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Oliver Futterknecht, Economist, Swiss Re Economic Research & Consulting and Assistant Vice President Swiss Reinsurance Company Resilient Latin American Insurance Market Provides Ample Growth Opportunities



Despite the global economic recession in 2009, the environment improved considerably throughout the year, thinks Oliver Futterknecht , Economist, Swiss Re Economic Research & Consulting and Assistant Vice President Swiss Reinsurance Company Ltd.


In 2009, the global economy experienced its deepest recession since the 1930s as world gross domestic product (GDP) shrank by 1.9% , to USD 58216bn. The industrialised countries were severely affected across the board, with very few of them reporting economic growth over the whole year. However, on a quarterly basis, their GDP growth resumed at a modest pace during the second half of 2009 due to the large fiscal spending programmes and very expansive monetary policies. Emerging markets, as a whole, weathered the global financial crisis better than the industrialised countries, albeit with tangible regional disparities. Emerging Asia performed well due to substantial GDP growth in China and India. Africa also performed quite well as it benefited from the recovery of commodity prices throughout the year. In contrast, Central and Eastern Europe – excluding Poland – experienced a deep recession, reflecting the region’s heavy dependence on exports, particularly to Western Europe. In Latin America, Mexico faced a deep recession, while most of the other major economies in the region suffered only mild retrenchments.
Despite the global economic recession, the environment improved considerably throughout the year. Credit and stock markets around the world rebounded from their March 2009 lows as central banks and fiscal authorities took decisive measures to stabilise credit markets and the real economy.
Insurance premium growth in emerging markets partially compensated for the contraction experienced in industrialised countries

The improvement of capital markets in 2009 helped to strengthen the balance sheets of insurers and boost profits. During the crisis, the insurance industry continued to provide cover and pay claims. While the capital of the insurance industry improved, global insurance premiums dipped by 1.1% to USD 4066bn in 2009. This is an improvement over 2008 (-3.6%), albeit clearly below the long-term average (+3.1%). Premiums fell in the industrialised countries due to significant declines in the US, the UK and Australia. Meanwhile, premiums in the emerging markets grew by 3.5%, but below the long-term average (+11.4%).
Latin America helped to Drive growth in the emerging markets

In the emerging markets, insurance premium growth was the strongest in South & East Asia at 12.1%, led by China. Premium expansion in Latin America and the Caribbean was also solid at 5.7%, with growth of both life and non-life business outpacing that of industrialised countries and emerging markets.
Sources: Swiss Re, sigma No 2/2010. Final and provisional figures released by supervisory authorities and insurance associations, and some estimates.
Life insurance premium growth in Latin America accelerated to 7.8% in 2009 (2008: +6.8%), despite the region's recession. Premium volume amounted to USD 44bn. This acceleration was supported by stronger growth in Brazil and Mexico, the two largest regional markets. The Brazilian life market was propelled by double-digit expansion of VGBL , group life and credit life. In Mexico, the resilience of pension-related insurance, individual and collective life more than compensated for the contraction of group life business. Life premium growth in Peru also accelerated, however only slightly. In the remaining larger markets, growth slowed. A drastic contraction occurred in Argentina due to the nationalisation of the pension system, which negatively impacted the retirement insurance market. In Chile, annuity business, the biggest line, fell sharply as retirement funds used for buying annuities lost much of their value. Sales of other life products also fell. In Colombia, growth of traditional life products slowed and pension buy-outs contracted due to overstated premiums in 2008 . This more than offset the strong performance of annuities, which were viewed as an attractive and safe option for retirees compared to the programmed payout scheme offered by private pension funds (AFP).
Regional non-life premium growth slowed to 4.3% in 2009 from 9.0% in 2008. Premium volume rose to USD 67bn. Chile’s non-life market was the most affected by the economic crisis, falling by 8.4% due to lower sales across almost all lines of business. The Brazilian market, which accounts for more than 35% of the region’s non-life premiums, declined slightly as a result of decreases in transport and credit insurance, brought about by the global recession. However, this decline was partially offset by the double-digit growth of premiums for financial, rural and special risks. Motor insurance premiums, which fell in other countries as sales of new cars slowed, received a boost in Brazil when tax breaks for the purchase of new cars were granted. Even though non-life premium growth decelerated in Venezuela and Argentina, the performance achieved by both markets in 2009 was still solid. Premiums in Venezuela rose by 6.0%. For the fourth consecutive year, premiums in Argentina grew at double-digit rates. Non-life markets in Mexico, Colombia and Peru accelerated in 2009. Mexico benefited from the renewal of the multi-line, multi-year policy of the state-owned oil company Pemex. In Colombia, the transfer of public workers’ compensation risks to private insurers and increasing sales of surety insurance related to anti-cyclical fiscal spending on infrastructure led to a solid growth of 9.0%.
Robust growth of the Latin American economy will have positive implications for insurance

After a dip in 2009, Latin America’s economy is expected to recover from 2010 onward. Brazil will lead the recovery in the region, followed by Peru and Chile. In contrast, GDP in Venezuela is expected to contract this year. An issue for Latin American economies is how they manage the exit from their expansionary policies. Further downside risks for Latin America are related to concerns about global growth, which could result in lower commodity prices and weaker demand for Latin American products. The crisis in the Eurozone is not expected to considerably affect the region as a whole, as long as the situation remains somewhat contained and does not continue for a long period. However, there are also significant upside risks. These include even stronger internal dynamics, which could attract higher capital flows, fuelling asset bubbles and local currency appreciation.
In 2010 and 2011, as the economies in the region recover, life premiums are expected to return to double-digit growth. Non-life premiums are also expected to continue to outpace general economic growth . In the mid-term, premium growth in Latin America & the Caribbean will continue to outpace that of industrialised countries, driven in general by stronger economic growth and catch-up dynamics. Commercial lines will benefit from massive investments in infrastructure and energy. Demand for personal lines insurance will strengthen as income and wealth rise. In addition, insurers will continue to develop standardized products and use cost-efficient distribution channels to satisfy the demand in untapped markets, such as low and medium income households.
These developments will, however, pose certain challenges for insurers. For example, insurers are likely to face strong competition from both domestic and foreign insurers. They will also need to raise additional solvency capital to meet increasing demand for insurance cover. In addition, insurers will require specialised expertise for complex infrastructure development projects. They will also need to develop the right products for targeted client segments and adapt to changes in the regulatory environment.
Oliver joined Swiss Re’s Economic Research & Consulting unit in 2007 at the company’s headquarters in Zurich. His area of expertise is the Latin American (re)insurance industry and how it is impacted by the economic environment and capital markets. Oliver’s research and forecasts support corporate decisions such as strategic planning and mergers & acquisitions.
If not otherwise stated, all growth rates provided are inflation-adjusted and based on a year-on-year comparison.
The aggregation of countries is weighted by US dollar GDP based on market exchange rates. International statistics using purchasing-power parity show higher world GDP growth rates because of their heavier weighting of fast-growing countries such as Brazil, China or India.
VGBL stands for “Vida Gerador de Beneficios Livre”. VGBL is a unit-linked savings product that imposes a penalty for early withdrawal.
Group life is usually demanded by privately owned companies that provide their employees with life coverage as a benefit. In turn, collective life is intended for all others who share mutual characteristics. This makes collective life suitable for banks that want to guarantee the payback of their loans in case of death or disability of the borrower. Collective life is also used to simplify the emission and administration of microinsurance and mass marketing.
Employees build up capital for their retirement via a privately managed contributions scheme. Beneficiaries reaching retirement age then use the accumulated savings to buy an annuity from a life insurance company.
In 2008, growth skyrocketed in part due to a one-off transaction that transferred pension liabilities and assets to the insurance industry.
Regional premium volume in USD, however, will be negatively affected by the strong devaluation of the Bolivar Fuerte (local currency in Venezuela) in early 2010.

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