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Alternative thinking: nontraditional capital is subtly influencing Latin America's reinsurance markets.

Aidan Pope's father was a hydroelectric engineer who traveled the world building dams. Pope--who was born in the United States, grew up in Argentina and studied in London--is something of an engineer himself. The bridges he builds, however, are between companies.

Pope has been brokering reinsurance deals in Latin America for the past three decades and for the past four years has been the chief executive officer of Latin America and the Caribbean for Guy Carpenter.

"I always had a love for Latin America right from the start," he said. "I didn't grow up wanting to be in reinsurance, but I wanted to maintain my contacts in Latin America. So it all worked out pretty well in the end."

Between leaving a meeting and catching a plane, Pope took the time to speak with Best's Review about the impact of alternative capital on the Latin American markets and where he sees growth in the future.

Alternative capital is such a big topic in reinsurance. There is about $45 billion of alternative capital in the reinsurance market, which is about 15% of the total global property cat market. Are you seeing alternative capital entering the Latin American market?

Not really. To be quite honest, the alternative capital is not really entering the Latin American market at this stage directly. The reason is that there is quite a lot of overcapacity already in Latin America.

Secondly, the reinsurance rates are a lot thinner than they are for U.S. business or for retrocession business, which is the area so far where the alternative capital has been interested in playing. The thinner margins combined with the overcapacity means they aren't interested in getting directly involved.

If it is affecting Latin America or will affect Latin America, it's through the big multinational buyers who have large exposures in the region. Also, governments in some areas have been interested. The Mexican government bought a cat bond going back to 2005, and they've been updating it with various other issues. So governments and multinationals are using it.

That's where we stand at the moment with alternative capital.

So is it having any impact on the reinsurance market?

What it is doing is focusing the traditional reinsurance minds on the fact that there are alternatives out there, so it's making them more competitive and more disposed to offer wider terms and longer periods than the usual annual venture. They're thinking now about doing multiyear deals so as to lock in the business. In the past it was more of an annual venture because the rates are very thin and the margins are relatively low, so they haven't wanted to get tied into a contract for three years if there is a large loss that puts them in a deficit position.

We're also seeing the alternative capital work through nontraditional means to access markets, probably more in the government area. They're working with the multilateral organizations to access covers.

I think that's where one of the good opportunities could be, because they understand parametric trigger, they understand indexes. That's something that's not just related to catastrophe business; it could be related to agriculture or various other products that are being developed that have to do with health or life. I would welcome the fact that they didn't just focus on catastrophe, if they were going to enter.

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The other issue is modeling. With the large modeling agencies, Latin America is not their priority. The modeling is still very basic. The requirements are basic. In some countries it's still based on CRESTA (Catastrophe Risk Evaluating and Standardizing Target Accumulations) zone only.

That makes the capital markets a little bit nervous. So that's another limitation.

Why isn't there more of a push for better models?

The issue is that some of the players do their own modeling anyway, like Swiss Re and Munich Re. The other thing is that, because the rates are very competitive compared to the rest of the world, there is no great financial expediency on the part of anybody to do it.

What needs to happen for the modeling to improve?

A number of things--some that are happening and some that are in the hands of God, if you like. What is happening is the authorities are now looking at doing a models approach rather than a fixed, absolute percentage of the main zone aggregates. In Mexico now, each company has to present an approved model run on their portfolio, whereas before you had to buy 9% of the main zone. Now there's differentiation based on the type of portfolio that the companies write.

Colombia is now along the way to doing that, as well as Chile. It's going to take a few years because they, first of all, need to do quite a lot of research on the models. There's a lot of vested interest as well, in which model is used and how it is handled. So it's still going to take a few more years, but that is certainly going to happen and it will definitely increase the focus on modeling.

The other thing is if there are a number of losses or if there is a crisis of capacity, that would also focus people's minds on trying to understand their portfolio better and making sure they don't buy too much or not enough cover.

Some of these bigger markets have had losses. In 2013 the P/C market in Brazil is likely to face an overall loss. In Colombia the rates have been down and they've had combined ratios of more than 100 in the property market. What's driving the results?

What is driving the results is the inadequate rates. The multinationals are coming in looking for business, as has been evidenced by Axa taking a 51% share in Colpatria of Colombia. That is the battleground for the multinational companies now after Chile. Liberty is there, Royal & Sun Alliance, AIG, Chubb, Allianz. All the key players are well established, and they're all hungry to go in emerging markets.

You have another phenomenon of coinsurance. That's happening in Colombia and Brazil, which means the direct brokers place large risks among all the local insurance companies, thus not needing to access the facultative reinsurance market, which is generally more disciplined because they're seeing business from around the world. So you have that as well. But I think it's just hunger for business.

Also, Colombia is probably more attritional losses; every company is feeling the pain. Whereas in Brazil ff you analyze the figures more closely you'll find that some companies have had really disastrous loss ratios and others are not doing too badly. So to say the market is over a 100 loss ratio is not a true reflection of everyone's experience in Brazil.

Not everybody can sustain losses year over year. Is Latin America a long-term play where those with the deepest pockets will survive?

If you're entering into these very aggressive emerging markets, you have to have deep pockets and good expertise. And there's a shortage of talent, so those who are good are very expensive and they don't often stay at the same company for very long, particularly in Brazil. There's a quick turnover of people.

However, most of the organizations that are playing in Latin America do have deep pockets and the locals are part of large financial groups, so they have diversification. Also, don't forget we're talking about property rates, but there are areas that are growing rapidly and producing extremely good loss ratios, such as personal lines, life, medical and auto. So it's not all doom and gloom. The key is diversification and accessing this new emerging middle class.

Mexico is transitioning toward a Solvency II-type regulatory scheme. Is that changing the way business is done in that market?

Most of the players there are part of multinational groups or large financial groups, and they have the ability to raise capital, if necessary, to continue with the business. I don't think it will change original rates that much. There may be some consolidation with some of the smaller players, but I think that's pretty unlikely as well because Mexico has grown accustomed to Solvency II-type regulation for quite a long time.

How about in Brazil? Are regulatory changes affecting the way business is done there?

Susep (Superintendence of Private Insurance) is more still governed by setting rules rather than principles, which I would say is the Mexican approach. It's still finding its way within the new market environment, whether it's reinsurance or even insurance.

Where in Latin America do you anticipate the most growth in the next five years?

I think Chile and Colombia are where things are going to happen in quite an important way. The Pacific Alliance will be a significant force, and all the countries within that [Mexico, Colombia, Peru and Chile] seem to have a much more open regulatory environment and opportunities for significant noninsurance growth, which will probably lead to exponentially greater insurance growth.

Despite the low growth rates in Brazil, in the private sector you'll see a lot of growth as a result of this burgeoning middle class that's beginning to buy insurance for the first time.
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Title Annotation:Reinsurance/Capital Markets
Author:Smith, Kate
Publication:Best's Review
Article Type:Interview
Geographic Code:0LATI
Date:Feb 1, 2014
Words:1537
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