In the Latin American region, emerging expertise and ongoing privatization are spurring companies to consider new product approaches, writes Richard Meyer.
Against the backdrop of the ongoing liberalization of the economies of Latin America, more and more companies in the region are examining innovative approaches to their (re)insurance programs - and testing the ability of their providers to introduce more comprehensive products and services that transcend typical (re)insurance offerings.
The root causes vary. In some cases, the impetus to examine new approaches originates with providers themselves - in particular, the most sophisticated (re)insurers who perceive the need to provide fundamental education to their clients about the effectiveness and potential of the diverse product set known broadly as "finite" or "financial" insurance.
At the same time, in a region-wide phenomenon, the continuing privatization of formerly state-provided insurance coverages - specifically, workers compensation and accident and health insurance - has impelled corporations to investigate how they can best structure and deliver such benefits themselves, out from under the umbrella of the state.
Understanding the application of new products can be a challenge. For companies in Latin America, the true challenge - and the urgent need - is to approach such products as opportunities. The reality is that as new forms of (re)insurance become more pervasive in the region, companies can realize far more efficient and cost effective insurance programs, as well as - in the case of employee focused programs - coverages that even have striking human resources benefit.
Finite insurance emerges in the region
Finite insurance, as a product category, has become common in the United States and Europe, but need for the product is still not generally perceived in Latin America.
The first hurdle that must be overcome by companies considering finite insurance is basic understanding of the term and genre itself. The fact is that there is no concise, universally accepted definition of this product.
In the most general terms, finite insurance refers to products designed to address a company's financial needs opposed to capacity needs and requirements. While the definition may be concise, the range of applications addressed by finite insurance is exceedingly broad and complex.
In more detailed terms, finite insurance, for the (re)insurer, refers to a contract in which the downside risk and upside gain is limited; for the buyer, it refers to a product that combines risk transfer and self insurance, and that provides investment opportunities to achieve financial objectives.
The finite concept is an arrangement that combines risk transfer and self insurance by establishing a fund to pay losses over a defined period. The fund then pays losses within predefined limits. The fund receives the benefit of investment income, a large part of the fund balance is given back to the cedant as profit commission at the end of the term, and the reinsurer retains a small margin of the fund as fee.
Among the approach's many advantages are cost stabilization, by eliminating peaks and valleys from earnings; insurance cost reduction, by spreading price over a longer term; tailoring coverage to reflect uninsurable or difficult risks; providing protection from currency devaluation, and generating investment income and a tax advantage.
In Latin America, the approach is particularly appropriate to risks where the results are reasonably predictable and suitable for well diversified and high volume spread of business - such as property insurance and personal lines.
No concise discussion can fully do justice to the approach's flexibility and potential. The message, for companies in the region, is that knowledge of finite insurance is a standard that companies should reasonably expect of their reinsurers, as the leading providers become increasingly well versed in the intricacies of the genre.
Latin American companies are reviewing their reinsurance programs and looking to reinsurers for guidance about the potential of current or emerging finite insurance products to help achieve critical balance sheet objectives.
Workers compensation/accident and health insurance
Product innovation in Latin America is rooted too in the cessation of state-sponsored workers compensation and health and accident programs, and the adoption of such programs by corporations.
Privatization is a mixed blessing. Across the region, it is generally agreed, state programs have not been efficiently run, and historically have offered only minimal levels of coverage. The passage of these programs to the private sector represents an opportunity to dramatically enhance the level and nature of the benefits offered, with tangible value for covered employees.
The other side of the coin is that running a private program presents a whole set of new considerations for the sponsoring company. How should the program be structured? What are appropriate levels of coverage and corresponding rates? Are loss reserves sufficient to cover portfolio benefits? Does program funding reflect the long term nature of coverage liabilities?
The region's leading providers can assist companies in a process leading from identification of program objectives, to program design, to establishment of loss reserves, with an eye toward building in program benefits that enhance employee satisfaction.
As with all innovative approaches in (re)insurance, technology makes the difference in effective program design and administration. Part of the challenge, for the company, is to probe the provider's technological sophistication to ensure that systems can be put in place to achieve optimal program operation.
Throughout Latin America, companies enjoy a widening opportunity to structure (re)insurance in innovative ways - driven by the emerging expertise of providers and in governments withdrawal from long-standing benefits functions.
To take the fullest advantage, companies should look to providers that are as skilled at the process of insurance program design as they claim to be at the delivery of insurance products. The designated provider should understand the need to conduct an in-depth dialogue with a company to fully understand their requirements, issues and resources - before any product proposals are put forth.
Approached this way, the opportunity to innovate can impact a company's financial operations at the most fundamental level, dramatically heightening the benefit of the insurance management function.
Richard Meyer is chairman and ceo of Latin American Re.