January 31st, 2012

January 2012 Reinsurance Renewal, Latin America: Argentina and Brazil

Posted at 1:00 AM ET

Argentina

Regulatory changes feature profoundly in the reinsurance market in Argentina. As of September 2011, all reinsurance, effectively, must be ceded to “local” reinsurers. As a result, all treaties and most facultative covers with inception dates between September 2011 and December 2011 were canceled and rewritten to expire on June 30, 2011. Terms and conditions were maintained in this process and adjusted upward when there were adverse results.

Brazil

Downward pressure is the norm on primary rates in Brazil on virtually every line of business. Original rates are down 15 percent to 20 percent for property insurance, 20 percent to 25 percent for engineering, 15 percent to 20 percent for liability, 20 percent for surety, 10 percent for D&O and E&O and 10 percent for marine cargo. In 2012 original rates are expected to continue falling.

With the low levels that original rates have reached, along with the amount of treaty capacity available, insurers have used coinsurance to avoid the facultative market. Favorable terms in the treaty market have contributed to this dynamic. The risk going forward is that one large loss could have a profound effect on the market as a result of all the coinsurance placed.

Subject premium is continuing to grow at a double-digit rate across most lines. Insurance penetration is increasing by 10 percent a year in Brazil - and not only in personal lines such as life, health, motor and pension. Engineering penetration is rising as well, with infrastructure projects booming because of major global events like the World Cup and the Olympics. Oil and gas is another area of considerable growth in Brazil.

New regulations have affected the reinsurance renewal. There is a 20 percent maximum on intergroup cession, meaning that multinationals can no longer “premium strip,” which involves intentionally exporting premiums out of the country. This had been a recent practice. The rule is under review, but a quick reversal seems unlikely. Also, there is an obligatory 40 percent cession to local reinsurers (fully capitalized markets based in Brazil) for all placements. In the past, local markets had the right of first refusal, a measure implemented to protect the IRB. Now there are eight local reinsurers in the pipeline, with two more expected.

There is no defined renewal period for per risk excess of loss in Brazil, and January 1 is not a major milestone. Overall for 2011, however, reinsurance rates fell 10 percent for working layer programs and 15 percent to 20 percent for high risk excess programs. There were no structural changes, as the regulatory authority strictly controls retentions, keeping them very low.

IRB will, in effect, be privatized, which should allow it to operate more flexibly. Market capacity has increased rapidly and substantially, with both pure local players and multinationals establishing local reinsurers.

In proportional treaty, there are a number of new start-up insurance operations, and traditional structures are the norm for risk retention. Reinsurance commissions are never sufficient to cover original costs, which tend to be quite high in Brazil. Because of this, reinsurers are beginning to look more closely at their margins. Insurance companies automatically ask for increased commissions, and reinsurers are resisting. With the new, local insurers in the pipeline fighting for market share, competition is forcing reinsurers to concede. Capacity has tightened for start-ups, but established carriers continue to find capacity increases, and usually with little or no premium to justify.

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