Brazil, for a long time a regional giant, is now considered a significant global player in the reinsurance market. Ana Paula Nacif looks at a country going from strength to strength
After 70 years of market monopoly by the state-owned IRB, Brazil's reinsurance market opened up last year with foreign companies eager to secure a foothold in one of the fastest growing economies in the world.
The country has a 40% share of the Latin American insurance market and, since the new regulation was introduced in 2008, 50 international reinsurers have already registered with the regulator, the Superintendency of Private Insurance, known as Susep.
Brazil ranks as the 10th largest economy in the world and the largest in Latin America with a gross domestic product of $1.3trn. And although Brazil hasn't escaped the downturn - with the deterioration of the economic outlook damaging prospects for exports and domestic demand - "there is no doubt Brazil has developed into a regional giant in recent years and into a significant global player", according to Andres Tacsir, senior economist for Latin America at business intelligence firm D&B.
He adds that the medium to long-term prospects remain positive, strengthening Brazil's position as an engine for growth of global businesses. "The recent depreciation of the real could even spur investment once the current extreme uncertainty wanes."
This positive mood is shared by those who have decided to invest in the country since the opening up of the reinsurance market. "There is nothing new in saying Brazil is one of the biggest growth areas in the world," says Fabio Basilone, president of Cooper Gay do Brasil Resseguros. "Brazilians are known to be experts at managing turbulent economic scenarios due to the country's history of inflation and lack of investments. Nowadays, world investors and companies are not only seeking stability but also aggregate capacity to support them in difficult economic situations. In this context, Brazil is definitively a key place to trade with."
Eduardo Lucena, chief executive officer of insurance and reinsurance broker Colemont Brazil, explains that the primary objective of the new regulation for the open market was to create strong local capacity. "Although having a local licence grants the reinsurer market preference (60%), investment on local reserves and strong regulation may drive companies to cheaper licences, such as that of the admitted or occasional reinsurer," he points out. "My personal feeling is that international players may want to test the Brazilian market before engaging in deeper investments."
New entrants to this market may well want to test the water first, but the credit crisis does not seem to have frustrated their ambitions, although it has perhaps slowed the pace. "The amount invested by each reinsurer, their appetite for new explorations and how selectively they respond to risk exposure have changed - at least for now," says Mr Lucena.
Despite current uncertainties, the figures still look strong. Statistics released by the Brazilian insurance federation, known as Fenaseg, show that the Brazilian insurance market grew by more than 14% from 2006 to 2007. And Mr Lucena says the opening of the market to foreign players, coupled with the development of new products - especially those designed for middle to lower income Brazilians - will accelerate this growth.
Also, according to Kevin Frawley, Crawford & Company's chief executive officer of property and casualty for the Americas, the expectation in mid-2008 was that the Brazilian market would grow approximately 20% a year, on average, over the next five years. "With the current world economic crisis, this estimate may need to be reduced," he says. "For example, Susep said this month that market growth will be 8% to 12% in 2009."
An economic slow down has been predicted, with the Brazilian GDP expected to grow only 2% to 3% in 2009, but substantial investment in infrastructure by private companies and the government should keep the economy moving. For example, oil company Petrobras, which recently discovered new oil reserves, has already confirmed its investment plans for the next three years. Such investment and infrastructure programmes are also likely to increase the demand for reinsurance.
"Brazil has a huge population, strong domestic market and well-developed industrial and export sectors," explains Wilson Gozzi, director and president of broker Lockton Brazil, which has plans to become a leading reinsurance broker in niche areas and to reach a penetration ratio of 1% of the reinsurance market by 2012.
He adds: "The country needs to invest heavily in infrastructure, particularly ports, airports, roads and energy. Also, Brazil will host the 2014 football World Cup, which will attract a lot of investment in infrastructure for the whole country."
Some players expect the new market flexibility to bring a competitive edge that will foster product innovation. Bobby Vernon, managing director of Howden's Latin American operations, believes the reinsurance market opening up will prompt the development of new commercial insurance products, particularly in the casualty sector. This is because more insurance companies now have access to international products and solutions that will make their way into the Brazilian market, without the previous market filter of a single government-owned reinsurer.
In Mr Vernon's opinion: "Brazil could grow to represent 30% of our business in Latin America over the next few years," adding: "Smaller local insurance companies in Brazil, which have large multinational parent companies, will now become more competitive on the middle to larger commercial account segment in the country."
According to Amador Torrealba, divisional director for Latin America, Spain and Caribbean Regions at United Insurance Brokers, companies will be focusing on the development of 'mass insurance products' in the short-term for the working and middle classes, where business opportunities are massive.
He points out that aviation, agriculture and energy are additional areas primed for potential development. "The aviation business is very big and still under-insured; the agriculture sector is very much within its targets as this area is expected to grow 10% in the next two years; and, as for energy, Brazil is expected to invest more than $20bn before 2012 in the electricity sector alone, plus the investments expected to develop the vast oil and gas reserves that have been discovered recently."
It is clear that many players are feeling bullish about their business prospects in the Brazilian market, but they will also need to be ready to face some tough challenges. Hermes Marangos, partner and head of international at law firm Davies Arnold Copper, believes it will take time for international companies to compete on an equal footing with their Brazilian counterparts. "It will depend on local knowledge and whether these companies have extensive contacts and connections with those looking to buy reinsurance."
Being there on the ground may also prove crucial for business success. Marco Castro, managing director and general representative in Brazil for Lloyd's, says that having a local presence and knowledge are essential for companies that want to better understand and service the needs of the Brazilian market. "We want the Lloyd's market, based in London, to get closer and support the Brazilian market. Having a local presence will give us better access to business in Brazil."
Lloyd's was the first reinsurer to get admitted status in the country - with Catlin syndicate already taking full advantage of that - and Mr Castro points out that both insurers in Brazil, as well as foreign companies wanting to tap into this market, will have to learn how to work with each other. "Insurance companies and local brokers in Brazil will need to learn how to operate in this new environment and on a global basis. At the same time, the international market will need to learn how to operate in Brazil and Lloyd's Brazilian office will facilitate that."
Legal learning curve
The legal environment may also present another learning curve. Brazil has no history of international reinsurance law, which means companies are in a 'wait and see' situation when it comes to claims and disputes. "The question is, do you start from scratch or do you look at other jurisdictions?" asks Mr Marangos. "There are a range of complex issues in international contracts and many terms have specific meanings; we cannot be certain whether such terms will be understood in the same way in Brazil as they are in Europe, for example. One would need to be precise and careful when drafting contracts and terms to make things clear."
In the current economic climate, Mr Marangos explains that some companies' financial situation and ratings may not now be as good as when they applied for their licence. "We may see more consolidation between players whose financial position is shaky. Once a company gets a licence it doesn't mean they can maintain it if their financial position or rating changes."
The level of financial commitment required by the regulator depends on the type of the licence requested. Mr Torrealba explains that the occasional or eventual licence is the easiest one for a foreign reinsurance company to secure in Brazil, as they only need to comply with a minimum acceptable rating (A-) and capital requirement. "Although there is an exception for those companies based in Bermuda or those territories deemed 'tax haven countries' which, at this moment, are not allowed to write business from Brazil while their main office remains in these countries."
Apart from that, he points out that eventual/occasional companies do not incur additional overhead costs as opposed to local reinsurers, which need to capitalise the company in Brazil or admitted reinsurers, which need to hire staff and establish a local subsidiary or branch office in the country.
Mike Hughes, chief executive officer of Aon Benfield Latin America, emphasises that being local, admitted or eventual is usually a "trade-off between the size of the investment the reinsurer wants to make in Brazil and the participation they want to have in this market".
He adds: "Occasional reinsurers have a good advantage over the others - there is no mandatory investment and they only need to be registered at Susep. However, their ability to do business in Brazil is limited."
The reason for that, he explains, is that each ceding company can only have 10% of its total ceded premium on reinsurance placed with occasional reinsurers. "As insurance companies never know when they will need an occasional reinsurer to complete a placement, they usually prefer to avoid using them."
Companies may have to weigh their priorities but, according to Mr Marangos, many players are opting for the occasional licence because this is the fastest way to get a foothold in the market. "It takes far too long for a local licence to come through, in addition to all the bureaucracy involved to establish a local company in Brazil. The procedure should be much faster." He says there is the added advantage that "an occasional licence allows players to test the waters without having to establish a branch or local representative office in Brazil".
Whatever challenges the Brazilian market has thrown at foreign companies, it seems that their willingness to overcome any hurdles hasn't waned. And, for some, the country's future looks bright indeed. As Mr Basilone points out: "Brazil is a continental country, almost free of natural hazards and rich in minerals and oil. It is home to one of the biggest aircraft manufacturers in the world, has fantastic hydro-electrical power capacity, is the developer of the ethanol process for vehicles and a high consumer of goods. Also, most importantly, it is a country going through significant investments in infrastructure."
BRAZILIAN MARKET - Facts and figures - Source: Swiss Re
According to a report by Swiss Re, the Brazilian insurance industry was propelled by solid economic performance in 2007, with insurance premium volume climbing to $29.8bn, up from $23.1bn in 2006. However, insurance penetration, defined as premium volume as a percentage of gross domestic product, was 2.3% - still far below the world average of 7.6%.
Non-life premiums account for 51% of the insurance income in Brazil. In 2007, non-life premiums grew by 5.3% in real terms and soared by 22.9% in US dollar terms due to the continued appreciation of the Real. All lines of business experienced growth.
The life market, which accounted for the remaining 49% of the insurance premiums in Brazil, grew by 17.8% in real terms and skyrocketed in US dollar terms by 37.5%.
Currently, more than 100 insurers write business in Brazil, most of which are composites. The top five insurance groups control 40% of market premiums; the top 10 account for 54%. Bradesco is the largest player with 25% of the market share, followed by Itau with 13%.
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