Latin America Q1 2021 Market Dynamics
Latin America Q1 2021 Claims Dynamics
Latin America Q1 2021 Rate Trends
The region is faced with volatility and uncertainty: rising COVID infection rates and erratic government responses, the most significant GDP contraction of any region in the world, prolonged social tensions, and heightened political instability as the region anticipates upcoming elections in Argentina, Chile, Ecuador, El Salvador, Honduras, Mexico, Nicaragua and Peru.
While Latin America - with its need for infrastructure improvements related to transportation, logistics, energy, housing, and power - remains attractive to global investors, political volatility continues to dampen confidence, particularly for long-term investments. Economic, political, and social conditions are expected to slowly improve over the course of 2021 and 2022, but there is widespread uncertainty related to the course and timing, as the region awaits much needed structural reforms and a reprieve from the impacts of COVID-19.
Insurance Market & Key Risks
A challenging market environment continues: With COVID-19 still raging in some countries and restrictions in place, there is significant uncertainty in the market that, combined with ongoing insurer profitability challenges across the region, is creating a difficult market environment with rate increases, capacity contractions, and re-focused appetite. Areas most impacted include: Directors & Officers, Marine, Energy, Power, Cyber, Construction All Risk, Surety and some Property risks.
Some pockets of risks remain less affected: placements for SME risks, Marine Cargo, and Surety continue to enjoy expanded appetite and a more favorable environment as market competition in these areas is high.
Further capacity constraints could lie ahead: The local reinsurance market is rewriting some books of business which could bring capacity constraints in the mid-term.
Referrals and escalations are becoming more common: The underwriting process is becoming more stringent and conservative, and more risks are being referred to central teams. This is leading to delays and creating complexity.
Concern is growing regarding ESG issues: there is heightened interest in ESG matters, and more businesses are engaging Aon to explore related risks and risk transfer options.
Escalations and slow payments have become the norm: Insurer personnel are escalating decisions that previously would not have been escalated, adding more touchpoints to the process and requiring continuous communication to ensure no details are lost. As the region’s economy continues to struggle, the effects of the pandemic are expected to continue throughout 2021, making the need for swift claim settlements for clients more important than ever before.
Technology is a key enabler: Insurers are continuing to migrate to digital environments which will facilitate and speed claims processing; however, the digital transition has been slow.
Aon advocacy is key in today’s environment: Claims advocacy, especially for large and complex claims, has become invaluable in helping insureds avoid, manage and mitigate contentious claims.
Tips for Clients
Develop a robust marketing strategy: Establish a timeline with an early start. Plan to access many markets. Proactively identify alternatives and assess their short- and long-term costs and benefits.
Prepare for insurer discussions: Be prepared to differentiate your risk. Work with Aon to pre-define risk retention and risk transfer targets. Have clear goals. Overcommunicate the details of your risk management processes, particularly related to cyber, supply chains, and communicable disease. Risk assessment and proper quantification are key.
Make informed decisions: Use data and analytics to understand the current market conditions, including pricing and insurer performance.
Leverage Aon during the claims process: Report claims promptly and leverage Aon to provide advice and advocacy during the processing of your claims.
Latin America Featured Industries Q1 2021 Overview
Industry Issues As GDP decreased significantly across the region in 2020 so too did construction activity, which saw a 16% contraction – the highest globally, with Panama, Colombia and Bolivia experiencing the most notable impacts while Uruguay, on the other hand, managed to grow slightly. Despite major industry slow-downs, some important infrastructure projects either began construction in 2020 or are about to begin now, mostly supported by foreign capital investment, primarily Spanish and Chinese investors. Aside from these projects, many others remain on hold or have significantly slowed. With a massive investment in infrastructure needed, global investors consider Latin America a strong opportunity, although prolonged political volatility has affected investor confidence.
Market Conditions The insurance market for construction risks has, since 2019, experienced incremental rate increases, constrained capacity, and coverage restrictions; however, conditions are starting to moderate somewhat. Because the number of small to mid-sized projects has significantly declined during COVID-19, local insurer appetite for these risks is strong and market conditions are more favorable, with generally flat pricing. Larger projects requiring significant facultative reinsurance capacity are experiencing relatively modest rate increases. Underwriting scrutiny is high across the board; however, and the process is taking longer. Risk differentiation is key, and attractive risks are receiving significantly more favorable treatment than challenging risk types such as hydro power plant and projects with prototype equipment. The few Chinese reinsurers who have been approved to operate in Latin America have a strong appetite for reinsuring projects in the region funded by Chinese investors.
A Look Ahead According to the Global Data Construction Outlook, Latin America’s construction output is expected to partially recover in 2021 to 7.7%, and in 2022, to 5.1% – with the most significant growth in Panama, Chile and Bolivia, and less growth in Ecuador, Brazil and Uruguay. Insurance market conditions will remain stable, and insurers will require maintenance programs for delayed projects as a prerequisite for insurance.
Industry Issues Due to the impacts of the global pandemic, 2020 was a challenging year in the private equity space, with notable reductions in global and regional M&A and Private Equity activity, particularly in the first half of the year, with a partial recovery seen in the second half. Activity has rebounded in 2021 so far, with a 157% increase in the disclosed value of transactions; however, there was a 6% reduction in the number of deals compared to the same period in 2020, according to Transactional Track Record data. Market Conditions Aon has provided consultancy services to a number of large transactions in the region, with an emphasis on risk and insurance advisory. In Q1, the Transaction insurance market saw a significant increase in local demand from M&A and PE players. Although the number of local insurers in this space remains limited, there has been a notable increase in appetite from insurers in other regions for insurance related to transactions in Latin America, as compared to 2020. Overall market conditions are becoming more favorable, although still slightly challenging. A Look Ahead LATAM countries are generally behind some other parts of the world in terms of vaccination of the population which is seen as one of the key elements for economic recovery. As the recovery process strengthens throughout 2021, the number of transactions is expected to gain further momentum. The significant amount of committed but unallocated capital on PE firms’ hands (i.e., dry powder), together with reduced global interest rates, is expected to drive the regional market rebound.
Industry Issues 2020 was an unprecedented year. Drops in demand for fuel, gasoline and diesel caused by COVID-19 related restrictions in air travel and public transportation drove oil prices to all-time lows. The energy sector had already experienced some decline over the past decade and the pandemic accelerated these challenging conditions for some contractors and operators already struggling to stay afloat. The industry is now showing signs of recovery as vaccination campaigns gain momentum and restrictions ease in some geographies around the world. In most of LATAM; however, vaccination campaigns have not been as effective, and economic recovery has been slower. Major economies within the region like Mexico and Brazil, two of the biggest fuel consumers in LATAM, will struggle in 2021 to get even close to pre-pandemic transportation and fuel consumption levels, playing a major role in the outlook for the energy sector across the region.
Market Conditions Following an acceleration of Upstream rate increase in the second half of 2020, rate increases now range from modest to significant, depending on line of business and risk profile. Theoretical capacity is around USD 8.2 billion; working capacity is USD 6.2billion. The market continues to see Upstream losses from the 2020 Atlantic Named Windstorm season. Attritional losses have led to poor results in the following sub-classes: onshore/midstream PD; onshore OEE, geothermal and salt water disposal.
The Downstream sector experienced a 131% loss ratio for the period 2016 to 2020, prompting significant price escalation which continues but is starting to show signs of stabilization. Generally, Q1,2021 renewals saw less harsh conditions than in Q1, 2020. New capacity is entering the market, offsetting capacity that is withdrawing.
Pricing in the Offshore Construction market is increasing, reflecting capacity contraction in the most competitively priced trenches and uncertainty around premium volumes in this class. Deductibles and coverage remain unchanged. Capacity stands at around USD 3.5 billion. With a limited local market, local insurers typically act as cedants, without any retention locally. The fronting fee continues to vary across countries in the region, but in general ranges between 4–10% depending on the size and type of risk.
A Look Ahead The new US Administration is expected to play a major role in the future of the energy sector globally and in the region, as evidenced by actions taken almost immediately. First, the Keystone Project, which was a major pipeline running from Alberta to Nebraska was cancelled, citing its major environmental implications. Second, the US re-joined the Paris Acord, committing to rebuilding lost momentum and strengthening the Agreement’s objectives to mitigate global warming and reduce greenhouse gas emissions. The US also intends to implement additional taxes on foreign-produced products which create high emissions during their production. This could have a direct impact on countries such as Brazil and Mexico which import large quantities of these “high emissions” products into the US. The transition to green and renewable energy is not a matter of if but when, with most countries around the world aiming to switch from fossil fuels to cleaner energies by 2050. LATAM and the big Energy players will need to adapt to this new reality.