Protectionism in Latin America
Bruce Carnegie-Brown, Chairman of Lloyd’s, spoke recently about how protectionism ‘could be the one barrier that stops the strong demand for insurance in Latin America’. Speaking at a Lloyd’s Meet the Market event in Miami, Carnegie-Brown also highlighted how a combination of low insurance penetration and economic growth should create the conditions for strong demand for insurance in Latin America over the coming years.
Having just opened our Latin American hub in Mexico City, we’re obviously inclined to agree that there is a great opportunity in Latin America. But, is protectionism ‘the one barrier’ to growth?
You can’t deny that, like many countries and regions, Latin America is protectionist when it comes to insurance. Most, if not all, countries in Latin America do not allow local individuals or companies to buy insurance from ‘non-admitted carriers’, which is often defined as insurance companies that are established or regulated in other jurisdictions. Even countries which enjoy free trade agreements, or which are part of a wider trade scheme, such as Pacific Alliance, are not allowed to trade in cross-border insurance.
As with everything, there are also exceptions to the rule
Colombia and Chile allow local clients to purchase insurance from non-admitted carriers for certain classes of insurance, for example international marine, aviation and transport. They also allow a certain level of freedom to purchase non-admitted insurance on an ‘own initiative’ basis, as long as it is done outside of their country.
Peru also allows own initiative purchases. However, very few clients exercise this right, as they are concerned there would be a lack of recourse if they have an issue or need to make a complaint. Therefore, it’s usually only international commercial airlines or shipping companies who will purchase insurance outside of the country.
A few of years ago, there were a number of scandals relating to non-regulated cross-border financial services (not in insurance, fortunately) which no doubt have vindicated regulators in Latin America and reinforced their view that financial services, as a whole, needs to be regulated locally to protect their citizens.
However, the restrictions themselves may actually expose their citizens, rather than protect them. Particularly when it comes to complex risks where there is little appetite or capacity locally. This can lead to fronting – where a local insurance company issues the documentation and reinsures circa 100% of the risk.
Fronting often takes place when it comes to specialist and complex risks, where there is a gap in local knowledge and expertise. Local insurers do not have the appetite for the risk, but there is no other solution available.
Which poses the question: is there a call for certain insurances to be traded between experienced and professional buyers and sellers? I’d argue that yes, there is, so long as there are levels of control in place too. In particular, this could provide a solution where the local markets do not have the capacity or appetite for the risk. Not only would this increase competition, but also ensure that the risks are being adequately insured by the right levels of cover. And, importantly the Insured has clarity on the cover they are purchasing.
The other downside to fronting are the additional costs. I recently spoke with the Minister of Economy in one of the major LatAm markets, who recognises that limiting the purchase of large government insurance policies to local carriers, who are simply fronting, only adds to the cost.
However, it’s not something that I can envisage changing any time soon, as it would be largely opposed by the local insurance market.
Where protectionism isn’t a barrier
The Mexican regulator, isn’t protectionist towards reinsurance. In fact, there is a progressive attitude in this regard. Unlike Brazil and Argentina, Mexico doesn’t force local insurers to reinsure a part of their programmes with a local reinsurance industry. In fact, it encourages the Mexican insurance industry to reinsure heavily, in order to diminish the systemic risk to local industry and the economy.
With no limit to the foreign ownership share of local insurance companies, Mexico is also leading the charge on this front. Other countries, usually in growth economies outside of Latin America, will not allow foreign investors to own 100%, or in some cases even majority shares, in a local insurance company. Mexico, is forward thinking in their approach to this, and breaking the protectionism barrier.
I don’t think that protectionism plays a major role in the low penetration of insurance in Latin America. Particularly in Mexico, it’s just not that simple! Because, there are multiple challenges at play – there’s a large informal economy, a low level of penetration by the banking industry, and until recently no mandatory insurance.
Add to this, the lack of insurance culture, particularly amongst SMEs, and a lack of trust in the insurance products themselves. This has certainly not been helped in the aftermath of the recent earthquakes, where the press reported cases of individuals and companies who were inadequately protected by their insurance.
Having only been open for business for a month, we’re already talking with some insurance companies in Mexico, sharing ideas on how to improve the products and bringing our international experience to the local market. With our local presence, we believe that we are certainly in a better position to collaborate with the local industry, helping to tackle underinsurance and economic growth, protectionism or not.