BMS’ Juan Carlos Gomez highlights why Latin America is an increasingly attractive region for the (re)insurance sector…
Why is everyone interested in Latin America?
The region is booming with a wealth of expansion opportunities available. Some brokers have started investing in Latin America, and their reasons are plentiful.
While the figures vary between countries, in general, Latin America has a low insurance penetration. According to a 2020 report from Mapfre, the average penetration rate was 3.1 percent, and despite the region being home to approximately 9 percent of the global population, it accounts for less than 3 percent of the premium.
A significant reason for this is lack of financial resources. Insurance is obviously not a priority for those who are struggling. Countries are trying to counter this through solutions such as affinity deals and microinsurance, which allow access to protection products at lower costs and can be easily distributed. On the other hand, a growing middle class is counteracting this low penetration and driving more insurance purchasing. This trend is projected to continue, with the middle-class population expected to potentially double in less than 10 years – this will drive an increased appetite for insurance and reinsurance.
Another factor is a general lack of trust in insurance, with many feeling that money spent on paying premiums is not money well spent. There is a tendency to believe that whenever you have a loss, the claim process is complicated and something can go wrong. To counter this, the industry and governments must work together to improve the view the population has of insurance companies, and emphasise the real importance of insurance as a mechanism to achieve peace of mind, protection and sustainability.
“The middle-class population is expected to potentially double in less than 10 years – this will drive an increased appetite for insurance and reinsurance”
Low penetration of insurance products also means there is a gap between what should be insured and what really is insured. For example, there are some countries where if an earthquake were to take place, less than 2 percent of the properties would be insured. This is a terrible situation as it means an economy that has suffered an already significant impact will have the additional burden of having to pay for damages upfront or through a tax increase, putting further pressure on an already devastated population.
As Latin America is a region that is heavily exposed to catastrophic events, the lack of insurance is doubly important. Across the continent, there is a significant risk of earthquakes. Additionally, the whole region has varying exposure to natural catastrophes such as winds, droughts and flooding. There are also political, terrorism and social risks.
The region also presents opportunities for capital advisors to provide risk financing alternatives – not just through insurance, but through bonds, ILS and other risk financing mechanisms that could allow for the insurance gap to decrease.
To further improve the public’s perception of insurers and reinsurers, an increase in regulatory requirements is important. There has been a significant uptick in the number of steps needed to take to begin operations in the region. This has upsides and downsides. It slows the process, making it more complicated to set up new businesses or expand existing ones, but on the other hand, more regulation of the industry generates more trust from the consumer. An involved regulator that is closely analysing requests increases the guarantee that a valid claim will be paid. These consultations provide a much-needed boost in confidence around the purchasing of insurance and reinsurance for people in the region.
Latin America is primed for growth. Due to its diversity, it is difficult to discuss it using generalities – but this diversity can be one of its greatest strengths. Different countries are exposed to different risks. For example, Argentina is not exposed to cat, whereas Mexico has a high level of exposure. Brazil is not greatly exposed to terrorism risk, but Colombia is. This allows insurance and reinsurance businesses to choose which risks they want to insure, with varying levels of exposure, reducing the concentration of risk.
Diversification of risks, an expanding middle class and growing consumer confidence make Latin America an increasingly attractive region for the industry.
Juan Carlos Gomez is executive vice president of Latin America and Caribbean at BMS