IRB privatisation progresses

Brazil has taken another step forward in the delayed privatisation process of statecontrolled reinsurer IRB-Brasil Re, according to a resolution posted on the official government gazette Diário official da União.

The country’s national privatisation council (CND) announced a capital increase of between 2% and 15% for IRB in January 2013, adding that the government would waive exercising its right to buy the new shares.

This would allow the company to be privatised without having to launch a bidding process. The government set the price of the new shares at R$2,577 ($1,260).

LatAm Insurance Review spoke to IRB-Brasil Re CEO Leonardo Paixã at the end of last year who said that once the company is privatised “IRB-Brasil Re will be ready to compete on more equal terms with other reinsurance companies”.

Brazil’s federal government currently owns 50% of IRB, with local banks Bradesco and Itau Unibanco holding stakes of 21% and 15% respectively.

- By Annie Roberts

Pan American Life Insurance Group launch in Mexico

Pan American Life Insurance Group has launched operations in Mexico, with an initial investment of $4m.

The group received authorisation from the Mexican Secretariat of Finance and Public Credit (SHCP) to offer two of its portfolio products, within the medical insurance and personal accidents coverage lines.

The firm’s Mexican subsidiary will be under the supervision of Julio Verduzco, who will be responsible for a distribution channel of agents and brokers. “The sheer size of the Mexican market offers opportunities that do not exist in many markets,” Jose S. Suquet, CEO of Pan-American Life Insurance Group told LatAm Insurance Review. “We expect to write over $50m in premium [in Mexico] over the next three to five years.”

- By Roberto Barros

Pacifico and Mapfre to insure Peru’s military aircraft

A consortium of Pacífico Peruano Suiza, Peru’s leading insurer, and Mapfre Peru, the Peruvian unit of Spanish insurer Mapfre, has been selected to insure Peru’s military aircraft, according to the country’s Ministry of Defence.

A consortium of Pacífico Peruano Suiza, Peru’s leading insurer, and Mapfre Peru, the Peruvian unit of Spanish insurer Mapfre, has been selected to insure Peru’s military aircraft, according to the country’s Ministry of Defence.

Through a public tender, Peru’s Ministry of Defence awarded the successful bid to the two companies in a contract worth $22.3m.

According to a statement by the Ministry, as part of the transparency policy of the government, an open tender was held – despite being able to appeal to the mode of secret procurement under the law – so that all insurance companies in the market could participate in the bid to provide insurance coverage to aircraft of the country’s army, navy and air force.

The Ministry said that the winning bid allowed savings of nearly $3m, as the value of the contract was estimated at $25.2m and that this method takes advantage of economies of scale, by using a single process for the insurance requirements of the three armed forces.

Among the firms that participated in the bidding process was local re(insurer) Rimac, which reached second place.

Pacífico Peruano Suiza is focused on the non-life insurance segment in Peru and has 13.77% of the sector’s gross written premium as at June 2012. Together with its holding company, Pacífico Insurance Group, the group holds 26.12% of total insurance gross written premium in Peru as at June 2012, according to information from Fitch Ratings.

- By Annie Roberts

Green dreams

Simon Lee, CEO at RSA, discusses how protecting the environment in Brazil will minimise costs for the insurance industry

The deterioration of the Brazilian rainforests will exacerbate climate change, making extreme weather events more frequent and severe, which ultimately will be very costly for the insurance industry. For that reason, protecting the Brazilian rainforests must rise further up the political and business agenda, and insurers need to understand the environmental risks that occur as a consequence of the deterioration of this unique ecosystem.

The Brazilian rainforests are home to an abundance of natural life, but as they are also responsible for producing a fifth of the world’s oxygen, their importance stretches way beyond their boundaries.

To better understand the problems that climate change and deforestation are having in this region and what the insurance industry is doing to manage these environmental risks, RSA visited the Atlantic Rainforest in November. This was part of an initiative called the ‘Rainforest Challenge’, where staff worldwide were asked to develop ‘green’ ideas that could be implemented by the business. The winning proposal was to offer discounts on home insurance for customers with environmentally friendly domestic technologies like geothermal heating.

Environmental risks

One of the areas visited was close to the city of Teresópolis, where flooding in 2011 had a devastating impact on the local communities and where many physical scars remain.

Such natural disasters are becoming more frequent – and more fierce, as Hurricane Sandy recently showed. Most experts agree that climate change is helping to cause these catastrophes, so as insurers it is vital that we gauge the threat environmental degradation poses.

At the Rio+20 Conference earlier this year, world leaders agreed to develop measures to protect the environment and mitigate the impact of climate change. As host, Brazil showed its particular commitment to achieving a more sustainable future.

The Brazilian rainforests are protected by different conservation programmes. The main one is the ‘Forest Code,’ which requires landowners to preserve a percentage of the rainforests in their natural state. Thanks to lobbying, the code is now under threat. With 70% of Brazil’s population living in the Atlantic Rainforest, the conflict between human activity and nature is clear to see. A forest only 7% of its size five centuries ago looks set to continue to shrink.

The environmental degradation this could cause would bring with it a range of risks. If we are successfully to implement the controls that will help mange these, insurers need to be involved with more decision-making processes and forge close working relationships with regulators, governments and the wider business community.

Renewable energy

Another topic discussed at the Rio+20 Conference was how the world’s energy demands can be met in the face of population growth and rapid economic development.

Renewable energy sources can help with meeting these demands and protecting the environment. For its part, Brazil has an ambitious target of generating 75% of its electricity through renewables by 2030. Its wide range of natural resources puts it in a uniquely strong position to show leadership on this issue, but equally it will need a mix of different energy sources that will ensure security of supply.

Renewables themselves are not risk free, but skills exist within the insurance industry that can help many more green dreams become a reality.

Uncertain territory

As the Argentinean government obliges insurers to invest in public projects, the industry awaits further details of a national plan to boost growth

In front of a crowd of leading insurance industry heads in the Museum of the Bicentenial in Buenos Aires on 22 October, President Cristina Fernández de Kirchner announced one of the most significant amendments to Argentina’s insurance industry regulation that the country has seen in years: companies will be required to invest between 5% and 30% in public projects, with a goal of raising $7m in investments by March 2013.

“Through subsection K [of act 35 of ‘Reglamento General de la Actividad Aseguradora’], which incidentally has nothing to do with the ‘K’ in Kirchner, modifications to the fate of the vast resources available to our insurers will be made,” she said.

The caveat drew diplomatic applause from the seated businessmen present at the televised speech, while standing Kirchner supporters waved her party’s flag in the background.

The parallel said more about the increasing government intervention in the financial sector than the audience perhaps expected and will have deep implications for the insurance industry in the form of regulatory obligations.

With a stagnant economy (GDP contracted 0.8% in the second quarter of 2012, compared to Q1), inflation surpassing 25% and public discontent with the incumbent government – which saw over half a million people rally against Kirchner in central Buenos Aires during a nation-wide protest – the country is in need of investment, particularly in infrastructure and in the energy sector.

Insurers’ allocation amounts will depend on the sectors companies operate in but workers’ compensation insurers must invest between 5% and 20% of portfolios, general insurance companies between 10% and 20%, and life and pensions between 12% and 30%.

But the investment portfolio presented to insurance companies might prove to be unconventional, as they are normally characterised by conservative and liability- driven investments compared to other financial markets. Generally, insurance companies have been accustomed to safe investments compared to other financial industries.

“Opportunities and the need for infrastructure investments exist in Argentina, no doubt about that,” says Franklin Santarelli, managing director for Latin American financial institutions at Fitch Ratings.

“But this is not normally carried out by insurance companies. Also, not all insurance companies (assuming they would want to) have the skills and the balance sheet to venture into these assets,” he adds.

Although insurers can propose which public projects they wish to invest in, the portfolios will ultimately rest in the hands of a government committee established through joint resolution 620/2012 and 365/2012.

The committee is made up of the superintendent of Argentina’s insurance regulator (SSN), Juan Bontempo, as well as the economy and interior commerce secretaries, Axel Kicillof and Guillermo Moreno, respectively. No insurance industry representatives will take part.

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At least one proposed investment has been made known to LatAm Insurance Review. Gonzalo Delger, CEO of QBE in Argentina, confirmed knowledge of proposals made to the government committee involving investments in real estate.

But so far, only one investment vehicle has been announced: YPF, the re-nationalised energy company in need of investment after Argentina took control of the firm following an expropriation from Spain-based Repsol. Law 26.741, passed in May, established that 51% would be distributed to the state of Argentina and 49% would be distributed to OPEC.

According to Article 1 of the law, through “national public interest” Argentina would take control of “exploitation, industrialisation, transportation and commercialisation of hydrocarbons”.

The issue now is that YPF needs to raise capital to fund a multibillion-investment plan from 2013 that aims to reverse dwindling outputs, but the company reported 51% lower net profits in Q3 of 2012, compared to the same period last year. Its bond release in October was the largest corporate issuance in the company’s history, with two-year bonds carrying an annual interest rate of 5% and four-year bonds carrying a rate of 6.25. Insurance companies have already subscribed to $116m of the $423.2m YPF bonds, according to data from Argentina’s Ministry of Economy.

According to Alejandro Pavlov, senior analyst at Moody’s, investing in YPF might not be that different to investing in Argentinean sovereign debt.

“So far we are not expecting different risks [in investing in] infrastructure projects, than that of the general Argentine sovereign bond risk. There might be higher risk projects or lower risk projects,” he says. “There is a lot of uncertainty.”

But investments could be disadvantageous when it comes to asset and liability management, according to Santarelli of Fitch Ratings. “Technically, these investments may have decent liquidity, similar to other large corporations. However, it will depend on how the securities are distributed,” he explains. “For example, if the issuance is too small, and is acquired entirely by insurance companies that need it to comply with the regulation, liquidity will be very limited.”

He adds that insurance companies need liquid assets to cover their operational needs.

Insurers are waiting on further instructions from the government, which, if it wishes to diversify the investment options until the March 2013 deadline, will need to announce what other investment vehicles will be made available soon.

“This is a recent measure and the market is waiting for more details on what defines an eligible infrastructure project,” says Paride Della Rosa, country manager at Meridional Seguros, AIG’s subsidiary in Argentina.

“It is difficult at this point to evaluate the availability, risk attractiveness and overall impact to the market,” Della Rosa adds. “Based on what has been announced so far, we do not believe our company will have any difficulties meeting the required percentage of assets invested into this class of projects.”

However, the requirements will present further barriers to insurers who are eyeing the Argentinean market, but instead are looking to enter other Latin American countries.

According to David Pollitt of law firm DAC Beachcroft, a combination of regulatory issues and political uncertainties “introduce that element of doubt”.

“If the model is not great for insurers, then the model is not great for us,” he says. “We only want to go to those countries where we can see sustainable profitable growth for insurers, and therefore sustainable profitable growth for us.”

The move marks further state intervention from the Argentinean government following the issuance of resolution 36.162/2011 in October 2011 requiring Argentinean insurers to repatriate their holdings in foreign investments.

According to a Moody’s Investors Service report published in June 2012, 15% of Argentine insurers’ investments were held outside the country in September 2011, spread across public and private bonds, stocks, mutual funds and term deposits. On December 31st, foreign investments fell to 3%.

In the same year, a resolution was passed that obliged insurers in Argentina to only purchase reinsurance from companies domiciled in the country, a measure that played a large part in Moody’s decision to change its outlook on the Argentinean insurance industry to negative.

The move also encouraged international insurance companies to establish their own local reinsurance companies.

In the case of AIG, that came in the form of American Home, a local reinsurer to serve the needs of its major local corporate and multinational clients, according to Della Rosa.

“The challenges can range from recruiting skilled employees to hedging for inflation and foreign exchange devaluation,” he explains.

Looking forward, Diego Nemirovsky, vice president and senior analyst at Moody’s explains that the recent measures through sub-section K will be considered in future ratings. “This is more of the same story that we have been hearing of this kind of intervention by regulation- it doesn’t surprise us,” he says.

“We have to see exactly what the risk profile of these investments will be and what the liquidity will be, so we are following these developments.”

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PlaNeS

The percentage of investments required, as announced by the Argentinean government through sub-section K, took the industry by surprise, as it was during that same speech that ‘PlaNeS’, the National Strategic Insurance Plan (Plan Estratégico Nacional del Seguro 2012-2020), was announced.

Expected to boost insurance penetration from around 2.7% currently to 5% in 2020, the insurance industry was expecting a push by means of the introduction of mandatory insurance lines or fiscal incentives.

According to Pavlov of Moody’s, the insurance sectors that need the biggest boost are life and annuity by means of tax deductions.

“The tax incentives are practically nonexistent, there are very few deductions to invest in annuities,” he explains. “I don’t see any powerful incentives to make the [insurance] market grow.”

But one sector that did get a mention was agriculture, with the government hinting that obligatory agribusiness insurance solutions should be passed for coverage of crops in some provinces.

Nemirovsky of Moody’s explains that as agribusiness is one of the most important sectors in Argentina, this would present significant opportunities for insurance companies, but final measures have yet to be announced. “[PlaNeS] is a combination of theoretical measures that the government would take to increase insurance participation, but nothing has been made concrete,” he says.

“It is also true that PlaNeS was announced relatively recently, so we should wait and see if in one year we could see something translated into concrete measures.”

Planes and sub-section K of the general regulation of insurance activity (Reglamento General de la Actividad Aseguradora) may have been announced at the same event, but they have very different potencial outcomes for insurance companies.

And although the insurance industry is both hopeful about one and reluctant about the other, the shape that Argentina’s insurance environment market will take has yet to be set in stone.

- By Roberto Barros

The case for captives

Latam’s growing economies have enough size to form captives but many obstacles endure

There are promising signs that Latin America is growing more receptive to alternative risk transfer concepts. Perhaps the primary driver for this apparently greater interest is the region’s general increase in wealth and diversification of businesses. A related factor is the increase in stability that is fostered by a high growth rate of the middle class, says Eugene Durenard of Capital G Investments.

The risk manager at the Brazilian highway concessionaire BRVias believes that captives have a big future in Brazil because its economy is growing and, more specifically, because some Brazilian companies are purchasing companies around the world, and acquiring more risks, which they need to understand and mitigate. “Our economy is about the same size as the UK’s, so in theory it could have a similar number of captives,” says Guilherme Viveiros, financial specialist and risk manager at BRVias.

However, the region’s potential does not seem to be materialising straightforwardly, and the level of actual formations in the region still seems to be relatively low – though it is hard to get an accurate idea of the numbers. And despite some promising signs, Viveiros says he has not heard of any large Brazilian companies talking about forming captives, despite speaking with many of them.

Indeed, many obstacles to captive growth are still cited, including: restrictive, local regulation, the low education in some regions, the reluctance to use outside domiciles, and the alleged reluctance of some local brokers to provide companies with information on captives’ possible benefits, and their general resistance to the concept.

Education and knowledge

Historically, many Latam organisations did not have formal “risk managers” and insurance was sometimes considered an afterthought. Insurance brokers JLT entered the Latin American market when it helped form a captive for the Colombian oil company, Ecopetrol S.A. in 2007. One major challenge in forming the captive was educating the principals involved. The set-up process, local domicile issues, regulation and business practices were very much alien to them, says Steve Arrowsmith, executive chairman of JLT Insurance Management, Barbados & Bermuda.

However, more CFOs have come to recognise the true scope of risk management and finance, and how those functions interact with organisational growth, says Michael Cormier, managing director of Marsh Risk Solutions. “The risk manager and chief risk officer roles – with oversight of loss prevention, risk retention and risk transfer – are far more common today within LAC companies.”

Viveiros says these risk managers are starting to hear more about captives and risk management, in part because of the growing number of summits and events. But he adds: “It’s still quite rare – I feel that not many companies are talking about captives.”

This view was supported by Marcelo D’Alessandro, risk manager at Brazil shipbuilder Estaleiro Atlantico Sul, who says South America needs foreign “know-how” to really develop its captive industries, in part to demonstrate that captives are not simply a tax evasion tool.

Another problem, according to D’Alessandro, is the lack of relationship between some companies’ risk management programmes and insurance programmes. “We have big large companies in Latin America, which have mature risk management programmes. But these programmes are not linked to the insurance programme.”

D’Alessandro says this prevents companies from “having an exact dimension of the insurable value so you cannot measure the real needs for establishing a captive”.

According to D’Alessandro, Petrobras (Brazilian Petroleum) is closing its captive, as are some other firms, decisions he disagrees with but attributes to a lack of knowledge about ART, and risk retention.

Brokers

Risk managers/companies’ access to knowledge of captives is sometimes obstructed by local brokers, who often know little about captives and are resistant to discussing them, says Viveiros. “The average broker in Brazil would not know about captives. Marsh and Aon of course would, but the smaller local ones would not.”

Some brokers also obstruct communication between corporates and insurers, who are the best source of knowledge about captives, according to Viveiros. “Some local brokers try to create a wall between insureds and the insurer, so it is difficult sometimes to speak to them directly.”

However, brokers are not always an obstacle, says Arrowsmith. “An interesting development that emerged in experiencing the first one or two captive set-ups was the level of enthusiasm and support from our broker colleagues in Colombia.”

Arrowsmith says the level of support received in Colombia from brokers was “astonishing” and made the process run much more smoothly and quickly. “They don’t see a captive for their client as necessarily a threat to their income but as a means of strengthening and developing their relationship with the client.” Indeed, Viveiros notes that the larger multinational brokers, such as Aon and Marsh, are different from local brokers. “With some brokers, it’s a partnership, and they try to understand the companies’ risks.”

Marsh is present in nine Latam countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Puerto Rico, Venezuela and Uruguay. It also recently set up a Latam captive solutions office. “It is a reflection of the fact that clients are becoming increasingly sophisticated in the way they buy insurance in the region,” Andrew Perry, managing director of the Latin America and Caribbean team at Marsh, told Latam Insurance Review.

However, Viveiros says that he has never really seen the larger brokers actively try to promote captives in Brazil. “When I worked for CCR, a very big infrastructure company, I never heard about captives from brokers.”

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Types of risk

For those firms that do have sufficient internal and external expertise to form a captive, some lines of business are likely to be more suitable than others. In Latam, the exposure to natural disasters, such as earthquakes and hurricanes, is widespread and can be significant for many organisations. And the cost of catastrophe coverage offered by commercial insurers in the region can be expensive and fluctuate greatly. “With a specific and thorough risk identification, management, and retention plan, a captive can be used to absorb some of this volatility,” says Cormier.

New Latam captive owners are “very conservative” and ensure they fully understand the mechanics of operating a captive before retaining much risk or altering the programme, says Arrowsmith. However, he adds that surety is one line of business that has been of particular interest to Latam-owned captives. Two factors contributed to this: the reduction in local capacity and the huge amount of infrastructure development in the region, Arrowsmith says.

Construction, utility and oil and gas companies are required to post bid bonds and performance bonds to national or provincial government agencies to participate in tender processes and to perform the work if they are successful, he explains. “Many companies had exhausted the surety capacity and were close or exceeded their letter of credit capacity in the banking sector. Captives, either established or set up with this issue in mind, proved to be extremely beneficial.”

One company interested in writing surety through a captive is Brazilian firm BVRias. In theory, a captive would be suitable because the company has some risks that are “not very acceptable to the commercial market”, says Viveiros. These risks revolve around “highway concessions”, mainly comprising surety, property and casualty, and construction.

However, Viveiros doesn’t plan to form a captive for about another four years, by which point he hopes to better understand the company’s risks, and have formed the external and internal relationships necessary. “I need to understand what the shareholders want, and get their support, because it would be hard to do anything otherwise.”

Viveiros says another step will be to find the right captive managers, which he says is a challenge because from Brazil it is not always easy to find people with sufficient captive expertise. However, even if he understands the risk and gains stakeholder support, Viveiros says legislation might still pose a problem. “At the end of that process, we would still need to better understand the legislation, and partner with service providers within and outside of Brazil.”

 

 

 

 

 

 

 

 

- By Matt Broomfield

AGCS reinsurance authorised to operate in Brazil

Allianz Global Corporate & Speciality (AGCS) has entered the Brazilian reinsurance market with the launch of a new legal entity called Allianz Global Corporate & Speciality Resseguros Brasil (AGCS Brazil).

The firm received its local reinsurer’s license in Brazil from the Superintendência de Seguros Privados (SUSEP), the supervisory agency for the Brazilian insurance market in late December, commencing operations in January.

With the new reinsurance business model, AGCS Brazil aims to double the premium income it generated in 2012, which stood at 80 million Euro ($106.572m) by 2015, through cooperating with local primary insurers in the Brazilian market.

4_News_Ernanny Drault_AllianzBrazil represents about 50% of the market potential to AGCS in South America, and will be the main hub of operations in this region, according to Drault Ernanny (pictured) who is leading the initiative in his new position as head of market management in Brazil.

“Brazil is growing a lot with new investments in infrastructure and energy, so that’s where we see most of the business potential will come from,” he told LatAm Insurance Review.”

“AGCS’ next steps across the region will be focused on Argentina and Colombia after we stabilise Brazil, as we already have some business in those countries, and we also see good potential in Peru.” he said.

“Having our main platform in Brazil allows us to be closer to our clients than we are today, from Europe and the US, which will facilitate our business to sell to our customers in South America.”

Previously based in Allianz’s head office in Munich as chief of staff responsible for developing AGCS’ strategy for South America, Ernanny will now operate from the firm’s Brazilian headquarters in Rio de Janeiro.

In addition, the firm has opened two new local offices in Rio de Janeiro and Sao Paulo to facilitate its reinsurance operations.

AGCS Brazil is managed by country manager Angelo Colombo, who has a strong background in reinsurance and insurance in the region and who has led AGCS’ business in Brazil since 2009, when AGCS was granted its admitted reinsurer’s licence.

- By Annie Roberts

QBE acquires Ecuadorian insurer Long Life Seguros

Global insurer QBE has announced the total acquisition of Long Life Seguros as part of the company’s strategy to operate in the Ecuadorian life sector.

The acquisition is pending approval from the local financial regulator, Superintendencia de Bancos y Seguros del Ecuador (SBS).

According to Diego Sosa, CEO of QBE’s subsidiary in Ecuador, QBE Seguros Colonial, the firm had not been authorised to operate in the life insurance sector and was losing opportunities with its clients, which prompted the new purchase.

“All other multinational companies have a license to operate in the life sector in Ecuador and QBE can´t be in a disadvantage in the market,” he told LatAm Insurance Review. “The life business will be complementary to our business strategy in Ecuador.”

Although written premium in the life sector in Ecuador makes up only 20% of the total market, in the long term it will overtake P&C lines in terms of growth, according to Sosa, who added that the company is not interested in long term life products, which are still undeveloped in Ecuador.

“We see good opportunities to maintain our leadership in the Ecuadorian insurance market,” he said. “This market has doubled in size in the past years and we expect it to maintain double-digit growth, over GDP growth.”

According to data from the SBS, in September 2012 QBE Seguros Colonial was ranked 1st in terms of financial assets: $114.2m, with a total market share of 8.67%. Long Life Seguros was ranked 42nd with $1.7m in financial assets, representing 0.13% of market share.

By Annie Roberts

Emerging risks

With rapid developments in Latin America’s economy and increasing exposure to global markets, risk managers in the region are faced with a barrage of new exposures

With many Latam companies experiencing rapid growth trajectories, some are finding expansion can often equal new risk exposures. Some of these fresh exposures are Latam-specific, but many are commonplace in multinational organisations. Consequently, insurance requirements are not only changing but are greater than ever.

According to Stephen Ixer, associate at law firm Edwards Wildman Palmer, keeping the economies of Latin America growing at a time when Western banks are still consolidating their balance sheets means capital often seems scarcer than ever.

“In insurance, that translates into considerable demand for bond and surety insurance and reinsurance, which is one of the bigger growth areas at present,” he says.

“Also, as the region becomes ever more integrated into the global economy and international supply chains, there is greater take up of business interruption cover and third party liability by local companies.”

According to Ixer, in terms of new insurance solutions, companies are looking for insurance cover that is specialised to their needs and, as a result, “insurers are offering more individualised policies in order to maintain and grow their market shares”.

“Political risk insurance is always important for foreign companies looking to launch into Latin America; many also take out kidnap and ransom (K&R) for their senior employees,” he says.

And as Latin America’s economy continues to grow, so too does the demand for specialty lines insurance in the region.

Of those lines, Thais Kirschner, vicepresident of operations for Liberty International Underwriters (LIU) Latin America, expects to see the most demand for environmental risk, as companies look for ways to protect themselves against the unpredictable forces of nature.

ENVIRONMENTAL

Today, environmental liability is one of the biggest concerns affecting companies in Latin America. And for this reason, companies continuously seek new ways to protect themselves.

There have been several episodes of serious flooding in the region in recent years, including in Colombia in 2010, Brazil in 2011 and 2012, and Costa Rica in 2012, explains Ixer.

“Not only is this a drag on economic growth for the countries affected, but companies face delays in production schedules, and distribution networks can be disrupted,” he says.

“Such losses help focus companies’ attention on business interruption insurance to protect against such losses in the future.”

According to Ixer, recent models have predicted climate change in the higher regions of the Andes is likely to increase flooding in cities further downstream, which will have particular impact in the Andean countries of Colombia, Ecuador, Peru, Bolivia and Chile.

On the other hand, tropical countries such as Brazil, Venezuela and much of Central America have seen higher than normal rainfall in recent years, which has led to localised flooding, and this may also be the result of climate change.

Indeed, Kirschner predicts demand for environmental insurance increasing over the next three years due to three synergistic reasons: greater awareness of environmental risks, stricter environmental laws that emphasise the economic guarantee for damages derived from licensed activities, and the general lack of specialised products in the commercial market to address environmental liabilities.

“To fill this need in the market, LIU offers insurance to help companies cope with environmental risks with products that respond to: coverage for clean-up costs both for sudden and gradual events, legal defense expense, and monetary compensation in accordance to the damages caused to people and property.

CROSS-BORDER TRADING

With Latin America exporting more products to more regions around the world, the exposure to product liability, including product contamination and recall has increased exponentially, according to Thais Kirschner, vice-president of operations for Liberty International Underwriters (LIU) Latin America. “Many countries to which Latin America exports, such as the US, have strong product liability, product contamination and recall rules in place that demand immediate response and could end up being very costly for the company involved,” she says.

“As export companies start to have a better understanding of the risk to their brand, they are looking for insurance products that provide cover for extortion threats.”

And with an influx of capacity from new insurers writing cover in various Latam markets, the credit market has been growing. According to Beatriz Araujo, partner at law firm Baker & Mc- Kenzie, trade credit risk is becoming increasingly important as Latin American companies are investing across borders.

“The US, Europe and China are big investors in the region, particularly in its natural resources, so there are a lot of different investors in the region with different exposure levels,” she says.

D&O

One of the biggest developments in Latin America’s economic landscape is the influx of international companies coming to the region, and with this, a notable change in the risk appetite of many Latin American based operations.

According to Javier Mercado, regional VP and head of financial lines for Latin America and the Caribbean at AIG, the current level of M&A activity in the region – and consequently a lot of companies coming in to the region that are selling to markets like Mexico, Colombia and Brazil – brings another level of need for sophisticated insurance products. “These companies are used to the concept of risk transfer when compared to completely local companies and that’s influenced the purchases of insurance like directors’ and officers’ liability (D&O) insurance,” he says.

“We see now that the Latin American market is catching up to more developed markets like the US and Europe.”

And according to Ixer, with regulators across Latin America continuing to strengthen their powers in the wake of the financial crisis, D&O cover will become more important. Kirschner also highlights that a new risk facing the region is the vulnerability of financial services organisations that invest and manage wealth for individuals and corporations, due to Latin America’s booming economy over the last decade, which has resulted in a growing demand for investment vehicles to house emerging wealth.

“The managers of these institutions are increasingly under more scrutiny, and shoulder more risk, as the amount of capital under their management grows,” says Kirschner.

“Combined products that offer D&O and errors and omissions coverage to help these individuals mitigate their exposure to this emerging risk are a growing market,” she adds.

KIDNAP AND RANSOM

The threat posed by kidnappers is still acute with over 20,000 reported kidnappings worldwide each year, according to Willis in its latest Resilience publication.

But even this could be under estimating the true scale of the problem. The official figure for Mexico alone is 2,000 kidnappings in 2011, for example, but the Council for Law and Human Rights says that the true figure is more like 17,000 – almost nine times the official estimate, according to the report. A number of factors are driving this increase, primarily inequalities in developing nations.

“A lot of the countries where kidnaps occur regularly have a fantastically wealthy element of the population at the top, a very small middle class and a very large poor population,” explains Paul Mills, executive director of security services at Willis’ specialist kidnap-and-ransom division, Special Contingency Risks (SCR).

Mills says more countries may match this profile amid the economic crisis. Mexico, for example saw a surge in kidnapping and extortion following the economic crash of 1994.

Latin America continues to pioneer methods, such as virtual kidnapping but while progress in reducing kidnapping has been limited, there is greater recognition of the risks.

The report states that the coverage itself is wide ranging. Policies usually cover not just the ransom (reimbursed rather than paid directly by the insurer), but various other expenses involved, such as travel costs, medical bills rewards for informants and time away from work for those released.

CYBER

As a global threat, and in the nature of today’s economy where the exchange of information transcends all regional barriers, awareness of cyber liability in Latin American companies is growing exponentially. However, for companies operating locally, it is a relatively new risk.

“Multinational companies coming to Latin America are more well-equipped to deal with cyber risks because of the global mitigation structures they have in place, but local companies have less knowledge of how to protect themselves,” says Araujo.

According to Deloitte & Touche LLP, cyber attacks in Latin America have increased 500% since 2009 and 75% of enterprises in the region have suffered a cyber-attack in the last 12 months.

“This is an issue that’s being discussed in companies’ boards of directors because people are now understanding the financial impact that this might have and the reputational damage that it can cause.”

And according to Symantec, since 2009, Peru, Colombia, Costa Rica, Uruguay, Brazil, Argentina and Mexico have implemented or updated their privacy laws regarding data protection and have included sanctions as part of the norms used for failure to comply.

POLITICAL

With economic growth and a general perception of better stability across Latin America, political risk does not pose as big a risk today as it has in previous years. However, according to Araujo, political risks will be more evident to multinationals entering the region rather than to local companies.

“Because the environment in many of these countries is very regulated, there is a lot of interaction with government, and tax and employment regulations are complex,” she says.

According to Ixer, political risk is important for companies deciding where to do business in Latin America, as this has changed dramatically in recent years. “Colombia, which was previously a political risk hotspot, is benefiting from a stable political environment and a business friendly outlook while others, such as Argentina, have declined in attractiveness to foreign companies because of the tense political risk situation there.”

However, as Mercardo points out, there are a lot of companies requiring political risk cover for certain countries and very few insurers who are willing to provide such selective coverage.

By Annie Roberts

New frontier

Franck Baron, general manager of risk management and insurance at International SOS, on navigating the evolving risk landscape of Latin America.

 

The need for adequate coverage of a growing range of risk exposures is becoming increasingly important in Latin America, particularly for companies whose operations transcend both national and international borders.

12_13_Frank Baron_SOS InternationalIndeed, for Franck Baron (pictured), general manager of risk management and insurance at international healthcare, medical assistance, and security services company, International SOS, the biggest challenge is ensuring the right level of insurance coverage to cope with this new train of risks.

As a services company, which helps organisations manage the health and security risks facing their international travellers and expatriates, traditionally, the firm’s main insurance requirements relate to liability coverage; general liability, products liability, medical and malpractice liability.

“We also have a D&O liability and property and business interruption programme in place. Aviation liability is also important as we deal with a significant fleet of aircraft,” explains Baron.

However, according to Baron, increased cyber activity is presenting new risks in the form of privacy and cyber liability, which is prompting the company to improve its insurance programmes in line with this new risk exposure.

As a developing region, technological advances in Latin America are unprecedented, but criminal activity is moving just as fast. Nowadays, as the majority of companies will rely in some way on the internet, digital or cyber risk is becoming increasing relevant.

Beatriz Araujo, partner at law firm Baker & McKenzie, explains that in recent years, local companies in Latin America in particular have become much more connected through the internet opening themselves up to cyber-attacks.

“For multinationals entering the region, this is still a risk for them but I think they are more prepared because they’ve been looking at it as a risk in their operations elsewhere so they probably have a mitigation structure that they can mirror in their Latin American operations – whereas there may be less knowledge of how to mitigate risk if you’re operating locally,” she says. And this is certainly a sizeable risk in International SOS’s worldwide network of assistance centres, clinics, and health and logistics providers.

Right choice

Offering local expertise, preventative advice and emergency assistance during critical illness, accident, or civil unrest and with more than 10,000 employees working in 76 countries, in partnership with businesses, governments and non-governmental organisations, when it comes to the company’s own insurance standards, it needs programmes that can cover its international capabilities.

“For us, the market is the world, so we look at where the best capabilities are in terms of insurance capacity but also in terms of servicing, claims management and compliance,” says Baron.

“As a big healthcare provider, the liability market is quite narrow; it’s a very niche market, so there are only a few insurance players who have the expertise and the underwriting appetite for the coverage of medical malpractice,” he adds.

Baron, who is in charge of all the company’s insurance programmes, at both the global and local level, as well as developing an enterprise risk management programme throughout the firm, explains that ensuring its insurance provider has enough financial security and the capability to serve its audience in the different territories the firm operates is vital.

International SOS originated from Asia and, according to Baron, it already has a strong presence in Africa, Europe and the US. In Latin America the firm currently has operations in Panama, Peru and Brazil but is keeping a keen eye on other markets in the region.

“Latin America is a very interesting region because it is basically the new frontier region for us,” he says.

“We already have a strong presence there with our provider networks and a few developed operations, and we have partnered and acquired local expertise and businesses in the region to make sure we are a decent size in order to continue to grow business and serve our clients there.”

Baron explains that the country recently changed its insurance programme as a result of increasing demand from local authorities to comply with issuing local policies.

“There is a significantly growing demand from local authorities to comply strictly to local insurance regulation: this has an impact on how corporations manage and then structure their international programmes.”

Clarity is key

However, according to Baron, the main challenge of insuring their risks in the region is getting the right information from local authorities and the local insurance market, which can be difficult.

“At the moment, when it comes to insurance in Latin America, there is a myriad of different regulation across the region, so it is not that easy for us to navigate,” he says.

He continues: “An improvement for the industry would be to have a Latin American Union like in Europe and the US, which would constitute a single federation that issues regulation for the insurance industry.”

Baron emphasises the importance of the company’s brokerage relationships, relying on them to have the right level of expertise and knowledge about the local markets, in order to comply with local insurance regulation.

“The company’s policy is very clear on its relationships with brokers, collaborating with a select number of brokers to invest in sharing information with them,” he says. “We know how to leverage their skills and expertise and trust that they are knowledgeable about our industry, business, operation and culture.”

According to Baron, the firm’s leading broker is JLT and it is developing its business with Marsh, which it recently appointed as its North American broker.

And when it comes to choosing insurers, the firm is not focused on specific ratings but is more concerned with establishing long-term relationships with financially reliable insurers.

“Sometimes you have to accept the fact that the rating of a given company is going to be slightly downgraded for a period of time, but we would not change our relationship or programme with a reliable insurer because of this.”

While companies may be facing a barrage of new risks in the region, which in turn is presenting new challenges for risk managers, Baron attests to the fact that they are not being faced with the economic worries that their counterparts are facing in the US and Europe, who are finding it more difficult to develop and secure risk management strategies.

According to Baron, what does need to develop, however, is the skills and expertise of the local insurance industry, in order to cope with the sophisticated underwriting and claims management process.

Baron believes the company having its own captive ensures its local operations will be properly related to its risk management and insurance programmes.

“If you use it as a true risk management tool, it can help you to provide certain insurance coverage to certain territories where the local market is not yet mature enough to provide this kind of coverage.

“And for a company like us where we are investing significantly in Latin America, it’s also our way to ensure we can provide a decent level of coverage to all local operations through the captive.”

By Annie Roberts