Property and Casualty Insurance: Covering the risk of accidents and disasters

The insurance sector in Latin America is growing briskly, buoyed by an expansion of the middle class in several countries, economic stability and generally good prospects for continued economic growth throughout the region.

Property and casualty insurance (P&C) covers a wide range of risks for businesses, individuals and governments – automobile accidents, financial loss from natural disasters, fire, theft, marine and aviation accidents, industrial accidents and others.  In technical terms, property insurance protects individuals or businesses from the loss of property or the loss of income related to that property. Casualty insurance principally protects persons or businesses against legal liability caused by injuries to other people or damage to someone else’s property.

Premiums for all types of insurance in Latin America grew by double digits in 2011, said Juan Fernando Serrano, CEO of LatinoInsurance, a market-information and consulting firm that closely follows insurance developments in the region. Serrano estimated that some countries – such as Brazil and Ecuador – had premium expansion of more than 20 percent last year, and the area as a whole grew by 12 percent to 15 percent, benefitting life and non-life products alike.

“Economic stability in Latin America – supported by commodity prices and strong demand – is important and has an impact on insurance,” Serrano said. He also expects continued premium growth in 2012.

In Brazil, for example, “the middle class consumes everything,” he noted. “Goods, services … and insurance.”

Insurance premiums in Latin America, including life and non-life products, represent about 3 percent of world premiums, Serrano said. Still, insurance companies – both national and international – are eager to grow their portfolios: “It’s a small market, but it offers double-digit growth in income and profits,” he said.

Despite some disasters, such as the Chilean earthquakes, insurance companies are very profitable. The LatinoInsurance CEO added: “In 2010, their average ROE (return on equity) was 17 percent.”

Once the large international insurance companies were allowed to have 100 percent ownership, they began buying local companies and  had an important impact on the Latin American market, said Kathleen B. Smith, managing director for Latin America and the Caribbean at Marsh Inc., the worldwide insurance brokerage and risk management firm.

“Before, businesses had to depend on local companies, and they had limited capacity,” Smith said. “The market is much more diverse now, since different insurance companies and brokers brought their skill sets and new products to the region.”

The Latin American countries with the most developed insurance industries today are Argentina, Brazil, Chile, Colombia, Mexico and Peru – as well as the U.S. market of Puerto Rico, Serrano said. Aside from Brazil, the largest markets for P&C insurance are Mexico, Puerto Rico, Venezuela, Argentina, Chile, Colombia and Peru.

Although life insurance is leading the pack, P&C lines have strong growth potential in Latin America, according to Rafael Casas, president of MAPFRE America, the region’s largest supplier of  P&C coverage.

“Currently, large companies are covered by P&C insurance more than small and mid-sized companies,” he noted.

And since the level of P&C penetration in the region is lower than in more-developed markets, the sector has strong growth prospects – especially in the current world economic context, where Latin America expects continued economic expansion and increasing acquisitive power.

some examples:

According to LatinoInsurance’  Serrano these are examples where P&C coverage is growing:

• Automobiles – this is one of the fastest-growing sectors. With expansion of the middle class, demand for cars and other vehicles has increased, and loan rates are lower than in the past. More policies are being written, both for compulsory (SOAT) and non-compulsory vehicle insurance.

• As trade increases, there is more demand for cargo- and transportation-related insurance.

• New airports, roads, electric-power systems and other infrastructure projects require insurance from governments and private companies alike.  This is especially true in areas subject to earthquakes, hurricanes and other natural disasters.

• Surety bonds. When new projects are developed, governments demand performance bonds from contractors. Also, builders and other investors want to cover risks associated with developing multimillion-dollar projects.

• Credit insurance – a small but growing sector to protect against risk in accounts receivable.

WHO IS COVERED?

Multinational companies with operations in Latin America and multilatinas – which have operations and personnel far beyond their home countries – have used a combination of international insurance companies and local companies to cover a variety of risks. In recent years, they have turned increasingly to “captives,” or self-insurance companies.

Esteban Madero, a vice president at Marsh, said Latin American and Caribbean businesses have increasingly focused on captive insurance organizations to transfer risk.

Venezuela’s PDVSA has a captive insurance company, Serrano said, and Mexico’s PEMEX asks insurance companies for bids every two years. Each company has assets worth many billions of dollars.

In contrast, P&C coverage among small and mid-sized businesses (SMEs) varies.

Moreover, companies that have bank loans usually are obliged to obtain insurance under terms of the loan agreement.

HOW SOME COMPANIES COVER RISK

Big companies typically don’t like to reveal their insurance coverage. But publicly traded firms sometimes publish information on the topic.

Caterpillar, which has manufacturing operations in Mexico and Brazil and other countries, also is self-insured through captive insurance companies, including Caterpillar Insurance Co. Ltd. in Bermuda, according to the company’s 10-K for 2011.

Chile-based LAN Airlines S.A., with 150 passenger and cargo aircraft and operations in many countries, said in its 2011 annual report (SEC Form 20-F) that its insurance coverage for 2011 cost $16.3 million. The publicly traded international airline has hull insurance that includes, among other things, “all risk,” war and allied risks, plus liability for spares, passengers, cargo, mail, baggage and third parties.

Since 2006, LAN has negotiated common terms for hull all risk, aviation legal and spares coverage together with British Airways, Aer Lingus and their affiliates, the report said, which gives the airlines premium reduction and coverage improvements.

Top 100 Insurers in Latin America (Click image to view at full size)

THE MOST EXPENSIVE COVERAGE… THAT ONE YOU DID NOT BUY…

The cost for P&C insurance against natural disasters depends on the level of risk and location, Marsh’s Smith said.

“One of the biggest factors in determining the cost of your coverage is your loss experience,” she noted, so even companies in risky geographical areas are judged more on their own loss experiences.  Some of the most expensive insurance, she said, covers machinery breakdowns at complex operations.

In parts of the Caribbean, for example, which potentially face hurricanes and flooding each year, “there seems to be plenty of supply and demand for catastrophic coverage, but the cost is very high,” Smith said.

“For insurance companies, it’s all about spreading the risk. Catastrophic models dictate how much insurance a company can write, and at what price.” But, as insurance experts say, the most expensive insurance is the coverage you don’t buy.