Risk Solutions—Global

ANGEL MARTINEZSenior Vice President

Risk SolutionsLondon, U.K.

+44.20.7933.2295angel.martinez@uk.lockton.com

L O C K T O N C O M P A N I E S

Market Update March 2013

NEW RISK AND OPPORTUNITIES

IN LATIN AMERICAThe Latin American region looks set for sustained steady growth in the years ahead. An expanding and increasingly prosperous population, abundant natural resources, and strong commodity prices—along with relative economic and political stability in recent decades—all underpin this trend. Reduced global demand may be dampening growth somewhat, but projected GDP increases averaging around 4 percent for 2013 (roughly equivalent to 2012 levels) look healthy compared with most other regions. Brazil, Chile, and Colombia, in particular, should all see rapid economic growth in 2013. Intensive, and much needed investment in major infrastructure projects (along with Brazil’s playing host to the 2014 World Cup and 2016 Olympics) will fuel this growth.

A rapidly growing middle class in many parts of the region has boosted demand for goods and services. World Bank figures suggest that, between 2003 and 2009, the region’s middle class grew by 50 percent from 103 million to 152 million, to account for 30 percent of the population. Organisation for Economic Cooperation and Development figures suggest this figure could be as high as 50 percent. Definitions of “middle class” may vary, but the trend is clear. It will be some years yet, however, before this

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new middle class achieves settled social maturity. Although Latin America does not have a well-established insurance buying culture, such demographic changes are noticeably fueling demand for products such as household and, in particular, motor insurance.

Compared with other regions, Latin America has relatively low insurance market penetration: roughly half that of North America or Europe. The region accounts for roughly 8 percent of global GDP, but only 3 percent of global premiums. But, as economic stability and closer integration with the global economy fuel demand in an increasingly mature socioeconomic environment, this is beginning to change. Total insurance premiums across the region amount to around USD 130 billion today (predicted to rise to between USD 180 and 190 billion by 2016), with nonlife premiums accounting for roughly USD 73 billion of this. Brazil is by far the largest insurance market, with nonlife premiums of around USD 23 billion.

Within this general pattern of sustained economic development, however, the Latin American market continues to pose a range of challenges. Globalization and business expansion create new risks as well as opportunities and, despite the progress made in recent years, Latin America remains a relatively uncertain political and legislative environment in which to operate. In recent years, global insurance providers have entered

the region to meet a growing need for capacity and expertise, and more recently, local carriers have built on lessons learned from these new entrants to offer a comparable service in their local markets. Latin America currently looks like a very attractive insurance market, fueling healthy competition. In the absence of significant losses, property insurance rates are currently stable or showing reductions of up to 10 percent for clean renewals across most lines.

The factor most likely to affect this trend is major catastrophe losses. Unlike its northern neighbor, Latin America experienced modest natural catastrophe losses in 2012 (the key events being the Mexican Quake of 20 March and floods in Colombia around the second quarter of the year). U.S. losses (notably Superstorm

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Sandy) may have put some upward pressure on rates in Mexico, but cat experience has not been a significant factor marketwide. With climate change likely to fuel future losses from windstorms and flooding and many parts of the region exposed to seismic activity (a quake is currently predicted for northern Chile, bringing back memories of the 2010 quake that caused economic losses of USD 30 billion and insured losses of USD 8 billion), cat exposure remains a significant threat, against which the region is relatively underinsured.

Commercial, legal, and regulatory conditions vary significantly across the region. Local variations present significant challenges both for the emerging generation of multi-Latina companies expanding their operations across several regional territories and for overseas players seeking to access the Latin American market. These local variations considerably complicate the business of putting together an effective and efficient risk transfer program for multijurisdictional commercial operations and their insurance advisers.

Following a period of insurance market liberalization, there have been renewed signs of a nascent protectionism. Of particular significance have been Brazil and Argentina’s attempts to restrict the outward flow of insurance and reinsurance premiums (though, conversely, Colombia has recently made moves to introduce greater liberalization). Brazil recently stipulated that 40 percent of reinsurance should be placed with local carriers and limited intracompany cessions to 20 percent, while Argentina insists that 15 percent of all risks be placed locally, introducing a Strategic National Insurance Plan that is thought to be pushing rates up by as much as 20 percent.

Latin American continues to be troubled by lingering political instability—on which the recent death of Venezuela’s Hugo Chavez may or may not have a bearing—and by ongoing worries over the potential nationalization of overseas investments. Argentina’s controversial move to take control of oil firm YPF, in which Spanish oil giant Repsol was the majority shareholder, in April 2012, did nothing to allay such concerns, but does not appear to be part of a wider pattern.

Corruption also remains relatively high compared with other regions, as does criminal activity. Whilst industrial premises are typically well-protected (often by armed guards), domestic and, typically, commercial risks remain chronically exposed to property crime. The very high level of automobile theft in Mexico continues to put

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pressure on personal motor rates locally. High levels of social inequality also pose systemic problems and may be one factor in the exceptionally high rate of kidnappings seen in some parts of the region, with somewhere between the official figure of 2,000 and as many as 17,000 people abducted in Mexico during 2011 alone.

Continuing economic development, inward investment (running at over USD 100 billion currently), and improvements in infrastructure will support a continuing transition to a more stable, integrated, and mature society. Whilst Venezuela in particular may soon be facing critical infrastructure challenges for which it is ill-prepared, active programs of infrastructure development in a number of other countries—notably Brazil and Panama—are helping to offset the risk of poor infrastructure holding back economic development. Such projects clearly also create significant demand for insurance and reinsurance capacity.

Business expansion is also currently fueling a significant increase in M&A activity in the region, which in turn, is beginning to stimulate demand for insurance products that can mitigate the attendant risks. As Latin American businesses make increasing use of sophisticated information technology, there is also a growing awareness of the threat posed by cybercrime and data security issues, with three in four regional firms reporting having experienced some form of cyberattack during 2012. Growing businesses in the region will need to address these and other emerging risks if they are to prosper in the years ahead.

Latin America offers an increasingly stable and attractive business environment for those able to navigate its complex variety of cultural, legal, political, and regulatory environments. Firms operating in and from these rapidly developing and evolving economies need access to accurate and up-to-date advice on regulatory compliance as well as advanced global expertise in the most efficient risk transfer mechanisms available. Insurance brokers and risk management consultants with the combination of local and global expertise to help their clients and business partners realize these objectives and put effective risk transfer programs in place have a key role to play.