The global financial crisis barely registered on Brazil’s radar and now, as the country invests in a sporting future, opportunities abound for reinsurers
When the global financial crisis peaked in 2008, many feared it would slow the growth of the BRIC (Brazil, Russia, India and China) economies. In Brazil, the government was quick to respond, introducing a BRL503.9bn ($38bn), four-year stimulus programme – the Programa de Aceleraçao de Crescimento (PAC) – to invest in energy and infrastructure projects.
Including private investment, the programme is worth more than $360bn. And, given the country’s winning bids for the 2014 World Cup and 2016 Olympics, the investment has helped the economy to quickly rebound.
With a growth rate of around 5%, Brazil’s economy is also boosted by the country’s commodities – including soybeans, beef and paper – and oil and gas discoveries. But high demand for raw materials from China is putting Brazil’s old infrastructure under a lot of strain, leading to overcrowding and delays at ports, and increasing pressure to upgrade and develop transportation networks.
XL Re Latin America president Stephen Outerbridge says: “Most Latin American economies have withstood the global financial crisis very well, mainly because of strong financial regulation already in place pre-crisis. This is particularly true for Brazil, which showed a momentary dip in gross national product, but is now moving ahead strongly. The insurance market is expected to increase by 20% this year alone – and we are seeing evidence now.”
Most commentators on Brazil’s potential as a reinsurance market are upbeat. In a recent visit to Rio de Janeiro, Lloyd’s chairman Lord Levene said the country’s rapidly growing middle class and developing infrastructure demanded the attention of the insurance market. He revealed that Lloyd’s business in Brazil had doubled over five years and was the fastest growing of the BRIC countries. “This success has happened over all classes of business,” he said. “With an estimated growth rate of 8% per annum, it’s not surprising that more than two-thirds of our syndicates write business in Brazil.”
Levene pointed to the insurance opportunities linked to the World Cup and Olympics, which it is estimated will attract $60bn of investment. “Many insurance needs are clear: new buildings, new rail links, airport upgrades,” he said. “But some risks are less obvious, from an athlete’s injury to the safety of the spectators, to the most unpredictable element: the weather.”
Rates remain soft, however, and with Brazil’s minimal catastrophe exposure, there is little sign they will harden amid the competition to win business and gain market share. In the two years since the Brazil (re)insurance market opened up to global competition, the market share of state-backed IRB-Brasil Re has fallen to around 50%.
Outerbridge believes that heavy competition has so far been kept in check by the requirement that ceded business must come through local reinsurance companies. In January, local reinsurers’ right to first refusal was reduced from 60% of risks in the market to 40%. “A key part of this has been the continued strength of IRB, still very much a market force, which has had a strong hand in preserving market order,” he says.
The leap from an IRB-led monopoly to choice among global reinsurers has helped develop the market, notes Outerbridge. “Access to additional capital, either through fundraising or reinsurance as a proxy, is allowing insurance companies to develop new risks, not only on the industrial commercial side of the market, but on the personal lines side. Over the past five years, more than 30 million people have moved up the economic ladder into the middle class, creating potentially many more insureds.”
Reinsurers can apply to the regulator Susep (Superintendence of Private Insurance) to be registered as ‘local’, ‘admitted’ or ‘occasional’ companies. To achieve local status they must establish a subsidiary with capital of $35.6m, while admitted reinsurers need a minimum deposit of $5m and a local representative office. Occasional reinsurers are limited to 10% of the market and cannot domicile in tax havens.
Swiss Re head of Brazil and Conosur (the southern cone of South America) Rolf Steiner says: “Since the market opened two years ago, we have noticed a strong registration of international reinsurers in Brazil. More than 80 reinsurers now have a licence to operate in Brazil, divided between the three different types of registration.”
Among those to have already entered the market – monopolised for 69 years by IRB – are Lloyd’s, Swiss Re, Munich Re, Scor, XL, Catlin, Hannover Re, Transatlantic, Chubb, Everest Re, Ariel Re, Allianz, Mapfre Re, Zurich, Ace, PartnerRe and Navigators.
Lloyd’s became the first admitted reinsurer, while XL Re, Munich Re, Mapfre Re and J Malucelli have gained local reinsurance status. The majority of reinsurers have sought admitted status. Brokers continue to be the main distribution channel for most business. Authorised foreign reinsurance brokers include Willis, Guy Carpenter, Aon Benfield, Jardine Lloyd Thompson and Cooper Gay and United Insurance Brokers.
Focus of attention
Reinsurance premiums amounted to $1.3bn in 2007, with nearly half going towards retrocession, but the market is growing quickly. Much of the focus is on engineering and surety, as companies look to provide capacity for the many infrastructure projects planned or under way. This includes a high-speed rail link between Rio and São Paulo, a hydroelectric power station in Belo Monte, and oil and gas investments.
Swiss Re’s focus is on specialty lines, such as surety, marine, engineering, aviation and agribusiness, and it has development plans for commercial insurance and life and health.
“The volume that goes to international reinsurers is probably below expectation. That means the IRB share is gradually going down but it still has a strong position in the market,” Steiner says. “For Swiss Re, we are here on a long-term play and we see a lot of opportunities, especially in surety and engineering, which is related to all the construction going on.”
Ariel Re is the latest reinsurer to enter the market, announcing the opening of a representative office in Rio de Janeiro and its approval as an admitted reinsurer in July. Because Brazil is considered a tax haven by regulator Susep, reinsurers must seek a minimum of admitted status to access the market.
“The immediate opportunity is in the surety reinsurance space,” says Ariel Re chief executive Tom Hulst. “An important part of our business is surety reinsurance and most of that business is contract surety, which is essentially driven by construction projects. Brazil – given its GDP growth and investment in infrastructure – has a high amount of need for surety (re)insurance capacity.”
Prospects for insurers and reinsurers in the surety and trade credit class has prompted hedge fund manager Vinci Partners to set up a dedicated Brazil insurance and reinsurance company to underwrite this line of business. Its Austral start-up is aiming for more than $500m in annual premiums between its insurance and reinsurance entities, and to win 10% market share over the next five years, according to reports.
“They have connections straight into the large construction companies,” says head of Guy Carpenter’s treaty business in Brazil, Judi Newsam. “There is a strong desire to see an additional fully owned Brazilian insurance company operating in these areas. They want to see Brazilian companies benefit from these projects.”
Shape of the market
There has been consolidation in the primary market but, like many Latin American markets, it remains highly fragmented. In 2008, Zurich’s Brazilian subsidiary bought a controlling 87.35% stake in Companhia de Seguros Minas Brasil from Banco Mercantil do Brasil and two private investors. It also agreed to acquire 100% of Minas Brasil Seguradora Vida e Previdência from Banco Mercantil. As part of the transaction, Zurich Brasil entered into an exclusive bancassurance agreement with Banco Mercantil.
Life is the dominant line of business, followed by motor and health. Many primary companies have low levels of capitalisation and are largely monoline in their business profile.
“We’re expecting a slight increase on the merger front when the new solvency rules come into play,” Newsam says. “There is an expectation that many of the smaller entities will not be able to survive and will need to look to be taken up by somebody else.”
Despite major catastrophe losses in the first half of the year, the reinsurance market has shown no signs of hardening. “There’s downward pressure on rates across most lines of business,” Newsam says. “Property rates are very low, even by Latin American standards.
“The big players all have treaty capacities of $100m-$300m, so the big treaties can absorb most of the risks the market can throw at them. Mega-risks are being done on a co-insurance basis because the original rates are so low.”
The Chilean earthquake, which is estimated to cost the insurance industry about $8bn, according to Munich Re, has had little impact on reinsurance pricing in Brazil. But the two markets are not totally disconnected, Newsam says.
“Some of the same reinsurers may be licking their wounds and looking to recover from the rest of the region. There has been a tightening on underwriting conditions. In Brazil in was perfectly normal to see proportional treaties with no event limits. That has now changed.”
The industry is watching with interest to see whether Rio or São Paulo will emerge as the main insurance centre as the market develops. Rio was traditionally home to Susep, IRB and several broking houses, but São Paulo is home to many major insurers.
A number of companies have opted to have offices in both cities, hoping the soon-to-be-introduced bullet train will prove a valuable link between the two. “Politically, the governor of Rio is very supportive of reinsurance and actively encourages reinsurers to set up their bases in Rio,” Newsam says.
With support like that, perhaps it won’t just be the bullet train that will be moving fast for insurers in Brazil. GR