insurancebrazil_july2010

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Insurance Industry in Brazil

Executive View o the CurrentScenario and Perspectives or 2015

2 Edition

2010


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Index

Introduction 3

Economic Scenario or Insurance in Brazil 4

Survey in Companies 8

Recommendations 18

Conclusions 19

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The 2008 / 2009 period was very

challenging or the Brazilian economyand or the insurance market. The crisisthat aected the world reduced theexpected growth o many economic andinancial indicators, and caused greatexpectation as to the actual capacity olocal businesses to absorb the impact.However, ater the storm, Brazil came outrelatively unscathed compared to the resto the world. And the insurance marketwas no exception, having achieved anunprecedented growth in a period oglobal turmoil. The market rose by 13% in

2009, according to data recentlypublished by the Private InsuranceSuperintendence (Susep).

But what was the ormula deployed toweather the storm? The answer hasseveral explanations, the most relevantare:

The non-exposure o the companies tothe toxic inancial instruments and tothe American real estate market, partlydue to the regulatory model o our

insurance market

A tax reduction policy that, by slashingIPI (Excise Tax) on automobiles andother durable goods, boosted sales oAuto Insurance, Loan ProtectionInsurance and Extended Warranties

The advance o inrastructure projects,creating new opportunities or sales oinsurance such as Guarantees andMajor Risks

The improvement o the populations

purchasing power, which was able toovercome the impact created by thereduction in the number o jobs which has been strengthening internaldemand in recent years -, and avoredsales o individual products such asPrivate Pension, Automotive, Lie andHealth insurance

The important consumer credit marketwhich, although less vigorous in 2009in comparison with previous years,encouraged the placement o some

insurance products such as FinancialRisks, Loan Protection Insurance andUnemployment.

Below we present some indicators thathelp understand the behavior o theinsurance market up to 2009.

Revenues

In 2008, the Insurance, Private Pensionand Capitalization markets increased by

14% compared to 2007, reaching R$ 96billion. In 2009, a more vigorous growthis expected, to a level o approximatelyR$ 105 billion (including Health), with avariation o 10% compared to theprevious year.

The 13% increase in the market, wellabove the growth o the economy as awhole, accelerated the actual increase oits share on the GDP, a recurring trend inrecent years (see chart 1).

Economic Scenario of Brazils

Insurance Sector

It is also important to note that this

evolution in recent years has not beentotally uniorm. Some sectors, avored bybetter income distribution and higherconsumption o durable goods, hadsigniicant variations (see chart 2). From2003 to date, the variation has been over10 old.

Rentabilidade

When it comes to proitability, one o themain challenges o insurance companies

in the last ew years i not the greatest was how to adjust their portolios to anew proile o interest rates.

For better understanding, two dierentindicators should be noted: FinancialResults on Net Earnings (FR/NE) and NetEarnings on Net Equity (NE/NEQ) asillustrated in chart 3 (the igures oHealth insurance companies were notconsidered). In the beginning o thedecade, or example, the FR/NE rationo all insurance companies was

approximately 140%. Today it isaround 60%.


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As or the total proitability margins othe sector (NE/NEQ), indicators have beenaround 20% per year, with a slight peakin 2005 and the recovery in 2009 o theexisting indexes between 2000 and 2004.Other industry-speciic indicators orproitability (such as the combined ratio)have also had similar course.

In order to ace this new situation, theclaims ratio o the insurance companies,or example, had to be adjusted. In chart4, the evolution o the claims ration inthe Auto sector is highlighted. In spite othe increase in the last two years, thenumbers show a 7 to 8 percent decreasewhen compared to the igures rom thebeginning o the decade.

International Presence

The numbers which here do not takeinto account the capitalization market toollow international parameters showthat in 2008 the share o the Brazilianinsurance market in the world was 1.1%,considering revenues o US$ 47 billion(see chart 5).

Considering a share o 0.8% in 2006 and1% in 2007, it is reasonable to say thatBrazil has had a steady growth. Its marketshare, however, is still minor in terms othe global insurance market.

Perspectives 2015

In terms o the expectations up to 2015,everything indicates more good news orthe insurance segment. The mostimportant news is the prospect o asustained growth o over 4% per year orthe Brazilian GDP. This will bring growthopportunities in all segments o the

insurance business.

Even greater expansion in investments ininrastructure is expected, not onlybecause o the clear need o improvingthis sector in the country, but alsobecause o the commitments assumed orthe hosting o mega events such as the2014 World Cup and the 2016 OlympicGames.

In addition, the new oil prospectingrontier, as well as o other energy

sources, and their impact in the entireproductive chain, will bring opportunitiesor many dierent insurance segments.Another perspective or 2015 is theexpansion o the Brazilian middle classand the continuous reduction o thepoverty rate (see chart 6).

Some estimates account that thissegment o the population will reach 100million individuals, providing a hugecontingency o new consumers orinsurance products.


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Source: Inequality and poverty in Metropolitan Brazil duringthe International Crisis: Main Results, IPEA, August/2009.


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This chapter comprises the result o thesurvey conducted with 30 activeinsurance companies in the Brazilianmarket. The data was collected in

December 2009, with answers rom theollowing insurance companies:

ACEAliana do BrasilAllianzAmerican LieAssurantBanestesBerkleyBradesco Auto REBrasilprevCentauro

ChubbExcelsiorHDIJ MalucelliLibertyMapre Nossa CaixaMapre SegurosMartimaMetLieMitsuiMongeralNobrePorto Seguro

Previdncia do SulPrudentialQBERSA SegurosSantanderSulAmericaYasuda

Compilation and analysis o data providedthe conclusions described in the topicsbelow.

Characterizationof Insurance Companies

Initially, the companies deinedthemselves based on 5 dierent options:Bancassurance, Independent National,Independent National with BankPartnership and IndependentMultinational with Bank Partnership (seechart 7). Most companies were deined as

Independent Multinational (46% o thetotal), a number that is similar to thatobtained in the irst edition o the survey(44%).

In terms o company size (measured byannual revenues), most companies hadrevenues o less than R$ 1 billion (63%),a little above the 60% rom 2008 (seechart 8). As or number o employees (seechart 9), 73% operate with less than1,000 employees, maintaining the sameproile observed in the 2008 edition.

Other aspects o the qualiication were:

Distribution channel: the most common

way to sell products is throughInsurance Brokers (93% o thecompanies operate through thischannel). Next, through Banks (50%),ollowed by Call Centers (37%)Product line proile: the Personalinsurance segment (73% o thecompanies surveyed) comes irst,ollowed by Property/Casualty (63% -leader in the last edition) andAutomobile (50%)

Insurance market in 2015

Today the insurance market representsapproximately 3.3% of the GDP. In theprevious study, the general expectationwas that this share would reach a levelbetween 4% and 6% level. How do youfeel about this forecast?

The perception that the country and theBrazilian insurance market satisactorilyaced, the challenge imposed by theinancial crisis was clearly stated by thecompanies answers compared to theprediction made in the last edition, as youcan see in chart 10:

77% are more optimistic20% believe in maintaining thesituation in other words, they stillbelieve in growth, but not beyond theexpectation orecast in 20083% believe in a reduction o thesectors share in the GDP

Survey in Companies

In the previous survey, 5 factors werelisted as having the most positiveinfluence on the insurance market until2015. What are your impressions about

these factors 1 year after the onset ofthe economic crisis?

The previous survey asked which actorswould have more inluence in the marketuntil 2015, both positively and negatively.The 5 actors most mentioned were NewChannels, New Products, ClientAwareness, Economic Growth and IncomeDistribution.

In this edition, we seek to determinewhether these actors improved,

worsened or remained the same. Theresult presents Economic Growth andIncome Distribution as the actors withgreatest expectation o improvement, asshown in chart 11. In general, theanswers varied between stability andimprovement.

In the previous survey, 3 factors werelisted as having the most negativeinfluence on the insurance market until2015. What are your impressions aboutthese factors 1 year after the onset of

the economic crisis?

As in the previous topic, we consideredthe most important negative actorsmentioned in the previous survey: GlobalEconomy, Interest rate, Inlation and LegalFramework.

Analysis o the data indicates greateroptimism in relation to Interest rate andInlation, stability in the LegalFramework actor and a greater concern

about the situation o the GlobalEconomy (see chart 12).


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How do you think the economic crisisaffected your business?

The analysis o the answers shown inchart 13 revealed a very interesting resultin relation to the impact o the crisis inthe business o the largest insurancecompanies in Brazil.

Most companies (52%) indicated lowimpact in their business.

On the other hand, 38% claimed thecrisis had no aect. Adding the tworesults, we conclude that 90% o theinsurance companies reported little or noimpact caused by the 2008-2009 turmoil.

What do you think the Brazilianinsurance market will be like after thiscrisis?

In terms o the uture, the expectationwas clearly optimistic: 84% consideredthat the market will emerge strongerrom the crisis, 13% think it will be thesame and 3% think it will be weaker (seechart 14).

In terms of the technical reserves,which assets should grow relativelymore by 2015?

In terms o the new proile o technicalreserves, according to what is shown inchart 15, and considering only the optionmost requently mentioned by executives,hal o the companies believe thatinvestments in government securitiesshould increase compared to the currentshare. However, one third o thecompanies already indicates increase inthe amount o shares in the investmentportolio until 2015, a trend that iscertainly inluenced by the recent drop othe interest rate.

In the previous survey, a ranking withthe Microinsurance products thatshould show the highest growth wasprepared. Indicate whether thoseexpectations changed when comparedto the last assessment.

Due to the current relevance o this topic,the question about which product should

present a more signiicant growth, in theopinion o the executives, was repeated.Chart 20 displays the conclusions,considering options 1 and 2 (o highestgrowth).

In general, insurance companies kept thesame expectations in the irst and secondplaces Loan Protection Insurance (42%)and Unemployment (28%).

The dierence was a change in positionbetween Guarantee and microinsurance

Lie (16%) by a small margin. It is alsoimportant to note that a ield notreported in the list was mentionedvoluntarily: Funeral Assistance insurance.

How do you evaluate the ease ofplacement for reinsurance?

The opening or reinsurance is actuallycompleting 2 years. As such, somequestions were made or the analysis othis act.

The purpose o the question was todetermine how easy it was to placereinsurance in the insurance companies.As a whole, the evaluation wassatisactory. However, the biggestcomplaints (40%) reer to the interacebetween the two types o companies (e.g.:systems, processes etc.), as shown inchart 21.

Products

In the previous survey, the segmentsPersonal and Private Pension(Individuals) and Property/Casualties(Legal Entities) were indicated as theones that should grow the most until2015. In that sense, which actions arerequired to develop these markets to

their greatest potential?

ased on data collected in the previoussurvey, the most promising ields or thecompanies interviewed were assessed.This second edition determined whichstrategic actions would be necessary tobetter exploit the ields reported as themost promising. The conclusions can beseen in chart 16, considering options 1and 2 (the most signiicant), in relation toall possible options.

The use o New Channels or distributiono products was indicated as the maincritical success actor (30%), ollowed byAlliances (23%) and Technology (16%).

In the Legal Entity segment, whichsegments should grow the most percompany size (small, medium or large)?

Speciying the products that should growin the Corporate Entity segment, weasked what the expectation is in terms ocompany size. The results presentinteresting conclusions, when options 1and 2 are also taken in consideration (ohigher growth):

For small and medium companies, thePersonal segment was reported asshowing the best growth potential. Forsmall companies, the second place wastaken by the Property/Casualty segment(see chart 17), while in mediumcompanies it was Health (see chart 18)In large companies, the segments

Pension, Property/Casualty and Healthwere the leaders, in that order (seechart 19)


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Two years after the opening, how doyou evaluate the effects below in thereinsurance market in Brazil?

In general, the eects o the opening othe market were not considered to be sopositive, according to chart 22.

Negative view: most participants

claimed that the prices (or thePersonal and Property/CasualtySegments) are not less expensive norwere there new products launched especially in the Personal segment. Theperception was also that theproitability was not avorablyinluenced by this new scenarioDivided opinion: irst, whether themarket has higher or lower Risk oSolvency and, second, whether brokersare more or less prepared to ace thisnew challenge

Positive view: client companies(insurance companies), in general,improved their risk management

Cost and distribution

In the previous survey, a ranking of thedistribution channels that will developthe most until 2015 was defined. Basedon the previous years events, withmergers and associations, what is youropinion on this?

This question was also asked in the 2008edition. Results o this new edition arepresented in chart 23, and showinteresting acts when only options 1 and2 are considered (more signiicant).

One dierence in relation to the 2008edition is the weakening o the Internetchannel, which was second place then,and dropped to ourth (14%), ater Retail(19%) and Bank Branch (18%). TheInsurance Broker channel maintained theleadership (42%) o the expectations,rather surprisingly i we take into accountthat this is the most mature channel in

the country.

The drop o the Internet as an actualsales option or insurance may beconsequence o some actors:

Perception that the period (until 2015)is too short to deeply transorm theway in which the market relates to theclientDisputes in the sector, throughagreements and mergers, to increasedistribution capacity o retail stores

and bank branches

Anyway, this conclusion is speculationand deserves deeper analysis.

In the previous survey, the Internet wasreported as the 2nd most importantchannel to be developed until 2015.Considering this, which factors wouldhave to occur to make this channelmore viable?

Anticipating an expansion o the Internetchannel, the question was how to make itmore dynamic. The results are in chart 24,considering options 1 and 2 only.

The numbers indicate in irst place theimportance o change in Cultural Factors(21%) as a key actor or the channelsgrowth. The entrance o the newgenerations in the work market, moreused to internet use, may help change thecurrent status. Second, the numbersindicate Reduction o Legal Requirementsin the sales process (17%).

Considering the year 2015, whatshould be the behavior of the maineconomic indicators of market costs (inother words, operational marketing andadministrative expenses)?

As demonstrated in chart 25, mostinsurance companies consider adjustmentsuntil 2015 aimed at cost reduction. Thisadjustment will be both internal(administrative and operational expenses)and in the distribution channels

(marketing expenses).

Unlike the consensus in terms o thetendency o marketing and administrativeexpenses, there is a high degree ouncertainty in terms o behavior ooperational expenses in the next years,which will depend on the quality o therisk accepted by insurance companies..


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Technology

How do you qualify the levels ofinvestment in technology in the lasttwo years, in the following businesssegments?

Chart 26 shows, on average, that morethan 75% o the answers indicate that

the levels o investment in technologyincreased in all segments. Automobile isshown as the sector in which greatestneed or intensiication o investments,and Property/Casualties and Health wereshown as the sectors in whichinvestments were deicient.

In the last year, the pricing/underwriting area was reported aspriority for investment in technologyfor the coming years. In your opinion,what are the expected results?

The selection o the three most requentanswers shows the aspect RiskManagement as the most important inthe opinion o the executives (97%),(mentioned in practically all 30 answers),ollowed by Process Optimization (73%)and Costs Reduction (47%), as shown inchart 27.

In the previous survey, operationalefficiency and reduction of costs werereported as the main objectives soughtwith the investments in technology. Inyour opinion, were those objectivesreached? If so, to what extent?

he results or both questions were verysimilar, as seen in charts 28 and 29. Themain conclusion drawn is that in the twoaspects questioned Gains in OperationalEiciency (see chart 28) and CostsReduction (see chart 29) -, more than

hal o the companies considered to havehad gains o over 5% thanks to theirinvestments in technology.

It is also possible to note that, in case oOperational Eiciency, the results werebetter perceived by 30% o thecompanies, which reported to have hadgains o more than 10% in eiciency.

Which distribution channel will mostlydepend on investment in technologyuntil 2015?

The analysis o the data presented inchart 30, when only options 1 and 2 aretaken in consideration (more dependent),shows that, as the main sales channel,associated with its scattered operation insmall companies, Brokers was consideredthe sales channel that will mostly dependon investments in Technology (21%),

ollowed by Retailers (18%) and CallCenters (17%).


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I was surprised, and I think the trendwill continueIt was expected, and I think the trendwill continueIt was expected, but I think the trend isexhausted or will greatly decrease

As you can observe, the answers showthat insurance companies already

expected this market restructuring.Another interesting conclusion is thatthere is great expectation that thisbehavior will continue, given that 83% othe executives marked Expected andContinue (70%) and Surprised andContinue (13%), according to chart 33.

What is your expectation in terms ofthe number of insurance companies in2015, in comparison to the currentsituation, in the various areas?

In general, the expectation is that therewill be a greater concentration in theinsurance market until 2015, mainlyinluenced by trends in the segmentsAutomobile (50% o the answers), Health(45%) and Property (42%), as shown inchart 34.

In some speciic businesses, however, thetrend is less intense. For example, inTransport and Capitalization, more than60% believe that nothing will change. InPension and VGBL, the biggestexpectation is that new companies enterthe market, decreasing the concentration.

Strategy and Capital Management

What are the priority areas forinsurance companies to invest nextyear?

nsidering only options 1 and 2 (o majorsigniicance), the highest priority areasare Technology and Operations (33%),

Investments in Distribution (21%) andProcesses (16%), as shown in chart 31.

The interpretation o those results showsconcern rom insurance companies inrespect to an eicient and solidinrastructure to ulill the demands o itscustomers and distribution channels inthe correct time-to-market.

Once again, investments in Technology,due to the nature o the business, appearas large drivers o this objective.

How do you qualify the followingsentences considering the year of2015? a) foreign capital will expand itsshare; b) There will be increasedconcentration in the segment; c) newbusiness segments will be developed

In general, insurance companies agreewith the 3 statements, demonstrating aclear perception o the trends up to 2015.

In recent years, there has been a greatincrease in the number of mergers andacquisitions in the Brazilian insurancemarket. What are your views on this?

Most notably in the past year, theinsurance sector underwent major shareinterest changes with mergers,acquisitions, etc., and the insurancecompanies were asked about this marketmovement. The statements that should bemarked by respondents were:

It was surprising, but I think the trend

is exhausted or will greatly decrease


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Recommendations

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Based on our experience in consultingprojects or the insurance sector aroundthe world, we selected some strategic

actions adopted by companies toovercome the challenges mentioned inthe study.

Acquisition and retention of clientsOne o the main priorities or leadingcompanies reers to actions gearedtowards the acquisition and retention oclients.

In act, the ability to adjust products andservices to the new demands rom theseclients is a critical success actor, since it

strongly contributes to attracting newclients and increasing loyalty o the mostimportant clients.

Operational excellenceOne o the great challenges or insurancecompanies or the coming years willcertainly be reaching the proitabilityobjectives expected by their shareholders.Without the implementation o actionsaimed at improving operational eiciency,those goals will not likely be reached. Oneo the critical success actors is how clearthe improvement opportunities are inorder to direct investment and eort toactions capable o delivering the expectedresults. Another important actor is todevelop indicators that allow monitoringthe perormance o the most criticalprocesses, allowing better conditions tomake corrective decisions or improvementactions.

Efficient and sustainablecost managementThis topic is practically a consensus

among insurance executives to assureshort and long term sustainable results,and it should be handled with urgency orthe companies that wish to be wellpositioned in the coming years. In dealingwith this topic, companies are osettingthe reduction in the contribution oinancial gains in their results, resultingrom a scenario o lower interest rates,and the uncertainties o greater riskinvestments.

Efficient mergers and acquisitionsThere have been many recent associationsbetween companies in the Brazilianinsurance market. This trend hasemphasized the concentration among thebiggest players and, according to theperception o the executives interviewedin this study, it should continue in thecoming years.

In our experience, one o the criticalsuccess actors in processes o this natureis the ability to carry out the strategydeined to beneit rom the synergiesinitially identiied. The companies thatconducted successul associationprocesses worry about establishing aspeciic governance structure or thatpurpose, with clearly deined roles andresponsibilities or each participant. Inthis orum, the main goals and objectiveswere also deined, and the necessaryactions to reach those goals and to deine

perormance indicators were identiiedand prioritized in order to provide a clearand objective view o the results

accomplished, allowing decision makingto correct occasional deviations.

Another critical success actor is thestrategy to be adopted or seekingsynergies among the companies. It iscommon to imagine that, in anassociation between two companies, theideal strategy is to preserve the best oboth companies. This is hardly possible,given the complexity o each companysoperational model such as very dierentoperation structures and technology

bases. In some cases, the cost to integratesystems can be higher than the beneitexpected. In these cases, ourrecommendation is to evaluateoperational and technological limitationsbeore deining the strategy to beadopted.


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In recent years, the insurance market hasundergone great changes, including thebreaking o the reinsurance monopoly in

2007, the global inancial crisis, whichcrested in 2008, and even importantmergers and acquisitions between majormarket players that made the headlineso large newspapers in 2009. Additionally,the market has called attention due to itshuge growth potential, through theactual perormance and the socialimportance emphasized byMicroinsurance.

This entire set o variables inluenced,directly or indirectly, the results presented

by this study and it should be taken intoaccount as you read the questions andanswers presented in this study.

Among the most important aspects thatcan be highlighted here are:

An even more optimistic expectationor the growth o the insurancecompanies than the one presented inthe 2008 edition.Expectation o high growth or theproducts Personal, Health, Property/Casualties and Pension, with emphasisin the Loan Protection InsuranceMaintenance o the Broker distributionchannel as the one with highest growthpotential until 2015, ollowed byRetailers and by Bank Branches, leavingthe Internet in the ourth placeModest assessment o the actualbeneits provided by the opening o thereinsurance areaContinuing intentions to reduceexpenses in the three main inancial

areas: administrative, operational andmarketing

Perception o technology as an elementcapable o generating operationaleiciency, cost reduction and

dierentiation rom competitorsMerger and acquisition trend isexpected to continue, increasinginternal competition and developmento new segments

In summary, it is possible to concludethat the market is expected to grow until2015 with special attention to:

Products with higher expansionpotentialSales concentrated in brokers, but

increase in the importance o banksand retailersIncrease o competition in the sectorExpectation o reduction in expensesacilitated by the use o technologyImprovement in the relationship withreinsurance companies

Based on this, the scenario present in thelast edition remains: the best positionedcompanies will be those that deine acourse o action that balances prioritieso short term return to shareholders withthe urgent need or strategictransormation and long terminvestments. We can also add that thecompanies that manage to adapt, asterand more eiciently, through lexibleprocesses, organization and technologywill gain truly unique competitiveadvantages.

We hope this study could once againprovide important decision-makinginormation to insurance executives, and

thereore collaborate or the evolution othis strategic sector or the developmento Brazil.

Conclusions

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Copyright 2010 Accenture

All rights reserved.

Accenture, its logo, and

High Perormance Delivered

are trademarks o Accenture.

About Accenture

Accenture is a global managementconsulting, technology services andoutsourcing company, with more than181,000 people serving clients in morethan 120 countries. Combiningunparalleled experience, comprehensivecapabilities across all industries and

business unctions, and extensive researchon the worlds most successul companies,Accenture collaborates with clients tohelp them become high-perormancebusinesses and governments. Thecompany generated net revenues oUS$ 21.58 billion or the fscal yearended August 31, 2009. Its home pageis www.accenture.com.

For urther inormation about this surveyand Accenture solutions and services orinsurance companies, please contact:

Raphael de Carvalho(55 11) 5188 [email protected]

Silas Devai Jr.

(55 11) 5188 [email protected]

Raphael Araujo(55 11) 5188 [email protected]

Matias Arturo(55 11) 5188 [email protected]

About the Author

Silas Devai Jr. has a degree in Businessadministration, a post degree in Financeand an MBA in Marketing. He hasextensive experience in fnancialinstitutions and insurance companies,with previous work in operations, productdevelopment and business or companies

such as Citibank, Cigna and BrasilPrev. Hewas an active member o the FenaprevisProduct Commission and is currently oneo Accentures executives in charge o theInsurance Segment.

Contribuitions

Leonardo Framil, Raphael de Carvalho,Raphael Araujo and Gustavo Leanca.

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