Can premium growth stay strong despite inflation and slower economic growth?

Rodolfo Wehrhahn

Chairman/FIDES

Published  Friday, September 12, 2008

Historically, high inflation in Latin America has been blamed as one of the main factors hindering growth in the insurance business.

However, increased solidity and economic stability has helped premiums grow for five consecutive years through 2007 in Latin America.

According to a study carried out by Swiss Re, P&C and life premiums in Latin America rose 9.6% in inflation-adjusted terms to US$87.4bn last year, driven by Mexico and Brazil.

But will the region be able to sustain the growth in coming years?

BNamericas spoke with Rodolfo Wehrhahn, the new chairman of regional insurance federation FIDES, to hear more about growth forecasts on the Latin American insurance market and about how a possible economic slowdown could affect its development.

BNamericas: Does FIDES feel the current inflation in the region, and the possibility that it will continue to rise, is having an effect on the development of the insurance sector?

Wehrhahn: The reality in the region is fairly diverse. Chile is a very special case where all insurance is traded in UFs, a unit of account that maintains real value and thus protects insurance companies from the negative effects of inflation.

However, insurance companies lose their purchase capacity because prices are constantly increasing and profits are lower and that means less insurance is purchased. In other countries, insurance is traded in dollars so the effect that inflation has on insurance is transferred through changes to the value of the currency.

At any rate, inflation brings higher transaction costs to the market and those tend to shrink the amount of activity so we expect to fight off and eliminate inflation in the shortest time possible.

BNamericas: What sort of growth potential do you see for Latin America's insurance sector?

Wehrhahn: In 2007, global GDP expanded at a pace slightly higher than that of insurance premiums, which grew at 3.3%. Then the relative importance of the insurance sector decreased slightly, according to the deflated figures that Swiss Re published in its Sigma Nº3/2008 report.

A similar trend was seen in every part of the globe except Latin America and the Caribbean and Asia, excluding Japan.

In fact, North America [the US and Canada] registered growth at almost the same rate as GDP, 2.1%. At the same time in Japan, while the product grew, the insurance market slumped 3.2%.

But premiums grew 9.6% in Latin America and the Caribbean and GDP increased 5.1%. The figures demonstrate the South America-Caribbean region represents a major opportunity for the worldwide insurance market.

BNamericas: What is the ratio of premiums to GDP in Latin America today? Where do you see that figure in the mid-term?

Wehrhahn: Based on the latest Swiss Re report, insurance penetration in Latin America to December 2007 came to 2.5%, specifically 1.0% in life insurance and 1.5% in non-life insurance.

We are hoping that regional penetration and density indicators will improve systematically. Our goal is to double those indicators in ten years, moving from 2.5% in current penetration to 5% in 2017. That would imply boosting density from US$154.1 per capita to the equivalent of US$300 during the same period.

BNamericas: What segments have the most growth potential and how can they be properly taken advantage of?

Wehrhahn: The area of insurance in our region with the most growth potential is definitely the lower-income segment. The industry works to improve the insurance culture and show people that insurance is the most effective way of decreasing risk and uncertainty. There, the role that microinsurance plays is crucial since these are insurance products for low-income people.

BNamericas: How important is adapting to international trends so the insurance market can continue to develop in the region?

Wehrhahn: In order for the opportunity that we see to become a reality, it's necessary for insurance markets around the region to align themselves with international supervision and reporting trends: risk-based supervision and the International Financial Reporting Standards [IFRS].

I do feel the market is ready and, in fact, there's a restlessness to learn about risk-based supervision and IFRS.

BNamericas: What sort of effect might these new regulations have in terms of market consolidation?

Wehrhahn: Without a doubt, insurers that belong to international insurance companies based in Europe or the US are already ahead of their local competitors. In that sense, companies without international ties will have to struggle with higher costs when regulations change and, in the end, some of them might suffer overmuch. However, change is here to stay and the improved transparency and better information at these companies will work to everyone's benefit.

BNamericas: What role can organizations like FIDES play in helping to boost insurance penetration in Latin America?

Wehrhahn: We are firmly convinced that, in an industry as widespread as insurance, the experiences of some are useful to others, in the positive and the negative. In that sense, the exchange of information and mutual support are very important factors so that every country can improve its insurance penetration ratio.

There is a close relationship between the economic development of countries and the development of insurance, in such a way that economic development creates and is sustained by insurance developments.

To achieve that development, it's essential to open up to a new tier of clientele. That is why we are working on two very important projects: one is a project to develop innovative farm insurance in Central America that we've been working on for two years already with financing from the IDB, which aims to offer small-scale farmers enough protection for their needs and abilities.

The other is a project to develop microinsurance that will focus on independent people who survive off of semi-formal economic activities and who depend upon their jobs to survive. There are some very successful examples of this in Asia and some countries in Latin America and our dream is to extend that offer to every country in the region. In order to manage that, we are in talks with the IDB and hope they'll help a project like this take flight.

We strongly believe countries can develop and especially achieve more stability when they can rely upon a solid private insurance industry. In order to do that, we are tackling the issue with a continent-wide insurance survey that will give us some tips as to how to do that.

We also want to be well-informed in order to discuss insurance development which is something we are addressing by making ourselves an active presence at every international meeting on the issue, including events where the supervisors from our countries are also taking part.

ABOUT THE COMPANY:FIDES is a non-profit federation that groups insurance associations from 22 Latin American countries as well as the US and the Iberian peninsula.