Publish in Perspectives - Wednesday, April 2, 2014
The insurance markets within the Pacific Alliance countries are relatively attractive in terms of stability, economic outlook and growth. Here Peruvian capital Lima. (Photo: Quado678)
Latin America’s insurance market should continue seeing strong growth, experts say.
Willis Group, Zurich and other global insurance-sector players have reported relatively strong results in Latin America for the fourth quarter of 2013, with some posting double-digit revenue growth in the region. What trends and regulatory changes are behind growth in key markets? Will insurers in Latin America and the Caribbean fare as well or better in 2014? Are consolidation or competition heating up in certain countries? Looking ahead, what drivers and obstacles does the region's insurance market face?
Pablo Barahona, president & CEO of Liberty Seguros Brasil: GDP per capita has shown significant growth in the region over the last decade. In fact, it grew from $7,900 to $12,600 or about a 4.8 percent compound annual growth rate, compared to only 3 percent in the advanced economies. This accelerated growth, partially explained by commodity prices and improvement in economic policies in some cases, together with better access to credit by the middle class, has positively affected insurance sector growth in the region. These attractive conditions caught the attention of many global insurers who have seen the region as a good opportunity to counterbalance the growth and profitability difficulties that they are experiencing in the more developed countries. Although attractive, global insurers have faced difficulties capitalizing on these opportunities. In many countries, there are serious local players with technical and local market expertise and more experience with political or economic changes. Also, regulators are becoming more sophisticated and adopting capital requirements similar to those in the developed world. As a result, more and more capital is required to operate, negatively affecting return on equity. The future of the region's insurance sector is uncertain. On one hand, there are doubts about how GDP per capita will grow in the future as the commodity price bonus seems to be reaching an end. On the other hand, the demographic bonus in the region should have a positive effect considering that insurance buyers are at the high end of the pyramid. Competition will remain fierce as established players are not willing to give up market share to the new global players entering the region.
Renato Terzi, vice president of strategic planning and marketing at SulAmérica: Global insurers responded to the 2008 economic crisis by looking for new markets to substitute the slowing developed markets where they operated. This led to a rapid move in the direction of emerging countries, some in Latin America. Zurich, Allianz, Tokyo Marine, Yasuda and others either opened offices or invested in their originally shy presence. The call made sense then. Some Latin American countries were experiencing strong economic growth based on solid ground-sound economic fundamentals, employment expansion based on medium-sized companies and consolidation of a consuming middle class. Given the low original base and the new need for protection of the middle class, insurance figures grew at a pace roughly double that of national GDP. For the time being, that call still makes sense as the ground remains solid--the World Bank estimates an average regional annual GDP growth of 3.3 percent from 2014 to 2016, and the overall insurance industry keeps gaining ground, mainly in countries that are the new steam horses for the region: Brazil, Chile, Colombia, Mexico and Peru. But times are changing and the horizon is no longer that tranquil. Economic models are stressed and long-term political powers are preventing change, generating fractures in some sectors, unrest in the streets and fragility in figures such as current account deficits as well as currency devaluations. This could lead to a chill in some economies. On top of that, new entrants face dynamic and efficient local players. However, there is room for all, at least for the near future.
James Littlewood, Latin America resident in the Global Insurance Center of EY: Rich growth opportunities continue to draw insurers to launch operations or expand their presence in Latin America. The insurance markets within the Pacific Alliance countries are relatively attractive in terms of stability, economic outlook and growth. Since 2012, on average, insurance premiums have grown at a double-digit pace across the region. This pace will continue through 2014, compelled by strong regional growth in small business and the modernization of mature industries and infrastructure, which drive demand for insurance protection. Insurance capacity across the region is expected to continue to increase this year. This is especially the case in Brazil, where double-digit decreases in premiums are anticipated across many low-hazard markets. Successful insurers will redouble their efforts to find profitable opportunities in this environment of diminishing premium rate adequacy and reduced margins. These insurers must not only identify opportunities for superior top-line and bottom-line growth. They also need to execute effective strategies to better serve these segments relative to their competitors. This requires developing a customer-centric business culture focused on customers' distinctive needs and expectations. We are seeing a heightened competitive environment, with many insurers believing they can accelerate premium growth by targeting the rapidly growing market clusters within the region. Overall, insurance penetration rates remain low in many Latin American countries, particularly with life insurance, despite continuing economic growth and reduced poverty levels. Nevertheless, growing risks include significant regulatory and fiscal reform, inflation, substantial catastrophe exposures and volatility in currency exchange rates. Insurers that efficiently manage these complexities, focus intensely on the markets in which they compete and achieve positive changes in their operating environments are likely to prosper.
Alan Murray, senior vice president for financial institutions and insurance at Moody's Investors Service: Latin America's insurance markets should continue to provide an attractive regional market for expansion and above-average growth, in Moody's view, continuing a decade-long trend that has benefited from positive macroeconomic drivers and sustained political stability in most of the region. The region has also experienced a rapidly expanding middle class, significant infrastructure development and industrialization initiatives, and supportive and strengthened regulatory frameworks. Adding to the attractiveness of these markets has been the below-average penetration of insurance in nearly all of these economies-suggesting significant further long-term internal growth potential. The major Latin American insurance markets have an open-competitive structure that promotes product development, competitive efficiency and customer service. Furthermore, the region's improving sovereign credit profile and economic growth has contrasted sharply with recent challenges facing Europe and North America. Today, five (Brazil, Mexico, Chile, Colombia and Peru) of the eight countries representing the largest insurance markets in the region are investment grade, compared with only two countries less than a decade ago. As importantly, insurance operating environments have advanced significantly as a result of progress of insurance market development and institutional strength in most of the region. These macro trends should continue to attract additional investment by international groups, as evidenced by recent acquisitions by groups that already have a presence in the region. Despite broadly favorable trends, sovereign credit, political and operating environment risks will likely remain constraints in Latin America, although to a considerably lesser extent than in prior years, with Argentina and Venezuela remaining especially challenging. For property/casualty insurers, particularly in countries along the Pacific and Gulf of Mexico coastlines, catastrophe loss exposures to earthquakes, volcanic eruptions, hurricanes and flooding will remain notable hazards.
Jorge Claude, executive vice president of the Asociación de Aseguradores de Chile A.G.: Latin America has been showing important growth in insurance premiums. The main causes for this growth are the region's positive economic environment (such as GDP growth in Peru and Chile) and the enthusiasm that insurance companies have shown toward self-regulation and corporate governance. These have been central because they have given soundness to the industry. Besides, from a consumer's perspective, it generates confidence in institutions, which is also crucial for growth. Insurance premiums will continue to grow in 2014, but not as much as before because the region is experiencing more economic instability, mostly in the big countries like Brazil and Mexico, which had 2.5 percent and 1.5 percent GDP growth in 2013 respectively, according to ECLAC. It will also slow because there are some signs of institutional instability that could deteriorate the business scenario. Nevertheless, an opportunity has arisen regarding the 'new consumer.' That is, people are more empowered and demand the best solutions and best products in less time, and this represents a tough challenge for the insurance industry. The competition in the insurance industry in Latin America and the Caribbean has been consolidating in the last years, according to the Herfindahl Index. Countries like Argentina, Chile or Mexico have very competitive industries, but this remains a main issue for the region's emerging and small markets.