime during the first half of 2000. This postponement will result in the need for a revaluation of the starting privatisation price, which was defined based on the IRB's 1998 balance sheet. The 1999 results may substantially change the company's value.
Deregulation is not expected to occur all at once. Instead, the privatised IRB and the locally established reinsurers are expected to have a guaranteed first option (60%) of the market's premiums for two years.
In 1999, the local currency was devalued by 30% - caused in part by the government's decision to allow the Real to float freely on world markets - and the market's insurance premium volume was negative, when compared to the same period in 1998. The 1999 premium volume being US$8.5 billion, down from about US$10 billion.
This devaluation has had a noticeable effect on motor insurance. Results in other lines may suffer over the next year or two as well, with significant premium production being unlikely.
Nevertheless, the economic situation is not expected to have any long-term effect on the insurance market. Brokers, insurers, and reinsurers feel that while their short-term expectations may be somewhat lower, the market's long-term outlook is strong.
Already during the first quarter of 2000, Brazil's economy has shown impressive signs of recovery and growth, beating all expectations.
More than US$1.5 billion in foreign capital has been invested in Brazil's insurance industry. A number of major acquisitions and shareholder participations have occurred, notably, the acquisition of Cia Paulista de Seguros by Liberty Mutual and the participation of AIG in Unibanco. In addition, there have been a number of joint ventures by major US insurers with leading domestic companies, including AIG with Unibanco and Aetna with Sul America.
Nevertheless, contrary to the Argentine situation, the market share of fully controlled foreign insurers still remains very low. This is expected to change once international reinsurers are given unrestricted access to an open market. The privatisation of the IRB has attracted the interest of foreign reinsurers already represented in Brazil. Depending on the IRB's true financial situation and the minimum price asked, at least three bidders are expected.
The market will include three classes of reinsurers: local, with US$25 million of paid up capital; admitted, with US$150 million capital; and nonadmitted. A limitation of 10% cession to nonadmitted reinsurers is expected. Technical reserves are to be retained in the country, and an initial deposit of US$10 million will probably be required. A reinsurance tax rate of 2.5% over exported premium will apply.
As reinsurance competition and capacity increase, rates are expected to drop significantly. Additionally, co-insurance - which has been used extensively by the local market to avoid cessions to the IRB - will disappear as insurers compete openly for 100% orders under open reinsurance conditions. The estimates are that the current reinsurance premium volume of approximately US$800 million will at least double within three years following the opening of the market.
New opportunities for insurers and reinsurers are anticipated upon the privatisation of the workers' compensation scheme. In addition, reform of social security should result in the establishment of a private pension scheme, as the population becomes more aware of the need to have it as a complement to the official scheme.
Reinsurance brokers have a significant role in Brazil, bringing their international experience to the local insurance companies and assuring that those companies will have a broader view of the reinsurance markets, their players, expertise, technology, and products.
Guy Carpenter is currently operating in Brazil with offices in Rio de Janeiro and Sao Paulo. A team of experienced professionals in both facultative and treaty, supported by the international resources of the company, are already working with market cedants in preparation for the full opening.
Hugh Powell is the Guy Carpenter managing director in charge of operations in Brazil, Chile, Argentina, and the rest of the southern South American countries. He began his career at the age of 19 with a local insurer in Argentina. He was with Johnson & Higgins when it was acquired by Marsh in 1997, having previously spent three years with J&H New York and four years with J&H London, and then returned to Argentina to set up J&H Re in that country. Ultimately, J&H Re/Willcox in Argentina became Guy Carpenter Argentina.