Latin America is slowly but surely coming out of its shell, with the region’s risk management needs beginning to look like those of its contemporaries. But the region’s ‘emerging’ status remains steadfast. Non-life premiums in Latin America fell 0.2 percent in 2015, after increasing by 4.8 percent the year before, according to Swiss Re research. This was because Brazil saw a drop in growth from 8.2 percent in 2014 to a 5 percent contraction in 2015. Premiums also declined in Venezuela, falling by more than 25 percent in 2015 due to an economic crisis.
Swiss Re suggested that the declines in Brazil and Venezuela more than offset improvements in Mexico, Argentina and Chile, as well as steady growth in other Latin American economies such as Colombia and Peru.
Although Brazil appears to be holding the region’s insurance industries back, where there is growth could be a result of developing natural resources, including mining and oil, or creating manufacturing capacity, all of which require sophisticated insurance industries with sufficient capacity.
“I also think that they are a little more sophisticated and they are leading the way because they are in those positions,” says Dennis Silvia, president of Cedar Consulting.
Silvia goes on to suggest that captives are playing a part in these pockets of premium growth in Brazil, because they allow for connections with global reinsurance markets that in turn allow for insurance capacity that might not normally be available in the local economy. He explains: “Insurance is a prime economic engine that creates more growth potential for the economy.”
For some parts of Latin America, regulation is having an impact on the level of growth. Insurance companies need to identify markets with regulations that are stable, business-enabling, equitable in their treatment of foreign capital and fostering of market freedom. But in Latin America, this is not always the case.
According to an EY Latin America report, the captive market has not developed to any “significant degree” in the region, partly because of “complex and restrictive” regulations and limited knowledge of captives.
“Many countries in Latin America also impose a withholding tax on cross-border premiums. As regulatory reforms begin to ease, these captive restrictions and new cross-country trade agreements permit their functioning. Several large Latin American corporations that have expressed interest in captive ownership may take this route.”
Regulation remains one of the biggest hurdles for captive insurance in Latin America. Magdalena Ramada, a senior economist at Willis Towers Watson, suggests that in several Latin American countries, financial markets regulation, specifically in the insurance industry, reflects Solvency II-type principles, as well as increased control in growing markets such as micro insurance.
Ramada explains that changes in regulation are often not thought through. Insurance companies are then left to comply with new regulations that sometimes the regulators themselves are yet to fully understand.
She says: “Success depends upon the ability of insurance companies to monitor, identify and execute quickly to capitalise on promising markets, and to build relationships in countries in which they can become regulation and market shapers instead of merely spectators.”
Although global insurance companies have a presence in Latin America, limited options remain to front captives. This is dependent on the internal policies of each individual company and, in some cases, the local or global relationship with the specific client.
Regulation is not consistent throughout Latin America and in some parts of the region, regulation is preventing further captive growth. Silvia suggests that Brazil is a good example of this.
Silvia explains: “Brazil is meant to be leading the world from the Latin America area, from an economic perspective, but they are very restrictive in allowing insurance business to cede out of the country.”
He also reveals that Argentina is having the same problem. Although both countries are high-potential economies, their regulators aren’t allowing a lot of outside insurance influence by way of captives and global reinsurers.
Silvia says: “They really are preventing their countries from growing because they have to depend on whatever insurance capacity they have internally and they are not really leveraging the global insurance world against that.”
Offshore of itself
Since the rise of captive insurance in Latin America, Bermuda has been a popular domicile for its captives. At the Bermuda Captive Conference, a panel revealed that last year, Bermuda licensed five captives from Latin America.
Jereme Ramsay, business development manager for the Bermuda Business Development Agency (BDA), states that between 2012 and 2015, 14 Latin America captives were registered in Bermuda.
Ramsay suggests that Bermuda has been popular with Latin America because it has been involved in active business development in the region, “particularly with risk forums for financial executives we’ve organised in several countries to showcase Bermuda’s offerings and raise awareness about how captives operate”.
A spokesperson for the Bermuda Monetary Authority (BMA) revealed that captives from the Caribbean and Latin America had collectively generated $495 million in gross premiums, with a total capital and surplus of $560 million, as of 31 December 2014.
In 2015, 25 percent of captives licensed came from Latin America. According to the spokesperson, this shows that Bermuda is becoming “a domicile of choice for that region”.
Eduardo Fox, Appleby’s manager for its corporate and trusts groups in Bermuda and Latin America, explains that the majority of Latin American-owned captives are domiciled in offshore jurisdictions such as Bermuda, the Cayman Islands, Barbados and Puerto Rico.
There has also been some interest in European domiciles such as Luxembourg and Switzerland.
Fox suggests that several Latin American captives have chosen to re-domicile to Bermuda from less viable offshore jurisdictions. This is down to jurisdictions being downgraded by international rating agencies, significant tax system changes, financial and political corruption, or poor due diligence and compliance processes caused by less-than-optimum internal regulatory enforcement.
Bermuda is seen as the ideal offshore alternative by the Latin American market. Nevertheless, according to Fox, the bulk of Latin American captives are still new formations occurring in Bermuda.
Bermuda also has tax information exchange agreements (TIEA) in place with Argentina, Colombia and Mexico, designed to improve tax transparency. Brazil’s TIEA with the domicile is currently awaiting ratification, and negotiations are taking place with Chile and Spain. Once Brazil, Chile and Spain have approval from their respective governments, Bermuda will be able to boast a significant tax framework with Latin American countries, giving corporates yet aother reason to choose the domicile for their captives.
Ramsay reveals that, along with Argentina, Colombia and Mexico, Bermuda is also seeing interest and growth from Peru and Chile. He suggests that Latin American audiences are becoming more sophisticated and knowledgeable about captive solutions, and are looking to leverage these structures more and more to better manage their risk management programmes.
Even the most reputable governments in Latin America are now much more transparent and are currently seeking international recognition, says Fox.
Regulation aside, according to Silvia, there is a perception of political instability and economic worry in several Latin American countries, which prevents foreign capital from being invested for development.
Although there is still a long way to go for Latin America, it is no secret that the captive market has gained momentum, with 100 Latin American captive insurance and reinsurance companies around the world.
With this current growth rate and increased sophistication, paired with significant economies in Latin America—Colombia, Mexico, Peru and Chile—and those that could recover from bad luck—Brazil and Argentina—Fox suggests that the market could double in size in the next five to seven years.
Fox predicts that in the next 10 to 15 years, Latin America could see up to 300 captives in total. However, he notes that these may only arise from certain parts of Latin America, not all.
Silvia believes that Latin America has the potential to take on a more prominent position in the world economy, and as that happens, the region will create more opportunities.
But he warns: “Without a growing insurance capacity pool, including captive insurance and other reinsurance capacity coming into those countries, the growth will end up being a fraction of what it could be.”