Only reinsurers with local knowledge and those willing to focus on Latin America as a promising environment, in spite of the recent unrest in a few countries, will be able to successfully implement a policy of cooperation and growth, says Marcello Nusiner.
Over the last few months, and even before the terrorist attacks of September 11 on the World Trade Center (WTC), the international personal accident reinsurance market has become progressively harder as capacity continues to shrink and ceding companies around the world are finding it increasingly difficult to place their risks. Although it is hard to estimate an average price increase, some catastrophic covers have experienced a rise of 300% or more, while other types of personal accident accounts have suffered a moderate increment of 25% to 30%.
Although certainly of interest to the industry, the reasons why the market has hardened are many and of various natures. However, it is important to analyse the impact that this hardening of reinsurance terms and conditions has had on ceding companies and reinsurers worldwide, particularly in Latin America and the opportunities available in this context.
The Latin American personal accident (PA) reinsurance market is no different from other markets around the world in the sense that it has faced a capacity shortage and rising prices since the end of 2000. Traditionally, Latin America has generated a large number of personal accident facultative special risk cases that have been, for the most part, underwritten in London. Most of these cases have dealt with aviation, airline pilots, armed forces and fishing fleet risks. Historically, these have been placed by specialised PA international reinsurance brokers taking advantage of the London market's capacity, convenience of placement, and the well-recognised underwriting expertise.
However, as a result of the harden market, sources of reinsurance capacity to which brokers have historically turned have either disappeared, shrunk, or become much less flexible than in the past in their willingness to accommodate special requests, or to renew any account, notwithstanding its results at the previously prevailing rates.
Cat cost spirals
Catastrophic personal accident protection in Latin America also deserves a mention. Virtually all ceding companies, with very few notable exceptions, have seen the cost of cat cover increase substantially. Many of them are less than impressed by the reasons for a change in the reinsurance cycle and consider some of the price adjustments a virtual act of piracy.
In reality, the problem is the combination of the effect of some reinsurers completely withdrawing from the market, or many of them reducing their lines or the percentages of participation they are willing to accept on any specific piece of business and the fact that finally, all around the world, reinsurers have started looking at their aggregates per line of business and geographic location, measuring exposure in a much more serious, conservative and careful way than ever before. The result of this game of supply and demand is that it has given the upper hand to those solid reinsurers that survived the WTC attack and the market turmoil of the last few months.
The situation in some countries is even more difficult to accept and justify for a number of reasons, including fierce competition over the past decade or so, and the underwriting standards of some reinsurers more concerned with market share and volumes of business than with appropriate prices and profit. To be fair, some of the arguments put forward by local companies in Latin America are difficult to understand and justify, but others are more than reasonable and correct.
At one end of the spectrum there are countries where insurance companies have benefited in the past from competition among reinsurers. As well as low prices, the insurers have been spoiled by the low levels of information requested from them.
It is not unusual in many countries in Latin America to see companies that cannot now justify buying the catastrophic limits purchased in the past. The rule used was to inflate the limits unnecessarily just in case. This lead to unreasonable accumulations that were, in reality, given away almost for free by the reinsurers. With the new realities of the harder market, companies now have to come up with basic information about their portfolios that they previously never had to submit. Eventually this is going to lead to better risk management, will certainly contribute to the realisation of the need for lower limits, and will consequently provide for smaller price increases.
At the other end of the spectrum are the countries that have never really experienced the realities of a hard market, for example Argentina, where the industry was under the monopolistic control of the Instituto Nacional de Reaseguro (INdeR) - the former state reinsurance company - until about 12 years ago. After a short transition period it fell straight into a soft market until last year's renewals. It is therefore very hard for the managers of some of these companies to understand the changes and new requirements of the reinsurance leaders, and the reason why reinsurers are now asking for a significantly higher price on accounts that may have been running clean or performing nicely for many years, or perhaps even refusing to quote and offer support after having walked away with profits year after year.
Some other countries, such as Peru, have suffered seriously due to terrorism losses after years of internal political and social struggle. However, interestingly enough, most Peruvian insurance companies have been able in the past to obtain quotes including terrorism. Now that the internal situation in Peru is much more stable and terrorism has been almost eradicated, terrorism coverage has been excluded from all treaties and facultative business, and only in some cases has it been reinstated at an additional premium. The reaction may have been excessive in some cases and consequently ceding companies see themselves paying for the events of the WTC that in their view have nothing to do with the political terrorism they suffered for many years in their own country.
Although the business cycle of the reinsurance industry is now on the side of the reinsurers and they can thus command higher rates and demand stricter conditions, it is also true that reinsurers should be very careful with their approach to some markets and to some specific ceding companies in Latin America. It is certainly easier to generalise, establishing new underwriting standards and new guidelines and applying them worldwide. However, it is very important to maintain a balance between rating and price increases as the true economic realities of Latin America unfold.
It is a common mistake to treat the Latin American continent as one business entity and to ignore differences among countries and ceding companies. Clearly, it is not the same to offer catastrophic protection to a company writing large amounts of group life business in Mexico City, with a large exposure to cumulative losses due to earthquake, than to cover a small company in Argentina writing mainly individual life business in Buenos Aires, where natural catastrophes are completely unknown.
The risk is that since a general reaction to the WTC attack has been to significantly increase rates across the board for all types of business and for all countries, important regional differences and the capacity to absorb those increases and pass them on to the final consumer of some local markets will be overlooked.
Small and large companies in `damaged' economies across Latin America, such as Argentina and Venezuela - two countries which are currently going through delicate political, social and economic circumstances - are now facing the difficult situation of having to increase the prices to their consumers already greatly affected by the economic recession, devaluation, unemployment and inflation, because of the higher costs of their own reinsurance programs. In some cases, these increases in price are not possible either because of market regulations or the inability of local consumers to afford the higher prices. This may result in local companies that are either uncompetitive, or unable to afford protection, with the final result being that some companies will have to exit the market. Only those ceding companies with deep pockets, or a parent company with a solid balance sheet, will be able to survive the hard market and will enter into the next business cycle in a stronger position.
In situations such as this, where good business sense, appropriate risk management and a solid portfolio risk profile are not properly rewarded, the end result is that the entire marketplace will move towards a vicious circle of higher prices and unreasonable changes.
For reinsurers in this market, opportunity lies in identifying companies which have a better than average customer base, smaller accumulations of risk, outstanding past performance and better, more precise portfolio information, and to reward them with prices that reflect these characteristics. On the other hand, accounts that have shown heavy losses, or companies which insist on not providing the necessary justifications for the limits being requested or complete information regarding their operations, clients, accumulations, claims, etc, should be penalised with higher price increases. The result of these actions may result in a new standard of operation for the entire industry in Latin America and better results and improved relationships among ceding companies and reinsurers.
Only reinsurers with local knowledge and a more insightful business perspective of this region will be able to take advantage of the opportunities outlined above, and only those willing to focus on Latin America as a promising environment, in spite of the current unrest in a few countries, will be able to successfully implement a policy of cooperation and growth for many years to come.
By Marcello Nusiner
Marcello Nusiner is vice president and regional manager of AUL Re SA, the Argentinean branch of AUL International, with responsibility for life, accident and health business in Argentina, Uruguay and Paraguay.