Alan Watts says it will be challenging but there are still good opportunities for life reinsurers in Latin America, provided they adjust their goals to acknowledge the realities of the region.
Unfortunately the Latin American region has recently been living up to its reputation as being highly volatile. The Argentine crisis has been well publicised, Venezuela is experiencing political and economic uncertainty, and the Brazilian currency has already lost 54% of its value during this election year. Does this mean that Latin America has lost its attractiveness to life reinsurers who have been focusing on the region in the past few years?
If we start by taking a look at the fundamentals of change that have swept through the region during the past decade, then the basics continue to remain attractive. The huge investment from large foreign insurers throughout the region, either in setting up green field operations or acquiring - even if at elevated prices - existing local companies has changed the structure of most domestic markets and opened the door to product and distribution innovation.
Changes in the regulatory environment have allowed the opening up of the markets but have also provided a more professional regulatory approach. The reforms of the social security systems, and especially the privatisation of the pension funds in many countries, have created both a large market for mortality and morbidity cover and helped in starting to create an insurance buying culture. The demographics of the region offer a potentially huge market for protection-based products in that most countries have a very young population base. On average one third of the population is below 15 years of age. At the same time, life expectancy continues to improve dramatically. This means the market for retirement and older age products will start to grow as this segment of the population expands (in 2000, over 60s were only 8% of the population; this will increase to 14% by 2025).
Despite this, most of region's potential has yet to be realised. It remains a lower priority to most re/insurers focused on international growth than the other main developing region, Asia Pacific. However, while the potential is real, the actual goals and ambitions of many entrants to the region have focused on the potential rather than the realities of Latin America.
The region has a population base of around 515 million people. However, life insurance penetration has so far only reached an average spend, in 2000, of $25 per capita in the region, with a high of $75 in Chile and a low of $3 in Bolivia. Group and collective life are the main products, primarily as an employee benefit or credit life. Individual life sold by the admitted carriers struggles at the both the high end of the market, against the non-admitted carriers who can offer the stability of US-dollar products at lower mortality costs, and at the middle or lower end of the market, with the problems of distribution and premium collection.
However, the main inhibitors to growth are found outside the insurance industry in the socio-economic realities of the region. Income distribution is extremely unequal and vast sectors of the population live on or below the poverty line - for them, the buying of life insurance is not a priority. Also, the industry has struggled to build an insurance buying culture, though changing family structures together with the privatisation of the pension systems are providing an important impetus towards creating this culture.
Traditionally, individual life insurance has been the domain of the independent agent in Latin America, and this has resulted in several important problems for insurance companies. Firstly, they have never been able to have a relationship with their clients - the client belongs to the agent and not to the insurance company. This, together with front-end loaded commissions, has resulted in policies being rolled over every few years. Secondly, there is a lack of distribution because agents were focused on larger sums assured and had no interest - monetary or otherwise - to sell to a large section of the population that had a need for life insurance, even if it was just funeral expense cover.
This is changing dramatically as alternative distributors, primarily bancassurers, enter the market. They focus on simple products, few options, mass distribution and improved premium collection, which are the key issues to be solved when selling on a mass basis to an unsophisticated buying public. However, another key driver of growth in life insurance remains unresolved throughout most of the region - the preferential tax treatment of life insurance premiums. This is tied to the greater problem of very inefficient tax systems.
Comings and goings
So, in all of this, where and how have the life reinsurers been playing? There continues to be a flow of players entering and exiting the market. The exits have been the result of take-overs or closures at a global level rather than any disillusionment at the regional level. The continued entries show that most global players recognise the potential of the region. However, the players have obviously had different strategies. Historically, the main players have focused on property and casualty, and have then taken the life business alongside that, with or without providing any special support on the life side. In a region with major catastrophic exposures, this remains an entry strategy for some of the newer players as well.
Others, including specialist life reinsurers, have been offering ceding companies strong technical support. Some have offered support in healthcare, while others have not wanted to or have not had sufficient expertise to enter this volatile line.
Interestingly, and as a lesson for the future, reinsurers who played actively in the Argentine pension market in the late 1990s demonstrated how not to handle a major growth opportunity. By quoting on or below burning cost in what was, and still is, a line with a developing loss ratio, they unfortunately went for volume and market share and not profits. That many have seen heavy losses improve dramatically, solely on the basis of the recent devaluation of the Argentine peso, does not change the fact that the reinsurance market needs to learn from this past experience and reconsider this approach in the future.
All players that have been serious about the region have had to invest in having some form of representation locally - typically, as a minimum, a presence in Mexico and either Chile or Argentina. Some of these offices have sought to do the pricing and underwriting locally as well.
So is the region still attractive to a life reinsurer? The answer, obviously, depends on what their goals and objectives are. For the life reinsurer who is prepared to have realistic growth goals for the actual and not perceived potential of the region, and who is prepared to manage the ups and downs of what still is and will remain one of the more volatile regions of the world, then the region does offer the opportunity to grow and to build some very strong long-term relationships. However, with the number of players that are already in the market, together with the absolute size of the market, the ability of any reinsurer to achieve sufficient economies of scale will be a challenge.
By Alan Watts
Alan Watts is regional vice president of Life & Health, GE ERC Latin America.