Exploiting Latin America's rich insurance growth potential

With markets like Colombia and Mexico opening up their insurance industries to foreign players and penetration still low throughout Latin America, the region is increasingly becoming one of rich growth opportunities for both global and local insurers. 

To discover where those opportunities lie, and what challenges might be encountered along the way, BNamericas spoke to James Littlewood at EY's Global Insurance Center-Latin America.

BNamericas: Why do Colombia and Mexico stand out as particularly attractive markets given penetration is low throughout all of Latin America?

Littlewood: You've got countries like Chile, Colombia, Mexico and Peru, the Pacific Alliance, that are very outward looking economies, signing free trade agreements, demonstrating their willingness to work with global partners etc and creating a more attractive environment in that regard.

In Mexico, insurance penetration is very low [around 2% in 2012]. If you compare Mexico with other emerging markets like South Africa or South Korea, these places have similar demographics, similar levels of development, yet they have penetration of 12-13%. You could read that [low penetration] as "it's very difficult," or you could read that as "there's a lot of opportunity to go after." Mexico's insurance industry grew at 11% [in 2013], which is above GDP growth. Colombia's [insurance] growth was 8%, and Peru's was 15%, so I think there is a big upside to go after, even if GDP growth is slowing. We're still anticipating that insurance is rising, or outpacing GDP, and that's primarily down to the fact that there's a lot of upside.

You've also got very attractive demographics. Poverty reduction across Latin America is spread out. Some countries don't have Europe's problem of an ageing population. In a lot of countries in Latin America you've got a young population that is becoming wealthier, and that provides an inherently more attractive environment.

So I think the three points are: the economic willingness to do business in some of these countries, there's a big upside on penetration, and thirdly the demographics.

BNamericas: And which lines do you see doing well?

Littlewood: It's a million dollar question. I would say that in another five years these markets will have a tremendous amount of new competition. So you've got new products, new entrants into the market, people acquiring insurance companies, and a lot of the big European and big US companies with multiple products. So if you were just going to offer a multiple set of products, you've got a lot of both domestic and international competition there, so I think the game will move away from having exciting new products, more into, how do you exploit niches? So rather than just having a product, you have a niche that you're going after, be that a demographic or a distribution channel. [It will be more about] understanding the local markets, understanding niches and exploiting those, rather than having a multiple product offer.

BNamericas: What impact will this competition have on profitability and pricing?

Littlewood: It has to [have an impact]. There are a lot more multinational competitors bringing ways of thinking, and products, and marketing and sales from more mature markets, so it's just inherently more competitive. You also have more players in those markets. I think we have seen an impact on prices, but what's probably more interesting is the impact on the business model. So you've got the more traditional business model of having an insurance company that relies on brokers to go and distribute its products, but now people are also doing deals with banks. So you have bancassurance players, where you have distribution partnerships with banks, and we've more recently seen that with retail companies. Chile is a good example where you've got retailers like Falabella selling products. Those new business models and how companies adapt are going to determine the winners or losers, rather than product prices.

And I'd probably add to that that you're seeing people like ComparaOnline.com, an online insurance comparison site. In the UK, those kinds of websites disrupted the market, as almost 50% of insurance is now sold through those websites. So those business models are going to enter the market and that's going to create more challenges than pricing, because whole new ways of doing business are going to shake up the more traditional insurance companies, and if you're not online and able to interact digitally, you're not going to be able to take advantage of those new models.