“Brazil is a game changer. It is part of the economic growth that not just Latin America but the world needs. We would be absolutely foolish to miss the opportunity.”
So Pierre Ozendo, chairman and chief executive officer of Swiss Re America, told Reactions at the 2nd Annual Brazilian Conference, held at the glamorous Copacabana Palace in Rio de Janeiro in March.
Reinsurers were in no doubt that Brazil will become a vital reinsurance market. “I believe our growth opportunities are going to be significant, but we will be patient,” said Ozendo. “We won’t jump in just because it is a big market.”
International reinsurers’ patience has already been tested. They have not made as much progress as they would have hoped since Brazil’s reinsurance market was opened in 2008. State reinsurer IRB-Brasil Re formerly held a monopoly over the market.
Insurers have found they have had to adapt to a new world.
“The interesting point here is the major adaptation had to be on the insurer level,” said Rogério Acquarone, legal manager for IRB, on a panel discussion at the conference. “Insurers had to all of a sudden perform a certain number of activities and duties that they weren’t used to because IRB used to do them. So it’s indeed a big change. One would have imagined that once the market opened lots of business would shift from IRB to the market, but this is not what we have seen.
“We still retain about an 80% market share and I think one of the explanations is the insurance companies are still figuring but exactly how this open market situation works so they stay with the reinsurer that’s been doing most of the reinsurance part of the activity for them.”
The financial crisis did not help international reinsurers’ case. Brazilian cedants were wary about credit issues. Many took a ‘better the devil you know’ attitude.
“The Brazilian legislative environment is a very peculiar one. The fact that IRB remains a solid player in Brazil, with assets in Brazil, and is the main channel for the insurance companies to conduct their business to avoid credit risks is one of the reasons we have remained strong in the market up to now,” said Acquarone.
Slower than expected
International reinsurers concede that the transition has not been as successful as they would have hoped. But they say it is inevitable the market will prove worthwhile for them in the longer term.
“The transition to a fully open market might have happened a hair slower than expected, and IRB’s share has remained high,” said Mark Byrne, chairman of Flagstone Re, on the same panel. “Obviously clients have an important reason to maintain good relationships with the IRB, so I think if the client moved all its business right away it wouldn’t necessarily be constructive in light of the long-term relationship.
"And I would also mention that the financial crisis, which has created a period of time in which cedants – who five years ago did not have to think very much about reinsurance creditors at all – now have to take a position. They have had to do an analysis on the reinsurers’ credit risk and it’s been an environment where some of the highest rated international reinsurers had some of the biggest problems.”
He added: “I think we will continue to see the slow downward trend of the IRB market share. Obviously we wouldn’t be here if the admitted reinsurers didn’t think that was going to happen.”
Swiss Re in particular suffered credit issues during the financial crisis, and had financial strength downgrades. Ozendo admits it was a tough time but says Swiss Re has rebounded since it experienced difficulties in the fall-out of the financial crisis.
Benjamin Gentsch, deputy CEO of Scor Global P&C, agreed the IRB market share has remained higher than people were expecting. But he added that the gradual opening of the market has also had an effect.
According to figures from Lloyd’s, the total Brazilian reinsurance market in 2009 was worth $1.99bn, with local reinsurers writing $1.68bn of that and admitted and eventual reinsurers writing $310m. Under the rules of the market’s opening, local reinsurers had the right of refusal on 60% of business in 2009. This reduced to 40% this year.
“It’s not an open and completely free market right now,” said Gentsch at the conference. “During a regime of such restrictions the market of course does not work yet as a fully free and open market. We are conscious of that and we know this is going to change, and slowly but surely we are going to have an open market for reinsurers.”
Scor operates as both an admitted and eventual reinsurer.
“The reason for that is we want to optimise our access to the lines of business we find to be attractive. We also want to optimize the way we transact business, meaning that where we have underwriters in Zurich for some specialty lines we want to use Scor Switzerland and cede as an eventual reinsurer, whereas the admitted reinsurer on the non-life side is Scor Re US so there are considerations we have to work to as well.”
Service providers are also looking to capitalise on the growth in the region. For example, technology solutions provider CSC last year acquired BearingPoint’s Brazilian operation. This brought with it 550 employees and offices in Sao Paulo, Rio and Brasilia.
“We view this market as a tremendous growth opportunity for us,” John Hatcher, vice-president for Latin America in the financials services group at CSC, told Reactions at the conference. “The insurance market is very vibrant right now. The insurance market in Latin America and Brazil particularly has been underserved. Most firms have systems that have either been homegrown or been acquired from locally based application vendors. At this point, I think they realised that neither of those is the answer for the long haul.”
Hatcher adds: “One observation I have had is the companies here are not as burdened by their legacy infrastructure as companies in the US and Europe. So I see the companies here looking to do a bit of a leapfrogging over their large counterparts.”
He says CSC is seeing a tremendous number of opportunities.
“We see a lot of activity in reinsurance with the deregulation so that is obviously driving a lot of change in the business itself, and along with the business you need the rigour that a system and the processes that come along with it can bring,” says Hatcher. “On the general insurance side, we have systems we are bringing that leverage our global capabilities. We see the carriers here being predominantly multiline carriers. It is a little different. For example, we may see some activity in the microinsurance space that we may not necessarily see in other areas. We have got proven solutions that we think we will be able to very well adapt.”
Land of opportunity
Brazil’s potential is clear. According to Swiss Re figures, the country had total premiums of $47.5bn in 2008, with $25.07bn non-life and $22.43 life. This represents 3% insurance penetration. This will grow in coming years. There is an impending boom in infrastructure and energy projects. Brazil is planning to spend $11bn in infrastructure as it prepares for the 2014 World Cup soccer tournament and the 2016 Olympics. The Brazilian Growth Acceleration Programme, focuses $280bn on infrastructure improvement. Rio de Janeiro state expects as much as $90bn in investments in the next three years.
Lloyd’s says lines that are expected to create strong reinsurance opportunities are construction, property, energy, marine, aviation, transit, liability, directors’ and officers’ liability and surety.
Reinsurers say there are a lot of opportunities but not every line of business is attractive.
“The Brazil market right now is attractive but not across the board,” said Gentsch. “We have to be very selective and in Scor’s portfolio we are strongly exposed in the large corporate business and specialty lines. I agree with the assessment here that the larger volume of personal lines from our perspective is not [as attractive].”
Rodrigo Protasio, vice-president at JLT Re-Brasil, said in a presentation that the types of cover need to change for the market to fulfill its potential.
“There is no bad risk, just wrongly priced risk,” said Protasio. “A lot of reinsurers run away from catastrophe. You need to have good partners and be creative. It is not just proportional. We are going to need some layers.”
Patick Mailloux, chief operating officer of Swiss Re America, thinks there is a tremendous opportunity for the industry to develop some specific solutions.
“Solutions could range from microinsurance at one extreme to parametric solutions for the government, and they could really increase the penetration ratio,” Mailloux told Reactions at the conference. “I think Swiss Re is very well positioned from its ability to train, to provide underwriting expertise and new product development innovation to really help the local players here to grow.”
Rolf Steiner, who runs Swiss Re’s Brazilian business, added: “Swiss Re has a lot innovative products which others do not have. For example, in the life and health business we have had a lot of immediate success. The current life market in Brazil has a situation where they do basically no underwriting of individual life but the prices in the direct market are also very high. The market recognises that the prices could go down if the underwriting is done in a more professional way, but they also do not want to bother the customers or the agents to get into a whole lot of underwriting work. That’s why we developed innovative underwriting solutions with the least impact on brokers and insurers in the evaluation process.”
Steiner says Swiss Re’s premium volume is now about $75m in Brazil, down from $100m. He says the reduction comes from surety, and that Swiss Re is growing slowly in other lines. Ozendo summed up by saying Brazil represents a once-in-a –lifetime opportunity for international reinsurers, if they are patient.
“A great advantage of a market like this – and it is on a scale that we don’t get so see very often in one’s lifetime – are the opportunities we get in a partial way to relive history and not make the same mistakes,” said Ozendo. “We get to bring opportunities into a market that is evolving and use that experience from all markets and bring value and accelerate the capabilities of the local market place. If the insurance market doesn’t grow then we are all wasting our time.”
By Michael Loney – mloney@euromoneyny.com