The Brazilian insurance market at first blush seems a mouthwatering opportunity and many foreigners have been attracted to start operations there in the last years. But the government’s cautious and oscillating approach to the opening of the sector and market distortions are making it a tough nut to crack. It is a microcosm of the problems Brazil faces as it grapples with how wide to open the economy and is leading to missed opportunities.
Brazil is in a stage of rapid development of insurance markets. There has been average growth of about 13% per annum in premiums, according to Elias Silva, coordinator of the petrol risks group at insurance broker JLT in Rio de Janeiro. According to regulator SUSEP, the superintendency of private insurers, premiums grew at 14.58% last year alone. Today, the market is worth a hefty $33 billion. Moreover, there is plenty of untapped demand and some insurance markets remain incipient. Insurance penetration is just above 50% of the Organization for Economic Co-operation and Development (OECD) average at just $350 annual spending per capita, according to the International Monetary Fund.
Foreign entrants see Brazil as a market that is too large to be ignored. John Nelson, chairman of Lloyd’s of London, has identified Brazil as a key target for expansion. Lloyd’s recently hired Henrique de Meirelles, the highly-respected former Central Bank governor, as a member of the giant underwriter’s council. Increasingly, foreign insurers are becoming significant players in some markets. Liberty of the US, and Germany’s Allianz and HDI are in the top 10 car insurance providers in the country by premiums.
But, for the most part, foreign insurers are looking at commercial risk rather than at key retail sectors such as life, auto and health, says Joan Lamm-Tenant, global chief economist and risk strategist, Guy Carpenter & Company. Those foreign newcomers competing in personal insurance are coming up against highly entrenched Brazilian institutions and the dominant bancassurance model, where banks are the primary distributors of personal insurance.
Increased competition across the board means that margins have become too low to be attractive, says Lamm-Tenant. “Foreign insurers rushed in and obtained licenses. But that led to pricing that continues to be incredibly competitive and not sustainable,” she says. The problem is that insurers are trying to price in a market that’s still evolving, explains Lamm-Tenant. In developed markets, you have years of data on claims on which to base prices. “In Brazil, the infrastructure is just being created and we just don’t know how the litigation environment, codes and standards will be,” she says.
Moreover, the two most common routes to enter the market, through a joint venture or acquisition, are pretty much saturated. “I tell firms that if you haven’t already gotten in yet you may be too late,” she says. She thinks that not all will survive in Brazil’s competitive market. Some insurers are already deciding that other markets in Latin America such as Colombia and Peru are more attractive. The economies may be much smaller, but both are enjoying strong GDP growth and there are fewer barriers to entry for insurers and less regulatory uncertainty.
The costs for the Brazilian economy if foreign insurers do withdraw will be high. The insurance industry needs foreign expertise and know-how. Foreign insurers have been pushing an agenda of consulting to implement global best practices in many industries, securing significant improvements in work practices. They are also working to make insurance policies accessible to lower income consumers through new distribution channels so fresh thinking should allow innovations such as the internet and micro insurance to take off.
In addition to pricing pressures, there are two key issues that have been deterring foreign investments: legislation and distribution.
The government’s stop-go policies on liberalizing the insurance market have already caused consternation among foreign insurers.
An opening and retrenchment of the reinsurance market is a perfect example and is affecting the commercial markets. In 2008, the monopoly held by the state company, Reinsurance Institute of Brazil (IRB-Brazil), was finally broken, says Elias. Since the opening, 102 reinsurers have been licensed by SUSEP, the large majority being international players.
However, the government quickly found that local players were shut out of the newly-competitive reinsurance market because international markets offered better pricing. That led to an abrupt and damaging volte face. The insurance regulator, the Rio de Janeiro-based Superintendency of Private Insurers, modified rules in 2010 to protect the local market. Local reinsurers must take 40% of any reinsurance order, says Silva. That has put local brokers in the driving seat in terms of pricing.
This hybrid model has proven to benefit incumbents. One is that local companies often do not have sufficient capital to underwrite insurance for large deals. That has ensured the previous monopoly company IRB-Brazil has retained the lion’s share of the reinsurance business.
The decision to impose restrictions on the liberalization of the reinsurance market has also created distrust around future legislative changes in Brazil, an irritant that is certainly not confined to this sector. The key London market struggles to understand not only the insurance and re-insurance legislation, but also the levy of taxes when insurance or reinsurance is purchased, notes Michelle Oliveira, an associate in the construction and real estate division at JLT in London. In medium-sized construction projects, local insurers are increasingly dominating the Brazilian market. Moreover, the limits on liberalization drives up costs for all. When you have limiting regulations through market mechanisms, you create friction cost, says Lamm-Tenant.
Commercial insurance in Brazil will be affected at a time when this is a key focus for the country. The oil and gas and construction sectors are just two industries that stand to be hit. Brazil’s pre-salt area is turning out to be both larger and of more difficult to access than thought and there are plenty of new areas to be tapped. The World Cup to be held next year and the Olympics in 2016 as well as a host of infrastructure upgrades across the country together with large over-runs on some of the country’s most prestigious projects make a functioning insurance market vital.
Another area that has suffered from a lack of insurance is in natural catastrophes. Although Brazil is not prone to earthquakes or hurricanes, mudslides are common throughout the county and made worse because of the common practice of building often illegal settlements on the banks of streams and rivers that are prone to overflow. This should be a significant market for insurance companies but the government has not been able to unlock the market and remains the chief provider of rescue funds.
If the government has been responsible for causing many of the problems on the commercial side, it is brokers that are blocking developments on the retail side. The high costs of distribution have stunted the development of the personal insurance market. The typical figure for brokers’ commission is 20-25% in Brazil, says one broker who preferred not to be named. The bancassurance-style market – with distribution via banks - and heavy commission schedules mean insurance policies are expensive and insurers tend to focus exclusively on the wealthy.
The car market is a good example of how these market distortions lock out poorer consumers and lead to low levels of coverage. Some 3.8 million vehicles were sold in Brazil last year, an increase of 4.65% over 2011, itself a record year, according to Brazil’s Federation of Vehicle Distribution, Fenabrave. But few drivers take out insurance outside Brazil’s compulsory third party scheme and some 70-80% of drivers are uninsured. Ricardo Fuzaro, director of investor relations at Porto Seguro in São Paulo,
estimates that about half of Brazilian cars are more than 10 years old. Part of the reason is that insurance is relatively expensive.
Insurance consultant Carlos Luporini says that car insurance is more expensive than in other key markets. These high prices are coupled with Brazil’s low incomes ensuring low levels of penetration, he notes. Brazilian insurers have failed to innovate much. There is little risk profiling of drivers, for example, to penalize dangerous drivers and reward safer ones and prices are concentrated around a mean. The established brokers are starting to look at greater differentiation in prices, but gingerly.
In addition to the lack of innovation on the insurance side, brokers are stifling the development of new technologies in distribution. Take online sales. McKinsey carried out a survey of 4,500 Brazilians of whom 20% said they would “certainly” buy car insurance policies online. A further 50% said they would "very probably" buy online and just 5% of respondents said they “would not” buy online. Yet according to Fuzaro less than 1% of car insurance sales are transacted online. While younger people are looking at Internet solutions Brazilians are loyal to their broker, he believes. “We don’t see major structural changes for the Brazilian car insurance business,” he says. Although price comparison sites are well established online, they push sales to traditional brokers and so commissions remain intact.
The dual role of unpredictable changes in legislation and the unassailable role of the broker have tended to stifle innovation. Efficiencies are needed to open up new segments of the insurance market, particularly for lower income consumers, who have traditionally been poorly served.
Insurers need not just to provide capital but to transfer knowledge and improve standards, agrees Lamm-Tenant. “Companies that succeed will provide ideas and incentivize companies through their product offering greater deductibles for implementing best practice,” she says. She does see some new products and points to innovations in specialized areas such as medical malpractice insurance where Doctors’ groups are using technology not only to distribute products but mitigate risk and in property and casualty. Yet these are the exception in Brazil.
By contrast, in developed markets, there are lots of mechanisms to incentivize and encourage behavior change, Lamm-Tenant says. Take cargo transportation, a sector growing rapidly because of the expansion in the domestic consumer market. Brazil has significant loss rates because of unusually high levels of accidents and robberies. Accidents account for some R$6-7 billion in losses per year alone.
A lack of well-trained drivers combined with long hours and congested, poorly-maintained roads cause complications. Practices can be precarious, says São Paulo-based Luis Vitiritti, marine consultant and RE customer manager for Latin America at the Brazilian arm of Swiss insurer Zurich. He points to very basic failings including totally inadequate packaging where even the use of the most basic techniques such as boxes and the proper use of adhesive tape is not widespread. Foreign insurers are helping the industry modernize practices. For example they use detailed questionnaires to identify and quantify risks. Moreover, they offer extensive consultations and bring in best practices to help reduce the price of insurance. Such risk management solutions can cut losses by 50% or even 60%.
Lack of innovation in insurance will also stymie the development of key sectors including one that offers one of the greatest potentials for growth and a high return for society: micro insurance.
This is an area that Lamm-Tenant sees as one of the most attractive in the world and she is working on a pilot project to develop the market. Brazilian legislators are proving more flexible in the area and have passed legislation that allows simplified procedures and allows insurers to bypass brokers by distribution through stores and possibly mobile phone technology.
Lamm-Tenant has been working on the project for more than 18 months with six insurers. According to a report by Marsh & McLennan, parent of Guy Carpenter, the Brazilian market has an estimated market potential of 100 million customers and between US$1.5-4 billion in annual premiums over the next decade with a possible return on equity of 20%. The market can only be cracked open if costs can be substantially lowered. That requires multiple insurers entering the market and distribution channels that bypass the traditional broker model, says Lamm-Tenant.
The Brazilian market is in a state of flux. It seems to offers plenty of opportunities for foreign companies, but pricing is too competitive, regulation too unpredictable and brokers too powerful. Companies looking for a fast return on their capital will find Brazil a tough market to crack, reckons Lamm-Tenant. If Brazilian authorities fail to modernize the industry, it risks losing a historical opportunity to innovate and push into new areas that would benefit the emerging middle class.