What does the future hold for Brazil's insurance sector? Three experts share their insights.
BY LATIN AMERICA ADVISOR
The short-term outlook for Brazil's insurance market—with a total of about $47 billion in premiums written in 2008—has been restrained by the deterioration in the macroeconomic environment and the industry's continuing regulatory transition, Fitch Ratings analysts said in a report released July 6. The authors added, however, that Brazil's insurance sector "presents significant potential for greater development" once a consistent economic growth resumes and regulatory issues are resolved. Do you agree? How have Brazil's 2008 regulatory changes for the industry played out to date, and which reforms will be most likely to spur Brazil's insurance sector growth? How much economic growth is needed in Brazil, and for how long, for the industry to advance significantly? How big can Brazil's insurance sector become in the next five to 10 years?
Luis Maurette, CEO of Liberty Seguros in Sao Paulo: We have observed that property and casualty written premiums for the last 12 months have grown despite the global economic turmoil. We attribute this growth performance to mainly two main effects: 1) the Industrialized Products Tax (IPI) cut that the government implemented in the beginning of the year, which has stimulated new vehicle sales and 2) regulatory changes such as the opening of the reinsurance market, which has contributed to the entrance of global reinsurers in Brazil, and new solvency rules that will result in a more stable and stronger insurance market. We do agree that the Brazilian insurance market presents significant potential for greater development and the regulatory changes are very positive for the market. Due to the opening of the reinsurance market, several large global reinsurance carriers have established a presence in the country, increasing competition and providing new products and more capacity to the market, and also adding expertise to some lines of business that were not explored in the past. Also, the new solvency rules strengthen and increase protection to Brazilian enterprises and individuals. Some macroeconomic reforms, such as the tax reforms, should contribute to the growth of the local insurance market as they will allow the economy to grow. Also, reforms in the financial market that contribute to the further drop in interest rates should force the insurance market to become more efficient at adding more value for customers, contributing to the market's sustainable growth. We observed that the insurance market has grown at the same pace of the economic nominal growth in the last four years. Today, the Brazilian insurance market represents about 3.5 percent of the country's GDP and we are optimistic that this percentage will increase in the future.
Antonio Penteado Mendonça, partner at Penteado Mendonca Advocacia in Sao Paulo: I disagree with Fitch's comments. In 2008, Brazil's insurance market didn't have a slowing in its growth because of regulatory measures. The slowdown is much more a consequence of the lowering in the prices of car insurance and the impact of the crisis after October. The market didn't have any significant changes in the regulatory measures in 2008. The exception was in health plans, where the supervisory board made changes expanding coverage to diseases and procedures that weren't covered before. Brazil's insurance market has a huge potential for growth in the next five to 10 years. Achieving this goal has nothing to do with the change in regulatory measures but much more with distribution channels to provide insurance coverage for the lower social classes. The regulatory measures, which were not mainly improved in 2008, but rather before, played a positive role for the market. Through them the companies were well capitalized. To confirm that, since 1994 there has not been any significant insurance company bankruptcy. If Brazil has a GDP growth of 1 or 2 percent next year, it will be enough to retake the growth average of the last 15 years. The market can grow in the next five to 10 years to approximately 6 percent of GDP just by providing coverage for the currently uninsured risks in household, vehicles and small businesses. If the market finds the right way to provide microinsurance, the growth can be even bigger.
Jan Smith, managing director of Kroll Inc. in Mexico City: Penetration of private individual insurance products in Brazil remains comparatively low and is therefore bound to benefit from a strengthening of economic conditions. Growth of the insurance market can be compared to the expansion of the credit card market: originally limited to the middle and upper classes, insurance products are gaining more acceptance and making inroads in the lower middle class. More importantly, the sector is finally pushing through with the most important overhauls in regulation in 20 years. The changes allow for greater flexibility in the sale of products, particularly for life insurance and workers' compensation. The changes make it easier to sell products individually and also allow for greater accuracy in the measuring of risk and therefore offer more competitive pricing. This bodes well both presently and in an economic upswing. Further legislative changes are in the pipeline and will focus on greater transparency of commission structures among brokers, creating uniform pricing for similar products and making the claim process more efficient. These changes will continue to foster greater acceptance and potential for growth over the next five to 10 years.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.