Latin Americas insurance industry is benefiting from the regions economic growth, but also faces some major

challenges. BY THIERRY OGIER AND LISA K. WING SO PAULO Swiss-born insurance executive Werner Stettler has spent almost a quarter of a century in Brazil, but he says he has never had it so good. Stettler is now a vice president for the local subsidiary of Zurich Financial Services, which has been in Brazil for 30 years. Most important, Zurich recently paid $1.6 billion for a 51 percent stake in a joint venture agreement with Spain-based Santander to sell insurance contracts jointly across Latin America (except for car insurance). Brazil was a decisive factor to sign the deal, says Stettler, as Zurich, which traditionally has had a focus on corporate customers, now has access to a 3,500-branch network to sell insurance contracts to individuals for 25 years. Brazil definitely became one of the seven largest markets for Zurich in the world, he says. LATIN AMERICAN GROWTH Neither Stettler nor Brazil are isolated cases. In most countries in Latin America, the insurance sector is growing significantly, thanks to economic growth and demand for insurance. In general, most Latin American countries are going through a process of strong growth, and the insurance industry by excellence replicates what is happening in the economy, notes Diego Nemirovsky, vice president and senior analyst for Moodys Latin America Insurance Group in Argentina. Moreover, there is great growth opportunity within the sector because penetration is still very low in many countries. Of Latin Americas 100 largest insurers, only 17 saw declines in their premiums last year, according to a ranking developed by LatinoInsurance for the Latin Trade Group. Brazil-based Bradesco continues to lead the way in total premiums in Latin America. Last year Bradescos premiums reached $14.7 billion, a 29.6 percent increase. That was almost as much as No. 2 and No. 3 combined. Brazil-based Ita came in second, with $7.8 billion in premiums, which marked an increase of 9.8 percent. Meanwhile, U.S.-based Principal replaced Spains Mapfre as Latin Americas third-largest insurer because of a 64.1 percent increase in premiums last year, to $7.1 billion. Mapfre came in fourth with premiums of $6.5 billion, an increase of 9.7 percent. The top 10 also includes Brazils Porto, Spains Santander, U.S-based Liberty and France-based CNP. WINNERS & LOSERS Measured in percentage changes, Vida Camara (Chile) was the clear winner, with a 158.4 percent increase in premiums last year. Other winners include Brazils Safra (122 percent), Perus Interseguro (106.1 percent), Chiles Cruz Sur (101.5 percent) and Brazils Virginia (80.1 percent). Venezuelan insurers were the big losers, led by Horizonte (down 59.3 percent). Venezuelan companies accounted for 13 of the 17 losers on the top 100 ranking. The key reason was the 100 percent devaluation of the Bolivar last year, says Juan Fernando Serrano, executive president of LatinoInsurance. The key losers also include Segura Inbursa in Mexico, which saw a 39 percent decline in premiums last year. Inbursa has the Pemex account, which is written every 22 months and the Mexican regulator requests to register in the books the twoyear premium during the year of renewal, Serrano points out. For this reason, whoever has this policy will have a similar behavior, he says. CHALLENGES Despite the positive outlook throughout most of Latin America, new government regulations passed this year in Brazil and Argentina restricting companies from reinsuring risks abroad are raising concerns among industry observers. Another key factor that cant be ignored and that will continue to affect the overall insurance industry well beyond this year is the risk of natural disasters. As noted by Alejandro Pavlov, vice president and senior analyst at Moodys Latin America: The industrys biggest threat to Colombias insurance industry has been lower yields on financial investments and problems with natural disasters, which are more and more frequent. It is essential to manage these catastrophic risks. Although natural disasters will certainly raise costs for insurance and reinsurance companies and in turn their policyholders increased competition to capture clients in the regions growing economies will ultimately benefit the end user in the long term by expanding coverage and reducing costs, industry observers say. The life and health insurance sector, in particular, is expected to fare well region-wide. The privatization of pension

systems and healthcare, as well as the increased incomes of skilled wage-earners which turn to new healthcare and life products will continue to drive the sector in many economies throughout the region, notes Roberto Walker, president of Principal Financial Group Latin America. In another move to capitalize on the regions underserved insurance market, companies in Chile and Colombia have allocated significant resources to integrate insurance and healthcare services. This is catching on in Peru, where the two largest insurance companies are investing heavily to incorporate healthcare services into their portfolios. Pacifico Seguros, Perus second largest insurance company, earlier this year acquired Doctor +, a company that provides house-call services, and also is developing medical centers and acquiring clinics in Lima and the provinces. David Saettone, the companys CEO, says this is part of a long-term strategy to invest in Perus rapidly growing and largely underserved healthcare market. The first things people spend on when their purchasing power improves is healthcare, thus the demand for these services has increased tremendously in Peru, Saettone says. With these strategic moves, we want to build a strong, private national network to satisfy this demand and to improve the quality of our services and make healthcare accessible to all. Meanwhile, Rimac Seguros, Perus largest insurer, also announced plans to invest close to $60 million to expand its health business and expand its medical centers in Lima and the provinces over the next five years, according to company reports. Despite this outlook, nothing is set in stone. Some companies are bowing out of the sector and the region such as Dutch group ING, which in July agreed to sell most of its Latin America insurance operations to Colombias Grupo de Inversiones Suramericana (Grupo Sura) for $3.7 billion. BRAZIL But Brazil is clearly the star. Apart from Zurich, many other foreign investors have rushed to the fast-growing market, which, in spite of its restrictive regulations and bureaucratic rules, has become the focus of strong attention in recent years. The market has grown by 20 percent on average since 2005, says Leonardo Santos, a director at Austin Asis, a financial research firm in So Paulo. Such spectacular growth is the result of economic growth (except for 2009), and real income gains. A buoyant job market has meant that a large number of companies now offer private health and/or pension plans to retain the best talents. Meanwhile, the emergence of a new middle class has led to the opening of millions of new bank accounts. This has favored the development of new insurance products for this new type of consumer, Santos says. Consumer credit-related insurance and extended guarantees, which started from a very low base, have become popular. The real estate boom has also favored the insurance market, as such contracts [seguro habitacional] are required by banks when a customer wants a mortgage. We have been active on all fronts, whether it is life insurance or pension plans. We have to make the most of Brazil s current economic performance, Stettler of Zurich says. The insurance market growth has been phenomenal, yet it still has a lot of potential to grow further. According to Austin Asis, the insurance market accounts for only 3.5 percent of the Brazilian GDP against a global average of around 8 percent. Santos says the Brazilian market is due to increase to about 5 percent in the medium term, thanks to investment in the oil industry, infrastructure and special events, such as the 2014 soccer World Cup and the 2016 Olympics in Rio de Janeiro. Yet in the meantime, the current slowdown in economic activity and the new bout of inflation are bound to curb the pace of growth in the Brazilian insurance market in the short term. When inflation is high, people have less incentive to save or invest in insurance contracts, as there is less disposable income Santos says. It would be too optimistic to think of sustaining a growth rate of 20 percent. He also raises other issues related to capital intensive projects. There are a series of challenges, like how the government will deal with public spending regarding large infrastructure works, he says. Brazil does not have a very good record in terms of implementation of infrastructure works. Market sources say nine of the 10 largest insurance companies in Brazil now have foreign shareholders. Besides the Zurich/Santander joint venture, other large deals included a 1 billion reais (US$574 million) partnership between Mapfre, the Spanish insurer, and Banco do Brasil (BB), the state-controlled financial group, in life insurance and basic risks last year. BB also sells car insurance on behalf of Sul America, one of the leading insurance companies in the country. [ING is currently negotiating the sale of its 35 percent stake in Sul America Axa and Zurich are among the contenders].

Moreover, insurers that do not have a branch network have also made agreements with banks, such as Porto Seguro and Ita, to benefit from stronger distribution channels. Large foreign firms have also taken a closer look at the promising Brazilian market after authorities put an end to the state monopoly on the reinsurance market three years ago. When the markets opened up to private competion, IRB [Instituto Brasileiro de Resseguros, the former state-owned monopoly] lost a significant quantity of contracts. This was not well received [by the Brazilian authorities], Stettler says. Huge contracts are soon due to be awarded in the oil industry, as Petrobras and others plan to set up dozens of offshore platforms to explore new oil reserves, as well as big infrastructure works (two large dams have already been built on the Amazon River, and a third one is due to be set up in the coming years). But foreign reinsurance firms have been taken aback by the conditions imposed by the Brazilian government. After intense lobbying, some restrictions were maintained: 40 percent of the amount of any reinsurance contract has to go to a local company; moreover, local subsidiaries of foreign groups can transfer only up to 20 percent of the risks to their headquarters. Supporters say this will help keep more reinsurance business onshore, thus benefitting the local market, but critics argue that limiting companies risk placements will decrease options and drive up costs for companies and policyholders. Moreover, observers argue that these restrictions could harm important future investments such as those expected to accompany the 2014 World Cup and the 2016 Rio Olympics in Brazil by limiting national risk exposure and therefore harming the insurance industry as a whole. Sure, this is protectionism. It is always like this. It actually depends from which point of view you look at things, says Stettler, as Zurich injected 100 million reais in its local reinsurance company to satisfy the demands of the Brazilian government. Swiss Re, one of the worlds largest reinsurance companies, also has opted to file for local status to offer optimal support, service and capacity to its clients in Brazil, according to Ivan Gonzalez, head of Latin America for Swiss Re Corporate Solutions. These regulatory changes are still rather new, so its difficult to forecast long term what the outcomes will be but clearly those operating locally get the advantage of being offered a percentage of business before eventual or occasional reinsurers, he notes. Foreign reinsurance companies have joined forces in a common pressure group, which seeks more concessions from the government as parts of the current legislation are considered anticonstitutional. Insurance experts single out Peru as a strong market with great potential. GDP growth continues to be one of the regions highest, and insurance penetration is at a mere 1.5 percent of GDP. Indeed, the countrys stable economic and political conditions and open government policies are helping attract investments, and the insurance sector is no exception. Due to regulation in Perus insurance sector, competition has significantly increased over the past five years, resulting in higher returns for insurance companies and cheaper and more varied services for customers, says Saettone of Pacifico Seguros. Its a win-win situation. In just five years, he notes, the sectors annual profits have surged from $15 million to $250 million today. The impact of these higher returns is that risk management has become more technical and professional, Saettone says. Additionally, new product development and distribution channels have increased the accessibility of health insurance to a broader customer base. Chilean insurer Cruz del Sur is among the top growth winners in Latin America. Its premiums jumped 101.5 percent last year to $272.8 million, according to LatinoInsurance. Measured in Chilean pesos and adjusted for inflation, the value of its life insurance premiums which account for well more than half of total premiums jumped 79.4 percent in 2010, more than double the average rise in Chile of 37.4 percent. That allowed the company to increase its market share from 3.9 percent to 5.1 percent. Cruz del Sur has traditionally been in the second division among insurers, with medium term sales, says corporate vice president Andrs Lehued. But we now have a business plan in place to correct that. That plan involves strengthening traditional areas of business but also broadening the array of services the company offers. Efficiency savings also were part of the companys success. As a percentage of premiums, the companys administration costs dropped to below 11 percent from above 20 percent in 2009. The industry average in Chile remains above 20 percent. Lehued says he expects the value of premiums to grow handsomely in 2011, too.

In the first half of this year, we sold around $200 million in premiums, and we expect total sales for the year of around $450 million, he says. OUTLOOK The new crisis hitting Europe and the United States will affect the insurance sector in Latin America in 2012, albeit to a smaller degree than the 2009 global crisis did, warns Serrano of LatinoInsurance. This is due to the price reduction of most of the commodities sold by [Latin American] countries and a reduction in the volume of purchases of these and other industrialized products from the first-world countries, he says. The compounded average growth rate for the 2000 decade was 12 percent, and Brazil with 18 percent, Peru with 16 percent, Ecuador with 15 percent, and Colombia and Chile with 14 percent outperformed this average. The question is, can they keep growing at the same rate with this new crisis? Serrano says. Meanwhile, the insurance sector in Latin America will face several key challenges spurred by local conditions. Serrano singles out these three: Higher inflation that will affect the cost of claims, mainly in motor vehicles and health. Reduction in the percentage of new cars insured, if governments start increasing sales taxes for new cars and if bank reduce their car loans. New regulations in some countries, which will require higher capital from the owners of the insurance companies. Life lines of business (life, accident and health, and pensions and workers compensation) are slated to grow at least 50 percent more than non-life lines of business in 2012, Serrano predicts. As for country markets, he expects that Argentina, Colombia, Ecuador and Panama will see increases of 13 percent to 18 percent. The biggest stars? I see three countries growing over 18 percent, [namely] Brazil, Peru and Uruguay, Serrano says. Ogier reported from So Paulo, Wing from Lima. With additional reporting by Gideon Long in Santiago.