Latin America is going through tough times. COVID-19 has hit the continent in dramatic ways, causing the worst economic recession in over a century. At the same time, life is becoming more uncertain for people and businesses: the risk landscape is becoming more extreme, complex and unpredictable.
What does this mean for the region’s middle class, and for its predominant business sector, the small and medium-sized enterprises (SMEs)?
Any major setbacks in these segments would certainly have profound implications in insurance markets, above all for the regional and national insurance companies. Very rarely has it been more evident how damaging severe external shocks can be for an unprotected population and economy.
However, each crisis brings opportunity: there are signs that the economies are bouncing back, markets are adapting and the current situation has shown how important professional risk management systems are for economic growth and the well-being of the population—well-capitalised insurance and reinsurance markets based on expertise and a reliable, long-term business attitude.
Tackling the various protection gaps is the main challenge for our industry. If we succeed, opportunities will indeed abound.
COVID-19 hit at a time of weakness
About 8.4 percent of the world’s population is living in Latin America. The region, however, accounts for 32 percent of all COVID-19 related deaths worldwide (at June 28, 2021, according to the United Nations Economic Commission for Latin America and the Caribbean [UN ECLAC], July 2021). Although vaccination rates vary significantly between countries, most governments struggle to secure enough vaccine doses and on national levels access to vaccination is very unequal. As of mid-2021, only about 14 percent of Latin Americans were fully vaccinated (UN ECLAC, July 2021).
It is no surprise that such a scenario represents a massive shock to the economy. Stay-at-home orders and social distancing measures hit hard an economy in which 99 percent of all businesses (and two thirds of the employment) are SMEs. The domestic marketplace came literally to a standstill in many of the countries. At the same time, foreign trade plummeted by about 10 percent and the all-important tourism sector basically shut down altogether for more than a year.
As a result, in 2020 the region’s gross domestic product (GDP) collapsed by 6.8 percent (UN ECLAC, July 2021), causing the worst recession on record and threatening to wipe out the social and economic gains of the last 30 years.
“The digitisation of the economy and everyday life has changed the nature of risk.”
Florian Kummer, Deutsche Rück
Booming middle classes
These previous gains had been massive. Since abandoning the prevailing protectionist development models at the beginning of the 1990s, Latin American countries have become distinct winners of globalisation.
By liberalising their economies, privatising the dominant state industries and integrating aggressively into the world economy through varying types of trade agreements (for example NAFTA, CAFTA, and bilateral agreements with the US and later the EU and China), the region played out its competitive advantages, achieving the modernisation of its productive structure and skyrocketing growth rates.
All this culminated in a decade-long bonanza between 2002 and 2013 and the Brazil, Russia, India, China, and South Africa (BRICS) and emerging markets hype of that time. The effects on the population were equally impressive: about 100 million people were lifted out of poverty and entered the middle classes as per capita income rose, as defined by the World Bank 2021: people with an income of $13 to $70 per day in 2011 purchasing power parity.
In 2018, for the very first time in history the middle classes became the dominating socioeconomic group in Latin America (Figure 1) .
Figure 1: Per capita income in Latin America and the Caribbean
Source: World Bank 2018
Period of stagnation
After the party came the hangover: caused by a lack of ongoing reforms, the Latin American economies entered an era of stagnation in 2014. In fact, the growth deceleration was so strong that the six years from 2014 to 2019 represent the lowest growth period measured since 1901, similar only to the economic crises during World War 1 and the Great Depression following the Wall Street crash in 1929 (Figure 2).
This was the context when the COVID-19 pandemic hit the region disproportionately hard and further impaired an already weakened society. This explains the dramatic test for resilience the “new middle class” and the SME sector are experiencing now.
Figure 2: Latin America and the Caribbean* annual GDP growth and six-year averages, 1901–2019 (%)
* Includes the 20 countries of Latin America, Cuba, Haiti, and the Dominican Republic Source: UN ECLAC No. 11 Special Report COVID-19, p. 3
“We are now in a better position to understand risk, volatility and uncertainty than ever before.”
A changing risk landscape
The continent’s growth pattern as outlined above has taken place in decades of unprecedented change in the global economy and society. Accelerating climate change, the digital revolution, the historical experiment of an ultra-loose monetary policy, and rising geopolitical tensions are constituting the megatrends of our times. They have changed and increased risks for people and businesses in Latin America as well.
It’s not only the increasing frequency and severity of hurricanes hitting Mexico, Central America and the Caribbean, stronger and more frequent flood events all over the region, and the rising political tensions as a result of the mentioned socioeconomic crisis that are changing exposures significantly.
The digitisation of the economy and everyday life has changed the nature of risk and the statistical behaviour of entire insurance lines. Increased financial market volatility is adding to the overall picture. Risk is changing and risk is on the rise.
At the same time, we have never had more—and more accurate—information about risk exposures than today. Big data and data analytics are opening up completely new ways to identify, structure and quantify risks. Even if all data points taken together will never completely represent reality, we are now in a better position to understand risk, volatility and uncertainty than ever before. No longer do we only look back and use historical data. Today we apply scenario-based, forward-looking methods as well.
It’s not by coincidence that today we see a booming insurtech sector in Latin America and an increasing number of local startup companies focusing on digital distribution and new operational and analytical models. For true underwriting companies and for those being able to combine local expertise with innovative methods, increased risk may very well mean more business.
If managed professionally, higher risk quite often means higher margins, too.
Silver linings
There are clear signs that the odds are turning. As the US, EU and Chinese economies are recovering, Latin America with its high dependence on international markets will bounce back as well. More than 80 percent of Mexico’s exports are sold to the US, the tourism sector in the Caribbean represents around 15 percent of the islands’ GDP in average and with rising commodity prices South America’s mineral and agricultural export industries will resume their previous growth path again.
During the pandemic, about 4.7 million people have fallen back from middle class status into poverty (World Bank, July 2021). Another 20 million people could be spared this fate by recent governmental cash transfers that have been generous by the region’s standards. Thus, the economic recovery will arrive—most likely, just in time. It goes without saying that governments, legislators and regulators will have to support future growth by carrying out long-needed reforms and, in the short run, by increasing up vaccination rates to overcome the pandemic at speed.
Nevertheless, it is the unprecedented digital transformation that causes most optimism for the future: as in other regions, the pandemic was a catalyst for online platforms, digitised value chains, and increased digital skills and buying behaviours in general.
This will probably produce two very positive effects: increasing productivity in the business world and a power shift from producers to consumers. In many sectors, including insurance, consumers are just a few clicks away from better or cheaper offers. A higher competitive intensity will result in new, better and cheaper products.
“For us it makes perfect strategic sense to diversify internationally and to do so along the lines of the expertise we have built over decades.”
Building resilience
What does all this mean for the region’s insurance and reinsurance markets? The Latin American insurance sector has grown at a higher pace than GDP in the last decades. Premium growth outstripped GDP growth and led to increasing insurance penetration, culminating in a 3.1 percent penetration rate in 2016 (written premiums/GDP, LatinoInsurance 2009–2018).
On the other hand, this compares to a 9 percent insurance penetration for all OECD countries combined in 2018 (OECD.Stat). These numbers show both the enormous potential of the region’s insurance industry and the blatant un- and underinsurance in all lines of business and segments.
The COVID-19 pandemic has shown the disastrous effects of extreme events materialising in an unprotected environment. Examples are manifold: in Chile, the country with the highest insurance penetration (4.7 percent in 2018), only 30 percent of all properties damaged during the 2010 earthquake had been insured. For most other markets in Latin America, we estimate that insured losses as a percentage of total economic losses following natural disasters are around or below 15 percent.
There is a similar picture in motor insurance. In Mexico, two out of three cars are not insured at all. This means that there is no effective private financial system to support road traffic accident victims, above all those with serious injuries and needs for long-term care. The list could easily be expanded.
Closing these protection gaps requires a combined effort of legislators, regulators, insurance companies and their reinsurance partners, as well as brokers and technology providers. We can only hope that the COVID-19 crisis has been the ultimate wake-up call in this respect.
Supporting local and regional insurers
About 50 percent of the region’s $155 billion of insurance premiums in 2018 (LatinoInsurance) have been issued by local and regional insurance companies. With their distribution channels deeply rooted in local communities, their expertise and detailed understanding of client needs, their strong brands and their proven ability to adapt, this segment is particularly important for insuring the middle classes, the SME sector and the middle-market businesses in almost all countries in Latin America.
Supporting these insurers in weathering the current storm and enabling them to take advantage of the opportunities in the future will be key to the continent’s resilience to future disasters.
At Deutsche Rück, we very consciously decided to enter the Latin American reinsurance market in 2021 since we are convinced that based on true long-term partnerships, the region’s specific risk/reward profile offers significant opportunities and that our core expertise matches perfectly with the nature and potential of its insurance demand. Since the mid-20th century, we have been the leading reinsurer in the middle class and middle-market/SME segment in our German home market.
This position reflects our owners’—the German public insurance companies’—strong distribution channels as part of the German Saving Banks Group (Sparkassen-Finanzgruppe).
For us it makes perfect strategic sense to diversify internationally and to do so along the lines of the expertise we have built over decades in our core markets. Looking beyond today and spotting business opportunities in tomorrow’s markets together with our local partners and clients is part of our business culture and history.
Seizing opportunities in Latin America’s reinsurance markets and helping to increase the urgently needed resilience of Latin America’s economy and society are essentially two sides of the same coin. We are proud to be part of this process.
Florian Kummer is head of Latin American markets at Deutsche Rück in Düsseldorf, Germany. He can be contacted at: florian.kummer@deutscherueck.de
Images, from top: Shutterstock / ShustrikS, Lidiya Ribakova, elcatso, Yai
