Land of opportunity: industry insiders are optimistic about the potential of Latin America despite recurring economic crises. (Industry Strategies: Latin America).

Latin America is viewed by U.S. and European insurers as an underserved market with vast potential, but recurring economic crises and political instability in some of its key countries have curbed development of the insurance industry.

Over the past year, foreign insurers have taken root at an increasing pace in Mexico, Chile, Argentina, Brazil and, to a lesser extent, in other Latin American countries. But the Argentine government's debt-default crisis, beginning late in 2001, raised questions about the region's stability for foreign companies, much as Mexico's 1994-95 economic crisis did. Despite those questions, some insurance industry insiders are still optimistic about the region's prospects.

PartnerRe Ltd., for instance, has enough confidence in the region to sink more permanent roots there. Salvatore Orlando, head of Latin America for Bermuda-based PartnerRe, said his company is optimistic about the region's long-term prospects for insurers and reinsurers. The company recently opened an office in Santiago, Chile. "After having reached a certain amount of premium income, we think that we have now to be much closer to our clients," he said. "Chile gives us the opportunity to hire professional people in the region."

The Chile office in the capital of Santiago will be responsible for Chile, Argentina, Uruguay, Paraguay, Bolivia and Peru.

"Right now, Latin America is going through an economic crisis, but PartnerRe is looking at business for the long term," Orlando said. "You have to take the chance and pick the right resources. This gives us a chance to match ourselves better with our clients and gives us the necessary tools to succeed in Latin America."

Claude F. Gallello, managing director for large accounts at Willis International, pointed out that diversified financial-services firms, such as ING of the Netherlands, like the potential of a huge population, combined with an underdeveloped personal-finance segment. "ING, which recently acquired 49% of Sul America, Brazil's second-largest carrier, has certainly invested in Mexico and other parts of Latin America," Gallello said. "They also took ownership of La Comercial in Mexico. ING is making those acquisitions because of their keen interest in personal lines. Both Brazil and Mexico have significant populations, and insurance spent per capita is not high. They see growth opportunities in those countries."

Orlando said Latin America in the next few years is going to be particularly interesting for reinsurers. The catastrophe business is significant, with a hardening of the market that makes prices interesting for reinsurers, not only on the nonproportional level but for proportional business, he said.

New Demands

"Right now, it's very interesting to do business in Latin America, compared with three or four years ago," he said. "It's a very difficult market, but there are a lot of opportunities." Property, life and casualty are promising areas in the commercial segment, along with engineering and agriculture. "In agriculture, we're seeing a huge demand of new products, insuring crops and multiperil," he said. "Those are the lines of business we think are going to be very interesting in the next few years."

PartnerRe's new office will serve five targeted countries, but Orlando identifies the company's main target markets as Argentina, Chile, Colombia, Mexico and Venezuela. Those five countries, plus Brazil, comprise 90% of Latin America's insurance business, in terms of 2000 premium, according to Swiss Re's newly published Sigma No. 2/2002, "Insurance in Latin America."

Although SwissRe predicts the region's premium volume overall is set to drop sharply this year, mainly due to currency devaluations in Argentina and Venezuela, "real-term premium growth in the region will stay ahead of macroeconomic growth in the future."

Brazil, the biggest insurance market in Latin America, is an interesting market for reinsurers, said Orlando, given that 85% of the region's top industrial output originates from it. But there is a problem--IRB, Brazil's state-owned reinsurer, which effectively controls the reinsurance market, has yet to be privatized. "The reinsurance market in Brazil is still closed," he said. "Everybody is looking at that market, but it doesn't make sense for PartnerRe to open an office there if the market is closed."

Argentina's ongoing financial crisis is keeping insurance players on their toes, said Orlando. "We have to be very careful. We're monitoring the situation closely," he said. "It's very important for us that we select the right clients. Up to now, we have received all the premium income outstanding from our Argentine clients, so we've had no problems with cash flow."

Orlando said the July 1 renewals for Argentina, Chile and Mexico were especially difficult because reinsurers were analyzing the situation very carefully and re-examining and improving terms and conditions.

While the government of Colombia is struggling with armed leftist rebels and the cocaine trade, and Venezuela's economy has been battered under the controversial 2 1/2-year rule of President Hugo Chavez, Orlando said the corresponding risks in those two countries don't preclude a reinsurer doing business.

"You have to select your risks carefully," he said. "Coverage for this high exposure can be very expensive, but clients are paying it."

Political Overtones

Politics in Latin America is more than a spectator sport for foreign businesses. Over the past decade, the region has painstakingly shaken off what American and European business people have seen as a leftist past, hostile to capitalism. But while Mexico seems to be heading farther down the open-market road with last year's election of former Coca-Cola executive Vincente Fox as president, socialism seems to be making a comeback in countries like Venezuela, where President Chavez proclaimed a "Bolivarian Revolution" against corrupt business leaders, and Brazil, where an Oct. 6 presidential election brought the candidate of the left-leaning Workers' Party--Luiz Inacio Lula da Silva--close to victory. Polls in Brazil showed da Silva with a 2-to-1 lead over his opponent going into the runoff. Anti-capitalist sentiment seems to be on the rise in crisis-ridden Argentina as well, where residents are angered at the sudden devaluation of their savings.

Currency Concerns

Gallello said insurers have to tread with care in the region's uncertain economic and political climate, but optimism doesn't yet seem to be flagging. "We're not seeing any withdrawals from those countries, but there is the usual increased pressure on prices," he said.

A leftist turn in politics could turn off a lot of political risk coverage, said Gallello. "In Venezuela, the political-risk market is virtually closed down," he said. "When those events happen, it's a logical reaction that underwriters are going to reduce their exposure in those countries, for fear of accumulation of risk.

"We always use these as examples for customers about buying political-risk coverage--you don't buy it in an election year if the government is moving toward a leftist regime;' he said. "You buy it in advance of that, and get yourself a policy that's locked in for a couple of years at lower rates. You don't start buying it when there's mounting pressure on the economy brought about by a new regime."

Gallello said investment income and the exchange-rate environment can be sensitive to the mounting inflation seen in Argentina. "Policies issued in a country in local currency have to constantly be re-evaluated," he said. "The emphasis in these countries is to go toward getting rid of U.S. dollar-denominated policies and issuing policies only in the local currency. The inflation factor has to be taken into consideration. In the property business, for instance, you have to make sure you're covering to full values."

Currency devaluation, as experienced in Argentina, affects insurers just as it affects banks, he said. "It erodes their investment, making it worth less in those countries," he said. "There could also be some good opportunities for investors to buy, though."

In With the New

Despite the risks, there are some very innovative markets in Latin America, which have been launching new products and distribution channels in line with general business growth, Orlando said. Direct marketing of insurance is popular, as is bancassurance. "You have innovation there," he said.

Life insurance is becoming an attractive market for insurers throughout Latin America, as other countries follow the example of Chile, which successfully privatized its state pension system in 1981. "If you look at penetration levels, the potential in Latin America is huge," said Orlando.

Premium Volume in Latin America

The insurance industry in Latin America grew by 6% in 2001, with nonlife
premiums growing more than life premiums.

Overall premium volume in U.S. dollars ($ Millions)--2000


Mexico                $9,866
Guatemala               $190
El Salvador             $230
Nicaragua                N/A
Costa Rica              $324
Colombia              $1,829
Ecuador                 $209
Peru                    $555
Bolivia                  $84
Chille                $2,687
Argentina             $6,778
Uruguay                 $403
Paraguay                 $78
Brazil               $12,554
French Guiana            N/A
Suriname                 N/A
Guyana                   N/A
Venezuela             $2,227
Dominician Republic     $408
Panama                  $368
Belize                   N/A

Source: Swiss Re

RELATED ARTICLE: Setting Up Shop in Latin America

Following are some of the recent moves by insurers to expand their presence in Latin America:

* MetLife Inc. said it won in bidding for Mexico's largest life insurer, Aseguradora Hidalgo SA, with a $962 million offer. A month earlier, MetLife acquired two life insurers and financial-services companies in Chile--Seguros de Vida Santander and Soince Reinsurance Co.--from Spain's largest bank, Santander Central Hispano.

* The Principal Group Inc. said it would acquire Zurich Financial Services Group's private pension operation in Mexico. Pending regulatory approval, Zurich More S.A. de C. V., will merge with Principal More S.A. de C.V., the seventh-largest pension fund provider in Mexico.

* Transamerica Reinsurance, a unit of Aegon Group of the Netherlands, opened its head office for Latin America in Weston, Fla., near Miami, to manage and support business development throughout Latin America. Transamerica's focus in Latin America is primarily in Chile, Argentina, Mexico and Brazil.

* ING said it completed its purchase of a 49% stake in Brazil's Sul America as part of a joint venture with that company, which has a market share of 19% and about 7 million clients.

* Grupo Financiero Banamex-Accival, a banking unit of Citigroup Inc., bought Aegon NV's stakes in Seguros Banamex Aegon, a Mexican life insurer, and Afore Banamex Aegon, a pension-management company, for $1.24 billion.