Latin America’s largest economy offers attractive opportunities for foreign reinsurers willing to get stuck in, writes Ana Paula Nacif.
With the Brazilian reinsurance market open for business, Lloyd’s, the first reinsurer to get admitted status in the country, is optimistic about the prospects of the largest reinsurance market in Latin America.
Lloyd’s opened its new office in Brazil last month, a year after it received permission from the Super-intendence of Private Insurance (Susep). “The opening of the market has created a lot of opportunities for reinsurers interested in expanding their business in Brazil,” says Marco Castro, Lloyd’s representative in Brazil. “The strategic plan for Lloyd’s Brazil is to have a platform from which to attract more business; and the more local presence we have, the better it is to access the Brazilian market.”
It seems that Lloyd’s strategy is paying off. It now has three syndicates in the country – Liberty, Catlin and Marlborough – and Castro expects to have at least another two syndicates on board by year end. Business is also expanding quickly with Lloyd’s premiums going from £53m in 2007 to £95m in 2008, a 79% increase. Though the growth is fast, these amounts are still small compared with the total Brazil reinsurance market which was worth almost US$2bn in premiums in 2007.
After 70 years of monopoly by state-owned IRB, the Brazilian reinsurance market opened up for business in September 2008. Since then, the country’s reinsurance market has gone from strength to strength, with many companies keen to grab their share of the market in one of the fastest growing economies in the world.
Brazil has a 40% share of the Latin American insurance market and, since the new regulation was introduced, 56 reinsurers have already registered with the regulator. To date, 26 have a local presence.
The market has undergone significant changes over the past year. With new market practices and regulations, not to mention the global financial turbulence, reinsurance companies and buyers are having to adapt to a different set of circumstances. Fabio Basilone, president of Cooper Gay do Brasil Resseguros, says that such changes will continue to shape the market over the next two years.
“From the reinsurance buyers’ perspective, there is a new world of possibilities,” he explains. “But from the risk taker’s side, changes were much more related to the commercial aspect of reinsurance transactions than to the nature of the risks themselves.”
With new players, the market has become more competitive. According to Castro, international companies are bringing expertise, capacity and experience to the country. “Lloyd’s has a strong commitment to the Brazilian market,” he says. “As the economy grows, we will develop the reinsurance market with our expertise in complex areas such as energy, marine and aviation.”
The 10th economy in the world and the largest in Latin America with a GDP of US$$1.3trn, Brazil continues to be regarded as attractive market despite the global economic crisis. Unlike the US and Europe, which are expected to contract economically this year, Brazilian GDP is expected to grow – though by only 2% this year.
Andres Tacsir, senior economist for Latin America at business intelligence firm D&B, says that, in relative terms, Brazil and South American countries are dealing well with the global economic situation, and are certainly in a better position than they have been in previous downturns.
He explains that there are five major reasons for this – better fiscal framework, a flexible exchange rate, improved debt management, reduced inflation and expectations of inflation, and a relatively strong financial structure.
“At the same time,” he adds, “Brazil has not escaped unscathed. A general reduction in available credit, lower external demand, and a decline in trading have all contributed to negative growth in the economy, and the nation’s GDP hit a 16-year low earlier in late 2008.”
Brazil’s GDP fell 3.6% in the fourth quarter of 2008 from the previous quarter, the largest decline since 1996. Despite this, the economy still managed to grow by 5.1% in 2008, reaching US$1.25trn, according to the Brazilian Institute of Geography and Statistics (IBGE).
Despite that, the country has reacted quickly to the flagging global economy and the government has taken measures to keep things flowing. The interest rate has been lowered by 350 basis points, new lines of credit for both businesses and consumers have been launched, and the government has secured access to considerable amount of foreign reserves, reducing the risk of an external crisis. “Popular support for President Lula has enabled him to react to the changing economy rapidly, bringing in new policies with relative ease,” says Tacsir.
“We expect at least another two syndicates to come on board before the end of the year.
In fact, the government’s four year plan to invest US$38bn in energy, infrastructure and social programmes has sent a positive message to the insurance market. “President Lula is doing everything he can to keep infrastructure projects going, which are important for the development of the country,” says Castro.
Brazil is expected to invest more than US$20bn before 2012 in the electricity sector alone. And, Petrobrás, one of the largest oil companies in the world, recently has discovered new oil reserves and already has confirmed its investment plans for the next three years. Such investment and infrastructure programmes are likely to increase demand for reinsurance.
Apart from robust government spending and ambitious infrastructure projects, Basilone believes the Brazilian market continues to be attractive for reinsurers because of the country’s insurers and the risks they present. “Our insurance companies are in good shape and the nature of our risks is still extremely flat and catastrophe free,” he says.
This may well be an interesting and rewarding market but tapping into it doesn’t come without its challenge.
“The Brazilian market is much more dynamic now,” says Castro. “Brazilian companies are learning how to deal with reinsurers in the open market and how best to use reinsurance for their benefit.”
For reinsurers looking to establish themselves in the country, expertise may also be an issue.
Basilone says that: “Without any doubt, the real challenge is finding individuals with the right skills. As time goes on, there will be more well-trained professionals in the market but, for the time being, the right individual is very tough to find.”
Get stuck in
Having a local presence may well be the answer for reinsurers willing to rise to the challenges and reap the benefits. According to Castro, there has been a lot of interest from Lloyd’s syndicates.
“To take full advantage of this growing market, you have to have a local presence,” he says. “The closer you are to the market, the more business you will be able to get. That’s why Lloyd’s decided to open an office in the country. We expect at least another two syndicates to come on board before the end of the year.”
Basilone agrees that a local presence can make all the difference. “No one needs to have an office in Brazil to achieve good business results, but having individuals in the country helps a lot, especially in terms of learning more about local practices and needs. Lloyd’s is a good example of that.”
To claims that foreign reinsurers cannot compete on price with the domestic market, Basilone says: “Brazilian reinsurers are not necessarily cheaper than foreign ones. There are companies that have decided to fight for market share while others want to be very profitable, only dealing on safe layers and prices. It is, in fact, a matter of market strategy.”
It seems that Brazil may well be a land of opportunities for reinsurers willing to get stuck in. And with the insurance market expected to continue to grow – statistics released by the Brazilian insurance federation (Fenaseg) show it grew more than 14% from 2006 to 2007 and Susep expects it to grow between 8% to 12% this year – the rewards look promising. As Basilone points out: “There are still undeveloped areas, such as agricultural insurance and some life and personal reinsurance, to mention just a few. Therefore, we can expect spectacular income growth every year during the next three to five years. We may be talking about a reinsurance market worth US$4bn by then.”