The insurance industry in Latin America will enjoy tremendous growth over the coming years, but will require underwriting expertise and cultural insight to truly meet its specialized needs, writes Richard E. Meyer.

Now, more than ever, ceding companies must make a careful assessment when considering Latin American reinsurance companies. Critical attributes to look for include a deep rooted commitment to the Latin America marketplace, exceptional capitalization to withstand short term economic fluctuations, highly sophisticated approaches to product customization, and geographic portfolio diversification that effectively mitigates catastrophic exposure. Low rates are certainly favorable; however they often do not promise true security, long-term market presence, and reliable claims processing. The importance of such issues is underscored by the trends that have emerged in the market over the past year.

Catastrophic losses triggered some marketplace departures
Consolidation continued to be a preponderant theme in the Latin American (re)insurance market over the last 12 months. Having suffered significant losses in the region, a number of reinsurers decided either to close their operations or to significantly restrict their scope of regional services going forward. Though most of the contraction in service occurred in the six major economies, its effects have been felt across the region as capacity has begun to tighten and pricing has firmed slightly.

Much of the market withdrawal or consolidation stems from catastrophe losses resulting from Hurricanes Georges and Mitch. Many foreign reinsurers entered the marketplace during an incredibly soft period and were not able to earn enough in premium income to properly reserve for catastrophic scenarios so common to certain areas in Latin America. Reinsurers that were under reserved were doubly penalized. In addition to paying off ceding company losses, they were forced to further penalize their capital and surplus due to inaccurate estimates of the loss reserves needed for eventual responsibilities or liabilities. Therefore, it became necessary to make further adjustments with a negative financial impact.

Companies that tried to grow too fast at the wrong time suffered most heavily from those losses. The time to grow in Latin America, or perhaps in any market, is not when prices are on a clear and steep downward trend. Many of the companies that are either withdrawing - or cutting back severely - have not had a significant presence in Latin America for any considerable period of time. The strategy of such companies was to gain significant market share in a short amount of time. As we have seen repeatedly in Latin America, this strategy - when it cannot be quickly realized - inevitably results in top management ordering complete withdrawal from the region or dramatically limiting their acceptances.

Capacity considerations
For reinsurers committed to marketplace permanence, the outlook is quite favorable due to reduced availability of regional capacity. The July renewal season clearly indicated that prices are on an upward turn. In many cases, the market's remaining reinsurers have been able to step into the business left behind by the recent departure of others.

Catastrophe coverage prices rose anywhere from 10% to 33% during the 1999 mid-year renewals. Even though the increase may seem dramatic, reinsurance companies with long-term marketplace insight view the trend very favorably. In general, pricing stills needs to increase at least roughly one half or one third to adequately support the region's capacity requirement for catastrophe coverage based on its probable maximum loss in relation to individual reinsurers' appetite for risk.

Personal lines of business continue to grow
One of the most obvious Pan-Latin American growth trends of the last 12 months has been the anticipated demand for personal lines of business, such as homeowners, life products, automobile, and pensions programs. While reinsurance opportunities for personal lines will be forthcoming eventually, they have been somewhat dampened currently by short-term economic stagnation and individual reduction on intangible expenses. With the possible exception of Argentina, the middle class in Latin America remains relatively small compared with countries such as the United States. Substantial growth in personal lines will inevitably follow the wider development of the middle class in Latin America. As regional economies improve again, the emerging middle classes will regain personal economic strength and have greater purchasing power available to protect personal assets. This kind of delayed growth is to be expected in emerging markets. Once economies recover - and they always do - there will be a more brisk development of personal lines.

Argentina: rich market for growth
At the time of writing, the Argentine marketplace awaits an October presidential election in which President Menem is not eligible to run for re-election after 10 years in office. His party, the Peronistas, may lose control of the government. In this environment, prudent financial services companies are taking conservative lending and underwriting positions until the electoral outcome and its effect on the economy are fully understood. This short-term trend has created opportunities for reinsurers with substantial capitalization to respond to ceding company demand for advanced levels of risk management and transfer alternatives. This activity is occurring following the departure from the market of many small to mid-size reinsurance companies, due to unsustainably poor results. Many will re-enter other markets that offer a more immediate rate of return and less readily available capacity.

Concurrently, many lines of business continue to grow for remaining marketplace underwriters. Argentine businesses share the global trend of increasing reliance on technology, which is heightening demand for liability and contingency insurance. Smart risk managers recognize the need to be fully protected against the loss of a database or the collapse of an information technology system. This trend will continue to grow on the property/casualty front for some time. Regarding personal lines, a profitable automobile business has arisen due to the fact that Argentinians can now afford safer, more expensive cars that result in fewer accidents, but such cars also require higher levels of insurance to cover the vehicle's value. Pension programs are also increasingly successful since privatization in 1994 and the efficiencies continue to be realized, while all types of life insurance are widely written by local and international carriers.On the corporate front, the Argentine Congress is considering a law that will increase the amount of workers' compensation coverage per person from $110,000 to $180,000 - up from $55,000 in 1994. This will likely affect the profitable growth of the line, which became more regulated in 1994.

Brazil: privatization at last
For 1999, the most significant event in the Latin American reinsurance market is the sale of the IRB-Brasil Resseguros S/A (IRB) and the privatization of the R$19.4 billion reinsurance market. The announcement of the winning bidder for the IRB is expected before year's end. Of course, this is a moment eagerly awaited by many in the reinsurance community - not only to see who will purchase the available book of business from the IRB, but also because it signifies the opening of the Brazilian reinsurance market to international companies.

International insurers have been entering the Brazilian market through the acquisition of locally owned life insurance companies for the last several years. Once fully privatized, the market is projected to rise 100% to 200% in premiums over the next three to five years. This is largely due to a more open infrastructure that will enable the introduction of new products. As the world's ninth largest economy and by far the largest economy in Latin America, Brazil has enormous market potential. With a population of 165 million people, Brazil will see massive demand for homeowners, automobile, life, pension, and workers' compensation coverage.

In many ways, the Brazilian market is very similar to the US market. Brazil's premium volume today is approximately the same as that of the United States 30 or 35 years ago. Third party liability is one key area in particular where Brazil hopes to learn from the difficulties faced in the US with frivolous lawsuits. Brazilian companies will seek underwriters that can offer rating assistance and clauses crafted to avoid the same kinds of mistakes seen in the past in the US.

Colombia: optimism for better times Both financially and politically, 1999 has not been the best in Colombia's history; however, signs of recovery are beginning to emerge. Increased electricity use from large manufacturers and the increase in business inventories indicate a reactivation of growth, which is expected to be approximately 2% by the year 2000. Investor confidence is evidenced by the fact that many foreign investors have chosen to remain committed to Colombia, particularly in the insurance sector.

As in most of Latin America, life products are extremely active with heavy growth emanating from workers' compensation, social security privatization, and banking insurance. However, today's concentration of 80% life to 20% property is expected to reverse by 2001.

The adversity facing the nation, including the January 1999 earthquake, has resulted in opportunities for sound, committed insurance and reinsurance companies to earn reputations for solid customer service and support. With strong capitalization, well-positioned reinsurers have been able to demonstrate their ability to pay claims quickly and to offer creative alternative solutions for previously uninsurable events. For (re)insurance companies to successfully navigate through this period has required underwriting expertise and deep cultural understanding of the marketplace. New customized products, like alternative risk transfer, and non-traditional services, such as legal aid, are rooted in unique ceding company needs that must be addressed individually, especially during turbulent times. Because Colombia is accustomed to these occasional periods, the country's business leaders know how to survive and how to construct favorable long-term outcomes.

Mexico: continued marketplace maturation
Since the beginnings of insurance privatization in 1996, the Mexican marketplace has shown continuous progress. Following the Caribbean hurricanes of 1998, insurance premium rates began to rise, particularly for property/casualty coverage. Ceding companies seeking 1998 rates are finding them increasingly elusive. Fortunately, most insurance companies recognize that the least expensive premium rates may not deliver the service and depth of support required to meet their needs in Mexico.

Consolidation is playing a considerable role in the firming of premiums as multinationals acquire small and mid-size companies. In order to remain profitable during the soft market cycle, many Mexican ceding companies have been relying on investment profits earned from their reserve pool rather than from premium income. Large insurers have begun to increase rates slightly over time, clearly not a prudent long-term financial strategy, allowing medium-size companies to follow suit. The competition in the reinsurance arena is much too fierce to risk raising premium rates by any great degree. Reinsurers must demonstrate the highest levels of service and most sophisticated approaches to product development to attract quality business. Being established as a local company also offers great advantages that multinationals must overcome. Mexican ceding companies place great value on marketplace loyalty and will pay higher rates to locally based companies rather than sending the business out of the region.

Property/casualty products continue to thrive,with the greatest demand primarily for earthquake and fire coverages. On the life side, the most profitable line is still individual policies, because pensions and health continue to be administered by the government. Many companies hope for even greater growth, particularly along medical lines, in the future.

The region in context
On the whole, Latin America continues to offer great promise as a long-term business environment. The insurance industry will enjoy tremendous growth over the next three to five years, but will require underwriting expertise and cultural insight to truly meet its specialized needs. The changes that we now see are as fully fundamental and potentially far-reaching as the developments in Eastern Europe in the late 1980s. A few inevitable growing pains are to be expected, but the horizon remains highly favorable.

Richard E. Meyer is chairman and ceo of Latin American Re.