Latin America: hard market but less severe
The hard market arrived later in Latin American than in other markets but it has made clear to local buyers that a good risk management structure is well worth the investment, finds Rodrigo Amaral
Even though rate rises and capacity restrictions have been less acute in the LatAm region than in Europe and the US, insurers have become more restrictive in their offer of covers and have increased the scrutiny on single accounts as a result of tougher global market conditions.
“P&C rate rises for companies with good risk management in place can be limited to 5% or 10% even in catastrophic regions,” Roman Mesuraca, head of P&C in América Latina at WTW, tells GRM.
Those that do not have a significant risk management programme in place, however, have seen prices going up by more than 20%, especially when they also face catastrophic exposures, a common circumstance in large swathes of the subcontinent.
Mesuraca says that underwriters have become more selective in the allocation of capacity in some industries and sectors. Risks from companies in industries such as meat producers, plastic, wood, and paper and pulp have faced restrictions on automatic reinsurance contracts and, as a result, have seen limited capacities in their local markets as well.
As a rule, however, it is possible to say that the hard market has been less punishing for Latin American buyers, even though a degree of difficulty remains in place.
“In principle, there is enough capacity in the market. What we have not seen, though, is the arrival of new leaders,” Mesuraca says. “New markets have entered the market, but they are either followers or are focused on certain layers of programmes that are not decisive to define prices.”
He estimates that industrial risks have seen rate rises between 5% and 15% in recent renewals, with the latter rate being applied to buyers with catastrophic exposures. The main catastrophic markets in Latin America are Chile, Peru, Colombia and Mexico, and that is where buyers are struggling more right now.
“Conditions and capacity in the market remain restricted, and for now we have not seen new sources of capacity in the Andes,” says Mauricio Acosta, head of the Andean subregion at Aon. “The underwriting of risks in the corporate sector remains conservative and, in the short run, we do not see a significant change of risk appetite from insurers.”
On the liability side, rates have increased by 7.5% to 15%, Mesuraca says, noting however that buyers are spending more on covers due to the recovery of revenue by their businesses, after the lows of 2020. “Some clients are paying 50% or 60% more in premiums than they paid in 2020,” Mesuraca points out.
Brokers also stress that the intensity of the hard market varies according to the reliance of a market on global reinsurance. “Capacities in other jurisdictions are more expensive and more restricted than in local or regional markets,” Acosta says.
As result, in non-catastrophic markets with plenty of local reinsurance capacity, such as Brazil, price rises and tightening conditions have been contained, and buyers with good loss histories have been able to obtain flat renewals. Mesuraca has also seen, in some rare cases, minimal rate discounts for non-cat programmes.
Ricardo Ciardella, director of specialty at Marsh in Brazil, remarks that in Brazil it is possible to even find a bona fide soft market. In the legal surety bond segment, more than 30 underwriters compete for the custom of organisations that use insurance to replace financial guarantees demanded by courts in the country’s never-ending tax litigation processes.
Ciardella says that it is a business line that has few if any losses and, even though it is going through a slow period due to the pandemic, is set to gain some steam once again in months to come.
But even in the Brazilian non-catastrophic market, there are some segments that follow the global trend, he stresses. These are usually linked to sectors where the local market cannot offer enough capacity for the largest exposures. One example is port operators, which can demand limits of hundreds of millions of reais, and therefore must go to London, Bermuda or Miami to find the capacity they need.
“In this case, international capacity is needed, so rates and conditions stay closer to global trends,” Ciardella says.
Other sectors where global trends are replicated in Latin America are the likes of aviation, some marine covers, the highest layers of D&O programmes, mining and energy.
And then there is cyber, which is a case where the situation may be described as even worse for Latin American buyers than for their peers in developed markets.
The hard cyber market caught Latin American buyers at a time where they were starting to realise the need to pump up their limits to face new exposures such as data privacy laws and ransomware attacks. Now, however, the little capacity that can be found is usually local, covers only the most traditional cyber risks and tends to fall well below the needs of large buyers, despite very high prices and deductibles.
As a result, clients that have more complex needs must make a strong effort to place the risk, says Mauricio Masferrer, head of commercial risk at Aon in Brazil. “We are helping our clients very much during the steps that precede negotiations with insurers. We are helping them to understand their exposures and risks, so that they can show to the market what they are doing,” he says.
Brokers have also been busy helping Latin American buyers to deal with higher retention levels demanded by insurers. Several companies in the region are starting to show stronger interest in retention tools such as protected cells and captives, but education is required about the red tape and costs incurred to make the best of them.
That is why, according to Mesuraca, WTW and other players are using virtual captives to enable Latin American companies to see how retention vehicles work, while at the same time transferring some layers of their towers to a self-insurance mechanism.
“Establishing a captive takes a lot of time and knowledge, and it is necessary to allocate capital to countries that the insured sometimes does not know well,” Mesuraca says. “We allow them to simulate how to use a captive. It is a first step before doing it for real.”
And a further challenge for risk managers and their insurance partners in the region is to adapt programmes to inflation, which is on the rise in several countries and has traditionally been an old bugaboo of Latin American economies.
On the one hand, inflation is forcing central banks to hike interest rates, which can help underwriters make more money via their investment portfolios, thus reducing the need to harden prices and conditions to achieve better technical results. On the other, it may direct more capital to fixed income investments rather than to insurance underwriting.
From an actual risk-underwriting point of view, Ciardella says that high inflation is likely to push rates further up because it will make claims more expensive for insurers in areas like construction, where the prices of building materials are increasing rapidly.