The future promise of the Latin American insurance markets has become a familiar theme in recent years and there are a number of encouraging signs in this regard. Patrick Cerceau reports.

The increased frequency and severity of catastrophe losses in the world market over the last two years raises the prospect of major change in the insurance and reinsurance markets of Latin America and the Caribbean region.

Recent events in Turkey and Taiwan have clearly underlined the potentially huge losses that could result from similar incidents in other areas prone to earthquake activity. They have also raised fresh concerns over the importance of adhering to strict seismic construction norms.

Underwriters prompted to undertake some sober reflection in the light of the devastation wrought in Turkey and Taiwan will inevitably be looking again at the true extent of their exposures in a number of countries inthe Latin American region. There are already signs of increased apprehension among reinsurers active in the region, in the retrocession market in particular.The cost of protection for assumed business emanating from Latin America will certainly rise. Reinsurers offering catastrophe cover in the region rely to a significant extent on retrocession to support their underwriting.

With the retrocession market hardening, reinsurers will be looking to decrease their gross lines.

And in future there will be greater technical focus on catastrophe excess of loss calculation - in the Caribbean zone in particular.

A number of global players have recently reduced their participation in Latin American markets -principally on property business - or pulled out altogether. This has contributed to the substantial increases in premium level for major industrial risks now being seen throughout the region.

Signs of the future
The future promise of the Latin American insurance markets has become a familiar theme in recent years, and certainly there are a number of encouraging signs in this regard. The developing economies of theregion, with their expanding - and potentially vast - population of middle-class insurance purchasers, and their extensive industrial infrastructures, offer real opportunities for growth.

The privatisation of the region's social security systems and the establishment of pension fund schemes are fuelling a rapidly expanding demand for all types of life, health and workers' compensation insurance. The significant premium growth potential of the region is intensified - from the reinsurer's point of view - by a relatively high cession rate of around 14%. This stems from a high degree of catastrophe exposure combined with a relatively low level of capitalisation. A liberalising momentum
Other potential contributors to a rising volume of business coming out of Latin America are not hard to find. The prospect of liberalisation in the Brazilian market suggests the possibility of a 40% jump in the reinsurance cession of a market that contributes roughly half of the $35 billion in insurance premiums emanating from the region as a whole. Meanwhile, the continuing pattern of deregulation, privatisation, and economic and political reform exemplified in Mexico, Argentina, Colombia and Peru has established a liberalising momentum that will continue to promote further growth in premium income.

Plenty of potential
On the negative side of the equation, Latin America has yet to develop a true insurance buying culture - the insurance sector still represents less than 3% of gross domestic product in Latin America, compared with around 10% in more mature markets - rates remain relatively depressed, and sufficient global reinsurers retain an interest in the region's long-term prospects to perpetuate a competitive reinsurance market.

Despite this, there are now some encouraging signs starting to appear for global reinsurers who have established themselves in the region and built up the infrastructure, expertise and market understanding to play a valuable role in the region's reinsurance markets for the future.

Patrick Cerceau is head of marketing at AXA Re.