One of the main attractions of the Latin American market to international insurers and reinsurers is the combination of low insurance penetration together with a fast emerging middle class. Estimates indicate that 3 per cent of the world’s insurance premium is generated from Latin America, although Latin America has 9 per cent of the world’s population. By comparison, 41 per cent of the world’s insurance premium is generated from Europe, which has only 11 per cent of the world’s population and 33 per cent of the world’s insurance premium is generated from North America, which has only 5 per cent of the world's population. The potential scope for market growth in Latin America is therefore substantial.
While the combination of low insurance penetration and an emerging middle class is, in principle, a very attractive proposition for underwriters, the practicalities of operating in a specific country will depend on whether the business and regulatory environment allows insurers and reinsurers to flourish. The ease of operating is closely linked with the political profile of the specific country and politics are relevant for a number of reasons, for example, many insurance interests in Latin America (eg banks, oil companies, ports, etc) are state or quasi-state owned. There is a direct correlation between interventionist politics and heavy market regulation and the political regime directly affects how easy it is to do business.
Latin America comprises 20 sovereign states, which cover an area from Mexico to Chile and Argentina and includes the Caribbean. Each country has its own specific identity and its own cultural and legal framework. From an insurance and reinsurance perspective (underwriting, claims handling or regulatory) there is no single set of rules that applies across the region. Taking a very high-level view of the main countries in the region, it is, however, possible to identity four key political profiles:
- The liberal, pro-business countries of Chile, Colombia, Mexico, Panama, Peru and Uruguay.
- The populist left-leaning countries of Bolivia, Ecuador, Nicaragua and Venezuela,.
- The region’s giant, Brazil, which is responsible for just under 50 per cent of regional insurance premium.
- Argentina, which although often referred to in the same sentence as Venezuela, has not got there for the same ideological reasons.
Every year for the past 12 years, the World Bank has published a report that examines the “ease of doing business”. The 2015 report has ranked 189 countries using 10 different criteria including, for example, the procedure, time and cost to start a business, build a warehouse, import and export via seaport and to resolve a commercial dispute. What the study shows is that the liberal, pro-business countries described above rank comfortably in and among various western and eastern European countries. The populist left-leaning countries of Bolivia, Ecuador and Venezuela are in the 100 plus category, with Venezuela sandwiched between Afghanistan and Angola. In spite of obtaining the status of sixth biggest economy by GDP in 2012 (just above the UK), Brazil is in 120th position, just beneath Nicaragua. Argentina is below Brazil in 124th position, between Guyana and Bhutan. The above illustrates why insurance and reinsurance companies operating in the region need to recruit experts who are experienced in the local business, regulatory and operating environment.
The arrival of so many international entrants has caused capacity to soar and rates to drop across the entire region. Most players are now operating in an unprecedented soft market; at the same time, the fundamentals of some economies in the region have been deteriorating. Brazil, for example, is currently experiencing its worst economic downturn in 25 years.
From an underwriting and claims handling perspective, it is also important to take into account that in many cases policy wordings will be under the local law and jurisdiction of the country in which the insured risk is located. This may be for several reasons, including local regulatory requirements, commercial reasons or, in the reinsurance context, a wish to ensure that the insurance and reinsurance policies have the same law and jurisdiction clause as the underlying policy (notwithstanding the potential comfort in the English law context provided by Vesta v Butcher or Groupama Navigation v Catatumbo).
Simply translating the wording into a local language will not guarantee the right coverage, since local regulations and legislation must be taken into consideration. While local trends exist with regard to the specific provisions of insurance and reinsurance law and claims handling, the assumption that all countries in the region follow homogeneous rules must be avoided. The terms of each policy and any claim arising thereunder must be considered in isolation and in accordance with the applicable law governing the contract and the local claims-handling rules.
With that warning, underwriters and claims handlers should be aware that in most jurisdictions in Latin America:
- a “warranty” or “condition precedent” will not have the same meaning or effect as it has under English law;
- the duty of utmost good faith normally attaches a different duty of disclosure, sometimes premised on the questions asked in the proposal form, and the remedy of rescission (as opposed to damages) may be difficult if not impossible, absent proof of bad faith;
- there is usually a very short time frame within which an insurer must adjust and settle a loss and such time frame may be woefully inadequate in the context of complex losses. A common complaint of local cedants is that the time frame is also insufficient to get reinsurers on side, so the cedant inevitably ends up funding the loss;
- under most Latin American laws, an insurance or reinsurance broker is an independent intermediary – it is therefore more difficult to establish an agency relationship; and
- the concept of a “reservation of rights” or “without prejudice” correspondence does not exist in most jurisdictions, although their effect can be achieved by agreement between the parties.
Underwriters and claims handlers need to be careful that any policy translation is accurate and it should be clear which translation prevails in the event of any inconsistency or ambiguity. They need to be familiar with local limitation rules, disclosure obligations and rules regarding the award of interest, costs monetary correction, punitive and moral damages. It is also important to have a handle on court procedure, including the level of local judicial expertise and the amount of time a case is likely to take to get to judgment. The answers to many questions are simply not clear because the questions have not yet been properly addressed under the local regime.
The current political volatility in some countries in Latin America may not readily lend itself to foreign investment, however, underwriters are experts in risk-taking and every risk has the right price. While the underwriting environment remains challenging in Latin America, many countries still offer enough potential profit to entice insurers and reinsurers to continue expanding their operations. Overseas players are especially interested in Mexico and Brazil (on account of its vastness) and the Andean countries of Chile, Colombia and Peru. The stakes are high, capital set-up costs are substantial and the margin for short-term profit is slim; however, for those who are in the market for the long term, the potential for profit is great.
For the time being, and in the current soft markets, it is more important than ever for insurers and reinsurers underwriting in the region to pay close attention to their wordings and to maintain underwriting discipline. This will necessarily require an understanding of local law and claims handling. This comparison is intended to provide a high-level overview of the main issues.