The IRB sale and privatisation process offers a great deal of opportunity and promise. Luiz Carlos Del Boni Magalhães reports.
After much government consideration and industry speculation, Brazil is finally undergoing the much-anticipated reconstruction of its insurance environment with two simultaneous actions: the privatisation of the IRB-Brasil Resseguros S/A, the state-controlled reinsurance monopoly, and the deregulation of its national - and very promising - reinsurance industry.
The IRB sale and privatisation process offers a great deal of opportunity and promise. Insurance and reinsurance companies will be expected to deliver enhanced client-service attributes to seize this enormous opportunity and realise long-term success.
The state of the industry
In 1998, Brazilian insurance written totalled R$19.4 billion for insurance and R$1.1 billion for reinsurance. Following privatisation, these figures - of reinsurance - are expected to rise rapidly for the near term. Growth will be largely due to the market's current reliance on co-insurance in the absence of private market reinsurance alternatives.
Compared with the US, which has approximately $2,300 in insurance expenditures annually per capita for a population of 273 million, Brazilians spend less than $100 annually per capita for a population of 162 million. But in a newly privatised market that industry growth is expected to reach between 100% to 200% over the next three to five years. As Latin America's largest economy, Brazil is committed to an open insurance market that will drive new foreign investment and support fiscal stability, contributing to an enduring confidence in the region's overall long-term success.
Implications for market participants
The market's sheer size and growth potential will likely generate fierce, but profitable, competition among well-positioned insurers and reinsurers that can offer new products and technologies with unprecedented agility and specialisation to enhance client service. Increased insurance capacity is expected to drive new consumer demand and lower premium rates.
Personal lines of business - specifically health insurance, pensions, life insurance, and personal accident insurance - are expected to expand most dramatically, resulting from product availability and affordability. In addition to local industry activity, major international insurance companies are expected to establish Brazilian offices to serve the massive population's demand for these traditional lines of personal business (in fact, the arrival of the multinational insurers began about two years ago). Concurrently, many Brazilian companies will begin seeking the advanced risk management programmes and tools being embraced around the world today.
Client-oriented service attributes
In this new environment, insurers and reinsurers will need to intrinsically understand clients' specific needs - melding historical cultural marketplace perspective with sophisticated, tailored techniques unique to each situation.
In general, Latin American insurance companies have grown weary of new multinational entities entering the marketplace during favourable periods and exiting promptly upon severe catastrophic loss or signs of short-term unrest. They are looking for a totally service-oriented reinsurer willing to make a long-term commitment and create a stable partnership. A Brazilian presence with recognised underwriting expertise and in-house decision-making authority will be critical - anything less will signal a lack of dedicated capability.
Products and technologies not available under the state-run structure must be available to offer coverage to previously uninsurable events or risk management scenarios. Reinsurance companies must be committed to dedicating the time required to understand each client's individual situation and have highly skilled executives prepared to respond quickly with customised, creative solutions.
Companies capable of drawing upon a variety of expertise from both the insurance and financial disciplines will have the greatest advantage. In addition to traditional lines of business, alternative risk transfer (ART) is emerging as a revolutionary solution to risk management for strong Latin American companies with sound balance sheets and proven long-term financial performance. Previously uninsurable exposures that can be covered by ART range from the high cost of capital due to the sovereign country's credit rating, to unpredictable short-term currency fluctuations that impede a company's ability to maintain the stabilised pricing that is critical for customer loyalty.
As the world's seventh largest economy, Brazil is preparing to take a more competitive stance in the global market - on the corporate level, by creating an environment for sophisticated, stable risk management planning; and on the individual level, by providing more affordable personal insurance products to its citizenry. Insurance and reinsurance companies that recognise and respect Brazil's insurance history and its unique needs going forward will be successful in serving its community for the long-run.
Luiz Carlos Del Boni Magalhães, regional managing director, Latin American Re, São Paulo, Brazil.