Latin America’s Insurers

September 9, 2013

One of the greatest attractions of the Latin American insurance market is, paradoxically, that it is so under developed. But the region’s impressive economic growth has created a plethora of opportunities for the insurance industry that Britain’s insurance firms now racing to take exploit.

The growing size of the market is notable. With almost 600 million people, and nearly $130 billion in annual sales, Latin American insurance markets are growing fast. Moreover with most Latin American economies growing more quickly than their European or North American peers the future looks promising for both volume and premium expansion.

One driver is globalisation, in which Latin America is increasingly becoming involved. This is reflected in business expansion and an uptick in mergers and acquisitions, both requiring greater global insurance capacity and risk modelling. Another is the rise of the middle class. Take Mexico for example. In the 1960s 80% of its population lived below the poverty line, today more than 50% of Mexicans have entered the middle class. Economists and business analysts associate the recent growth in Mexican consumption and post-secondary-school education enrolment with the social goals of this emerging middle class. Meanwhile in Brazil approximately 2.7 million people moved into the middle class in 2011, and it’s estimated that 40 million people have gone from living in poverty to the middle class in the past decade. These consumers are accumulating assets, like homes and cars, requiring insurance protection.

These supply chains often cross national borders

2007-05-02 12.02.26-90

A building boom is being supported by a steady insurance industry

Latin America’s growing role in world trade is also good for the insurance sector. Exporters face a number of risks that are inherent to their activities. These include the risk of physical loss of products and risks during transport. As emerging economies move up the value added chain, the risks associated with supply chains will become more significant. These supply chains often cross national borders or even continents. To effectively manage the risks associated with the disruption of complex supply chains, in-depth knowledge of various risk factors and their interdependence is necessary. In addition to the trade enhancing effects of insurance, insurers can help exporters develop and maintain resilient supply chains.

Another boon is that the region offers better conditions for the insurance sector nowadays. Insurance, like most types of financial planning, needs macroeconomic stability to thrive. And, in recent years, several countries have consolidated their macroeconomic position. This is true, not only of the traditional powerhouses such as Brazil or Mexico, but also for the smaller economies. Take Colombia. External debt (the sum of public and private sector obligations to foreign creditors) has fallen steadily from 40% of GDP in 2003 to 22% today. The government has also built up about $35bn of reserves. This all gives Colombia an important buffer. It makes Colombia less dependent on foreign creditors. If the Colombian peso falls, the country doesn’t have to try to raise taxes or seek more international debt. Chile has been even more prudent. Its public debt is less than 10% of GDP while it’s also built up sovereign wealth of $15bn that it can use to stimulate the economy if copper prices fall. Peru looks good too. Its economy has grown at an average annual rate of 6.6% since 2003 and the national debt has fallen from almost 50% of GDP to 22% over the same period.

Security conditions have also improved. For example Colombia was once one of Latin America, and the world’s, most violent countries. Now the security has improved significantly. Luis Andrade, President of the National Infrastructure Agency, notes that “over the last ten years the number of attacks have gone down. This allows businesses to plan large infrastructure projects with less uncertainty and costs. That, in turn, helps insurance companies to offer more competitive products.” There is also policymaker support for the insurance sector. This stems from the role that insurance plays in the development of the economy. In order to maintain sustainable growth, Latin America will have to mobilise sufficient investment. There is a need for investments in infrastructure, buildings and machines. However, investors, both domestic and international, face a number of risks that endanger their investments. By taking on some of these risks, insurance facilitates investments and thus long-term growth.

A good example is the investment in the expansion of the Panama Canal which was facilitated through surety coverage by Zurich. When completed, a new lane of traffic will allow the transit of much larger ships, doubling the waterway’s capacity overall. Up to 10,000 direct jobs will be created at the peak of the construction phase, and 6,000 permanent positions when the project is operational.

Put bluntly, policymakers across the region are keen to encourage the insurance industry because they realise it can help attract investment to their economies. A global and competitive insurance industry can play an important role in the promotion of FDI. By covering and managing some of the risks investors typically face, global insurers make investments possible that otherwise would be too risky. Latin America has experienced the world’s strongest increase in outward FDI in the last few years. Bolstered by strong economic growth at home, Brazilian and Mexican firms have increased their investments abroad, in particular in advanced economies. Global insurers can play a vital role in helping firms located in emerging markets in managing the risks associated with their foreign activities.

It is little wonder then that so many analysts expect Latin America’s insurance market to grow strongly over the next five years. As it does so it will create opportunities for London-based firms to worth with Latin American partners.