January 24th, 2011

2011 Reinsurance Renewal Rates: Latin America

Posted at 1:00 AM ET

141x141jan1thumb27Reinsurance rates were flat for loss-free programs in Latin America, though those affected by the Chile earthquake sustained rate on line increases of 40 percent to 60 percent, depending on specific loss experiences. Per risk working layer programs were flat to up 10 percent if there was loss activity, and high-risk excess programs were flat year over year.

GDP growth (particularly Brazil) is driving the primary markets. In many countries, a new emerging consumer class is developing. Inflation is under control in all countries, apart from Argentina and Venezuela, where motor and health insurance portfolios are being compromised. Meanwhile, competition in Brazil, from multinational entrants and the opening of new reinsurance offices is driving down rates in large commercial risks. Rates are down 10 percent to 15 percent for the country. The major primary market loss came in Chile, with the earthquake, but more than 95 percent of it was reinsured. Multinationals are looking to make further acquisitions in the region, and local groups are also looking to defend their positions. For the coming year, further growth and relative stability are likely.

In Latin America, premium is increasing in line with the increase in exposures (like for like, but no more). There is a trend in some countries, Venezuela and Brazil, for example, for regulators to be more protective of their markets. Other regulators (e.g., in Mexico and Brazil) are keen to adopt Solvency II before the markets are quite ready for this.

Structurally, the prevailing trend for catastrophe excess of loss programs among internationals has been to increase retentions, while the local carriers have preferred to keep retention levels lower; per risk structures are essentially unchanged. Capacity has increased from both existing and new players, with Bermuda and Lloyd’s becoming more active in Latin America, though less so in the Caribbean. The market is saturated with good quality catastrophe reinsurers, both for the Caribbean and Latin American business. There are very few capacity programs, but growth and currency revaluations are putting some pressure on capacity requirements emanating from Chile and Colombia.

For per risk programs, machinery and process sophistication are on the rise, leading to larger risk losses in the region. Also, business interruption is becoming a greater factor. In the proportional space, cedents are looking to maintain existing structures, given favorable terms from reinsurers. Ceding commissions, profits and overrides remain effectively unchanged, although there has been some (minor) upwards movement on commissions in the Caribbean. Also, proportional capacity is increasing for the first time in about three years.

Notwithstanding the above, terms and conditions in Chile at mid year did tighten quite significantly with the introduction of lower event limits, minimum earthquake rates, and lower natural perils commissions, which were sufficient to satisfy the appetites of most existing players, that were keen to block out any new entrants.

Argentina

Per risk reinsurance for both working layers and high-risk programs generally fell 10 percent to 15 percent in Latin America at the January 1, 2011 reinsurance renewal. Inflation and a flat exchange rate relative to the US dollar have led to the need for more capacity, which caused some programs to renew either at flat or lower rates year over year.

There was no significant loss activity or changes to subject base exposure and premium in 2010. Consequently, reinsurance rates generally fell, especially as a result of new capacity coming into the market and an increase in net retentions among cedents.

Inflation continues to be the main economic challenge, especially in Argentina. Official results put it at 8 percent, though the reality may be higher than 25 percent. Primary reinsurance rates are down 10 percent to 15 percent relative to 2009, due largely to constraints on capacity, as loss ratios have not changed. In 2011, look for rates to continue to fall, perhaps as much as 10 percent. But, currency market developments and inflation may cause a net flat effect.

Brazil

For the excess of loss treaties that placed this year, rate on line halved relative to the year earlier. Automatic capacity continues to be a major force in the market.

Downward pressure on rates continues, with all lines sustaining decreases of 15 percent to 20 percent or more on certain classes. A large amount of automatic treaty capacity is available, and co-insurance is widely used. Liability and marine rates are also being squeezed, while engineering rates have plummeted. This is because large infrastructure projects, as well as the World Cup and the coming Olympic Games, have attracted cheap reinsurance capacity. Government budget cuts, however, could slow the pace. Loss ratios are consistent with 2010.

In 2011, continued downward price pressure is expected, and insurance penetration is likely to increase.

Loss experiences by business sector have resulted in some differences this year. Warehouse and supermarket risk, because of various losses over the past few years, tend to be placed outside of reinsurance treaties, and port authority losses are now heavily sublimited. Purchase of vertical catastrophe cover however, is on the rise. Capacity continues to increase with many new players in the market.

Click here to read the Executive Summary of Guy Carpenter’s report: Global Reinsurance Outlook: Points of Inflection; Positioning for Change in a Challenging Market >>

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