The reality of the protection gap: why Deutsche Rück is targeting LatAm

COVID-19 has exposed the harsh realities of the protection gap in Latin America and the need for ongoing support from re/insurers. With its own commitment to long-term relationships, Deutsche Rück believes it has a part to play, as Florian Kummer reveals.

The region has been hit hard by the pandemic, but Deutsche Rück has high hopes for Latin America. In December, it appointed Florian Kummer as managing director of Latin American Markets to lead its drive to write business in the region. According to him, however, it might not be such a departure for the German reinsurer as it first appears.

With 25 years’ experience in reinsurance, Kummer has worked in Mexico City and São Paulo, as well as in Madrid and Miami. He discussed the region’s prospects and the company’s plans in the latest session of Intelligent Insurer’s Re/insurance Lounge, the online, on-demand platform for weekly interviews and panel discussions with leading players in the market.

As Kummer admitted, COVID-19 has had a devastating effect on many Latin American countries. In Brazil, the disease was responsible for one in three deaths in the year to May. In 2020, the country—the most populous of the region—saw gross domestic product shrink 4.4 percent, according to S&P Global Ratings. Others, such as Argentina (down 9.9 percent) and Peru (11.1 percent), fared even worse.

Brazil is expected to rebound this year but slower than other emerging markets.

That does not diminish the long-term attractions of the region, however, according to Kummer. In fact, the crisis has served to illustrate the need for insurance capacity.

“If this pandemic has shown anything, it is that the protection gap is not just a theoretical concept—it is a real danger to economic development. The entire issue of what benefits insurance brings to economic growth can be seen very vividly in this crisis,” said Kummer.

A common thread

On one hand, it is a mistake to view Latin America as a single market. As Kummer explained, it’s a diverse region: in the Caribbean countries, the risk landscape is dominated by natural catastrophes, such as earthquakes, hurricanes, and flood. Tourism is a key market. Mexico, particularly, has massive ties to the US.

“More than 80 percent of the country’s exports go to the US,” he said. “That integration means that export liability to the US is a big factor.”

In the south of the region, mining, agriculture and oil dominate—and those are just some of the differences. “It’s a very heterogeneous continent, with different socioeconomic structures, political regimes and so on,” said Kummer.

On the other hand, what unites most of the region—and what is key to Deutsche Rück’s plans—is the growing middle class.

“What is common to the entire continent is that in the last 20 to 25 years, an urban middle class has emerged. About 100 million people have been lifted out of poverty during this era of globalisation, and there has been real progress in this socioeconomic segment,” he said.

“What is common to the entire continent is that in the last 20 to 25 years, an urban middle class has emerged.”
Florian Kummer, Deutsche Rück

Making a commitment

The region is therefore a good fit for the German reinsurer. The majority of companies in Latin America are small and mid-sized enterprises (SMEs), said Kummer. They are the “economic backbone” of the continent.

They are also the core of the reinsurer’s business. Deutsche Rück is “rooted in the German middle class” and its SME sector, he explained. “Its home market is basically the SME middle-market segment and the mass market in standard lines of business.”

This is the same market Kummer will be targeting in Latin America. “It’s basically in these segments where Latin America has been growing, so this is a very good match.”

Latin America is a good fit for Deutsche Rück, and Kummer hopes the reinsurer will be good for Latin America.

Crucially, the business’s strategy and interest in the region are for the long term. That’s different from much of the international interest in the region that we’ve seen to date, he pointed out.

“If you look at Latin America and the socioeconomic context, and the re/insurance markets within it, you see that there has been steep growth over the last 20 to 30 years, but there’s also much more volatility around it. The upward cycles are more pronounced, but so are the downward cycles,” he said.

“At the same time, look at the risk landscape: earthquakes, hurricanes, flood events, political and macro-economic risks. Latin America is a volatile region. It’s growing, but it’s volatile.”

Stability needed

In this environment, said Kummer, stability is key. It may not be exciting, but it is what the region needs to increase penetration of insurance.

“With increased uncertainty, more volatility and complexity, a long-term stable relationship is vital. They don’t want somebody coming in and going out, just opportunistically applying capital and withdrawing it,” he explained.

Deutsche Rück aims to do this with a conservative approach, concentrating on treaty reinsurance in P&C standard lines of business. Over time, it may expand as needs develop, but the focus now is on building relationships.

“Once you have trust and you have a business relationship over a long time, then the cooperation gets closer and closer,” Kummer explained.

“Innovation is a consequence of that, not its beginning.”

To view the full Re/insurance Lounge session, click here

Image courtesy of Shutterstock / Parikh Mahendra N

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