Rhythm of 2008 has a Latin feel

There seem to be a new rhythm in the insurance and reinsurance market in the first half of the year, and it definitely has a Latin beat.
While much of the talk in the recent past has been focused on the emerging economies of Asia and in some respects the potential that is clearly evident in Eastern Europe, Latin America has been off the radar for all but a few focused underwriters.
Spanish giant Mapfre has enjoyed the rewards of Latin America, benefiting from its cultural fit as Spain’s largest insurance operation and has quietly built a sizable operation in many Latin American nations.
In the past South America may well have been seen as too politically unstable and the same can be said for some of their economies where rampant inflation had blighted economic stability on more than one occasion.
But there are undeniable opportunities for insurers and it seems that the market is now waking up to that fact. As major international insurers and markets seek to broaden their physical footprints into the major regions, South America is not going to be left out.
Often success and failure is all about timing and the decision by the Brazilian regulators to open its reinsurance sector to overseas companies has proved the catalyst for change and the opportunity many international players have been looking for.
Such was the rush for licences that there were strong hints that Brazil would delay the opening of the market for fear it could not cope with the interest.
However the barriers to entry have been lifted and the first across the line was Lloyd’s, so often a pioneer in lands and jurisdictions with the advantage that in the 300 odd years it has been operating, its clients will have more than likely either come from the area in question or been significant trading partners.
The Lloyd’s brand is one of the world’s best known and as such franchisees will be quick to exploit the opportunities while individual underwriters watch on as their licence applications are processed.
But what makes South America so popular?
Without a doubt Brazil is the region’s biggest insurance market and therefore the most attractive. But the continent itself has countries with big populations and low insurance penetrations. Those key countries which have mature economies also have populations which are at a stage where they are “insurance aware”, even if the pricing and the range of policies available at present falls short of what they deem to be attractive.
While there is more scope for personal lines than say some of the emerging Asian nations, it is the prospects for the commercial business that is at present the biggest prize. Not only that but the energy market continues to power the region’s economies and none more so than in Brazil.
State oil firm Petrobras announced it had found a huge new field in the past two months and while it may well be five to 10 years before the field is in full production, South American energy firms are thrusting after new capacity in order to mitigate the ever-increasing value of their exposures.
Oil and gas remain big business but Latin American nations are also driving the use of renewable and sustainable energy products. Research into the biofuels is moving at a real pace in the region and the work on turning sugar beet into fuel has created a fast growing industry, as well as a range of issues as increasingly beets that would have been pumped into the local food industry are being diverted to the energy firms.
Wind farms, wave technology and water turbine facilities are all under construction across the continent as energy companies seek to invest in the fuels of the future –conscious that fossil fuels are both finite and becoming increasingly vilified as the impact of climate change is pushed higher up the social agenda.
Establishing a physical presence in the region’s biggest insurance and risk market is seen as the first significant step for many in terms of a long-term commercial lines strategy for South America.
While brokers and underwriters have offices in many countries, many believe that the time has arrived for the formation of a regional hub similar to that seen in the likes of Singapore, Hong Kong and Dubai.
It is not however without its own risk for the underwriters.
While many of the economies in the region are significant, there remains a latent instability. Rampant inflation and the potential for rapid recession are considerations for the international operators and the businesses they cover.
Just as the energy market is seen as the launch pad for many into the region, it has and continues to be the focus of significant political risk in several countries. The dispute between one US oil giant and the government of Venezuela, and moves to nationalise the oil, gas and mining industries in other countries, provide challenges for underwriters as they seek to meet the needs of international and domestic corporations in a backdrop of political upheaval and often rapid change.
The continent is as diverse as the risks that need to be mitigated but the feeling remains that while areas of Asia continue to show huge potential with rewards once the economies mature, the Latin America market is far further along the route to maturity albeit the population numbers nowhere near as large.
It is not a case of investing now for the hope of rewards in the future. There is ample proof that the South American market has new and significant risk classes developing now and the potential for providing reinsurance for the largest market in the region is a solid base on which to build, and hence the unseemly rush to obtain a licence and establish a physical presence in Brazil.
It certainly does not have the potential to be of the size of the booming Chinese market but at present the international insurance community has very limited access both to China and the Russian market, which is seen as another global economic heavyweight in waiting with a fledgling insurance market ripe for the injection of international capital and expertise.
Brazil does however have the balance between risks which are there to write and the potential for the future, particularly as the drive towards renewable energy continues.
The insurance market knows it takes two to tango but in South America they are discovering increasing numbers of willing partners that are in need of guidance through the complicated steps of risk management and mitigation.

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