Unfazed by its larger neighbours, Puerto Rico has been quietly building itself up as the market of choice for innovative reinsurers. Ana Paula Nacif examines this jewel in Latin America's crown.
The fourth largest insurance market in Latin America, Puerto Rico is pulling out all the stops to become the place of choice for insurers and reinsurers. Particularly those looking for financial incentives as well as a sound regulatory environment in which to do business.
It seems that offshore markets such as Bermuda, which has recently had to deal with its fair share of political problems and issues around overcrowding, now have a serious contender.
Commenting on Bermuda's issues, Bradley Kading, president of the Association of Bermuda Insurers and Reinsurers, says: "These are all illustrative of growing pains. There is no doubt that the Class of 2005, the 10 companies that were created after Hurricanes Katrina, Rita and Wilma, strained Bermuda's resources. There was a great competition for talent. It was really talent that was the chief constraint; it strained resources on housing and education, and those are all growing pains."
He is, however, optimistic about the future. "I think we're over the worst of that and people expect that there will be a consolidation of insurance enterprises over the next couple of years. People note that the Class of 2001 has not really consolidated and they note the Class of 2005 appears to be ripe for consolidation. So, if that happens, it will address some of the growing pains."
While Bermuda is trying to get over its growing pains, experts say Puerto Rico is going from strength to strength. "The overall market in Puerto Rico is worth $8bn in premiums and is therefore very attractive for reinsurers looking to do business there," says Amador Torrealba, divisional director for Latin America, Spain and the Caribbean at United Insurance Brokers (UIB).
He adds that Puerto Rico is working hard to become an international regional insurance centre. "Until five years ago, it was a conservative market, following the rules of the big American companies. Now the market wants to have its own personality and therefore it wants to attract more European companies. This means that there are opportunities for everybody, regardless of how big you are, providing you can adapt quickly to the changes they are making."
Rubén Gely, director of the International and Offshore Insurance Center (CIS), believes Puerto Rico is not in direct competition with Bermuda because it offers "unique opportunities" to insurers and reinsurers. "Strictly speaking we are not competing with Bermuda. What our centre can offer, they simply cannot. Fundamentally we are a US jurisdiction but companies don't have to pay tax; no other jurisdiction can offer that. It is also important to remember that Puerto Rico can be used as a platform to both the US and the Latin American markets. We have a strong domestic market, worth £82bn ($162bn) in 2006, which means that companies that establish themselves here can do both international and domestic business."
“While Bermuda is trying to get over its growing pains, experts say Puerto Rico is going from strength to strength
The government approved a new legislation which established a comprehensive tax and insurance regulatory structure. This encouraged and regulated the formation of Puerto Rican Specialty International Insurers to write insurance on foreign risks, reinsurance and Puerto Rican excess lines risks. To attract investors, the law granted broad tax exemptions and set up a regime of flexible, yet prudent, insurance regulation.
Puerto Rico is a US jurisdiction and a member of the National Association of Insurance Commissioners. Despite that status, its residents and corporations are considered non-US entities for most US income tax purposes. This means international insurers and their shareholders are exempt from all Puerto Rican taxation. The law also allows a foreign insurer to establish a branch on the island through which it may operate as an international insurer.
The government says Puerto Rico is the logical portal for insurers and reinsurers wishing to enter the Latin American insurance and financial markets with direct access to other international markets and to the United States. "Because it operates under US jurisdiction, but without the taxes associated with it, Puerto Rico has the best of both worlds," says Tony Matta, senior vice president, Aon Re Global Fac.
He adds: "Puerto Rico is best described as a Latin American market operating in a US environment. It is a dynamic professional market with a lot of qualified local people. The market is growing and on the accident and health side, premiums will certainly continue to grow, as long as the economy keeps growing and the market doesn't soften. A lot of the growth is coming from the pharmaceutical industry, but overall the market is not growing as fast as rest of the Caribbean."
Top of the class
According to Puerto Rico's Office of the Commissioner of Insurance, the territory has one of the most solid economies of the Caribbean, showing consistent growth during the last decade, with gross domestic product of $50.3bn as of 2004 (see box).
The government also attracted and retained high technology, capital intensive manufacturers and oriented industries. "The country is growing," says Mike Hughes, chairman of Aon Re Global Latin America. "There is a lot happening in terms of infrastructure. The construction and pharmaceutical industries are growing and, with that growth, there are a lot of business opportunities coming from the island."
Puerto Rico's financial services industry has become one of its fastest growing sectors. In 2005, people employed in banking, accounting and insurance, amounted to 26.5% of the workforce.
“Because it operates under US jurisdiction, but without the taxes associated with it, Puerto Rico has the best of both worlds
"As I put to someone recently, there are more college students here than there residents in Bermuda," says Ralph Rexach, partner at law firm Rexach & Pico, who served as an insurance commissioner between 1991-1992. "We have an ample pool of qualified people. As a result it is a lot less expensive to operate in San Juan than Bermuda, the Cayman Islands or Barbados."
Torrealba agrees: "You have well-developed insurance and banking sectors, a strong currency (US dollar), as well as top-of-the-range technology and infrastructure. You also have bilingual skilled staff who understand both the American as well as the Latin American cultures."
Since the CIS was set up in 2004, an increasing number of insurance and reinsurance companies have sought licenses to operate in the territory. "The first application was filed in 2005," says Rexach. "In 2006 we had two applications and in 2007, to date, we have already filed four applications, and have a number of additional ones in the pipeline. Interest in Puerto Rico is increasing by leaps and bounds. None of the applications have been captives. Each company has its own very unique business plan."
Rexach says that the market has been particularly attractive to specialty reinsurers because "it allows insurance business people to quickly take advantage of niche market opportunities."
According to CIS' Gely, the centre has been created to promote Puerto Rico as a good place to do business. "We already have three international companies and, more importantly, we have a few applications being processed and I guess by the end of the year we will have between 10 and 15 international companies operating in the island."
"What is also very important," he adds, "is the kind of application we are receiving. We are satisfied that we have applications from specialty reinsurers with complex operations that are financed by large corporations, which have had no hesitation to capitalise these companies and are satisfied with our business environment."
Puerto Rico already has a mature insurance and reinsurance market, with Swiss Re, Munich Re and Lloyd's, to name a few, operating on the island for decades.
“There is a lot of international capital interest in Puerto Rico from the US as well as Europe
"I cannot see a downside to that market really," says Matta. "It is a healthy environment in which to set up business. It has good quality base of resources. The insurance industry has been there for over 80 years so it is a mature industry; people know what they are doing and understand international markets. You don't have some of the hiccups less-developed insurance markets might experience."
Recently, Benfield - which already had a presence in Puerto Rico - expanded its capabilities on the island to offer facultative and treaty broking services to insurers, reinsurers, independent insurance brokers and managing general agents. The company says the expanded operations will serve as a springboard for developing new opportunities within the Caribbean and Latin America regions.
American International Group (AIG) has also set up a reinsurance unit through the CIS. The company invested $8bn to launch the operation, which has a class 4 license and is authorised to operate at a maximum level to cover catastrophe risks of up to $100m.
"The reinsurance market has always been strong in Puerto Rico because of nat cat exposures," explains Hughes. It also has a strong domestic insurance market, far bigger than other locations, which also offer business benefits. Reinsurance is a very important part of what we do in Puerto Rico and we have the most experienced people operating in the country. So we give the importance it deserves in that regard."
It remains to be seen if Puerto Rico will capitalise on Bermuda's woes or not, and take centre stage as an offshore market of choice. But given the speed of growth and the increasing number of companies willing to settle there, it is not surprising that the overall feeling is positive. "Brazil is the largest market, but the largest growth is in Puerto Rico," says Hughes. "The country will be very closely behind Mexico and you will probably see more opportunities in Puerto Rico than in Mexico."
Whatever happens, it seems that Puerto Rico is on its way to carving out a name for itself. As Gely concludes: "There is a lot of international capital interest in Puerto Rico from the US as well as Europe. It is an exciting time and we are confident that the market will grow even stronger."
Ana Paula Nacif is a freelance journalist.