With Europe in recession and North America growing at an anemic pace, insurers are seeking new markets. Not surprisingly, many are casting an eye towards Brazil.
Executive SummaryEconomists at Coface outline positive economic trends for p/c insurers looking for growth in Brazil, including 3 percent GDP growth and an expanding middle class. They note, however, that there have been some regulatory impediments for insurers and that business corruption, infrastructure shortcomings and dependence on foreign capital are drags on the Brazilian economy.
A host of factors make Brazil attractive in both the short and long term. They include:
- A robust and growing economy relatively unaffected by global shocks
- A burgeoning middle class
- Huge infrastructure projects in advance of the World Cup in 2014 and 2016 Olympic Games
- A liberalized insurance sector, which encourages foreign investment.
With a gross domestic product of $2.42 trillion, Brazil is already the world’s sixth largest economy—bigger than the UK. A diversity of trading partners, as well as a mix of agriculture, raw materials, manufacturing and services bodes well for continued growth and reduces vulnerability to global economic upheavals.
Brazil’s economy grew at a rate of 7.5 percent in 2010, slipped to 1.1 percent in 2012 due to the European recession, but is now expected to climb back to 3.4 percent in 2013.
Brazil shows continued growth over a wide range of sectors. For example:
- In the agriculture sector, Brazil recently replaced the United States as the world’s leading grower of soybeans, and ranks as one of the top five corn producers. Grain production in 2011 achieved record levels. Productivity grew considerably thanks to biotechnology developed by the Brazilian Agricultural Research Corporation.
However, a lack roads and port facilities, as well as a shortage of storage capacity, continues to hinder development. Nevertheless, growing populations, urbanization and the increased reliance on biofuels, will maintain demand for Brazil’s agro products.
- In the automotive sector, Brazil is the world’s fourth largest car market. Anfavea, Brazil’s auto industry trade group, forecasts sales will increase 68 percent from 3.4 million units in 2011 to 5.7 million by 2016. European, Korean and Chinese automakers are investing heavily in local plants.
- In the oil industry, Brazil currently produces roughly 2.2 million barrels of oil per day and intends to double production by 2020. Petrobas, the state-owned oil company plans to spend some $225 billion to develop offshore reserves.
- In the metals and mining segment, minerals account for 50 percent of Brazil’s exports. Continued demand from China and the developing world is likely to maintain prices. Moreover, exports will have to compete with domestic demand, thanks to huge infrastructure projects.
Growing middle class
With a population of 197 million, Brazil is the world’s fifth largest nation and largest in Latin America. Unlike many of its Latin American neighbors, Brazil has made good progress in reducing poverty. From 2002 to 2010, the population grew 10 percent, yet in that same period the middle class grew by 30 percent, according to a 2011 report from Deloitte (“Insurance Industry in Brazil,” Deloitte, 2011, p.36).
Today, about 55 percent of Brazilians are considered middle class. Per capita income is about $12,000 while unemployment is less than 6 percent.
Brazil is also benefiting from what the government calls a “demographic bonus.” The majority of Brazil’s population is in their productive years (15 to 65) with relatively few younger and older non-working dependents, according to the Deloitte report (p.24). Moreover, the current cohort of workers is much better educated. Over the 10-year period ended 2010, post-secondary enrollment increased from 1.8 million to 6.5 million. (Sources: Private sector education booms in Brazil, Financial Times, Sept. 28, 2011; Developing Insurance Market in Brazil, XL Group presentation, Nov. 2011)
Brazil has been named host nation for both the 2014 Soccer World Cup and the 2016 Olympic Games. Preparing for both of these world events will require tremendous infrastructure investments. Estimates are that the World Cup event alone will inject about $60 billion into the Brazilian economy. These world event infrastructure investments are above and beyond the government’s already existing Growth Acceleration Infrastructure Program which has created 9 million new jobs since 2007, according to A.M. Best’s May 2012 Special Report, “Brazil’s Economy Fuels Pace for Growing Insurance Market,” (citing government estimates, p.7).
As in other developing countries, Brazil’s new middle class is looking for ways to preserve their newly acquired assets and guarantee a more stable future for their families.
Meanwhile, the combination of a strong economy, growing middle class and huge infrastructure projects present an extraordinary opportunity for insurers.
Total premium direct written (life and non-life) in 2011 was about $53 billion (BRL 105 billion), according to the A.M. Best report (p. 1), citing the Superintendence of Private Insurance (SUSEP), with $25.3 billion (BRL 47.5 billion) attributable to non-life.
The insurance sector, which represented just 0.8 percent of GDP in 1994, has grown to 3.9 percent in 2012. Comparatively, in the United States, the insurance sector represents 10.2 percent of GDP.
Brazil’s domestic insurance industry was liberalized in 1996, with investment by foreign insurers being among the reforms. Since then, the Brazilian insurance market has grown at an average rate of 10 percent, compared to a global average of about 3 percent. Presently about 115 insurance companies are doing business in Brazil. Domestic insurers still dominate with 62 percent of the insurance market, according to experts speaking at the International Insurance Society Seminar in Rio de Janeiro last June.
Life insurance accounted for about one-third of the market as of June 2012, Fitch ratings reported late last year (“Outlook 2013: Brazilian Insurance Sector,” Dec. 14, 2012, p. 2) and is dominated by a product called VGBL which is roughly analogous to an American 401(k). New regulations will soon allow for the development of many new, simple and low-cost micro insurance products with easy payment plans.
Auto accounted for about half of all non-life insurance in 2011. Just five insurers collect nearly 50 percent of the auto premium, according to A.M. Best’s report. However, the infrastructure projects surrounding the World Cup and the Olympics, as well as Brazil’s growing energy sector, will offer opportunities for construction-related and professional liability risks.
Sources vary on the magnitude of recent premium growth rates and underwriting profit margins, depending on whether life premiums are included in the analysis of SUSEP data. Fitch reports a five-year average of about 16 percent for life and non-life combined (through the first nine months of 2012), and loss ratios ranging from 64 to 67 for auto, and 20 to 32 for property since 2008. In its report, A.M. Best calculates a 9.8 percent annual growth rate from 2007-2011 for just non-life premium (with marine, property and professional liability among the lines showing double-digit growth) and a five-year non-life loss ratio of 55. Some predict the Brazilian non-life market could reach $160 billion by 2030—the same as for Germany. (Source: Developing Insurance Market in Brazil, XL Group presentation, Nov. 2011, citing Aon as the source of the projection.)
With its future tied to exports, trade credit insurance will play an increasingly important role. About 5 percent of the Brazilian GDP is already covered by credit insurance.
While there are 60,000 brokers in Brazil, according to a market participant speaking at the June 2012 IIS Seminar (Patrick de Larragoiti Lucas, Chairman of the Board of SulAmérica, a large Brazilian insurance groups), most large insurance firms are affiliated with banks that have extensive domestic distribution channels through branch networks, Fitch reports. Likewise, many new entrants to the Brazilian market are also partnering with banks.
Until recently, all reinsurance passed through a single, state-run entity. However, in 2007, Brazil’s $2.8 billion reinsurance sector was opened to foreign players. Today there are 10 local reinsurers, 29 admitted reinsurers, and 59 “occasional” reinsurers adding capacity to the Brazilian market, A.M. Best notes, counting up reinsurers registered with Brazil’s regulator, SUSEP. Indeed, competition in the reinsurance sector led to a 24 percent decline in premiums in 2012, Fitch reported.
Regulation and supervision of the insurance industry in Brazil is largely the responsibility of the National Council for Private Insurance (Conselho Nacional de Seguros Privados, or CNSP) and the SUSEP, according to a June 2012 report by the International Monetary Fund, “Brazil: Detailed Assessment of Observance of Insurance Core Principles of the International Association of Insurance Supervisors,” which notes that CNSP, reporting to the Ministry of Finance, is responsible for establishing government policies, guidelines and directives.
SUSEP (Superintendencia de Seguros Privados) acts as the CNSP’s executive, regulatory, supervisory, and enforcement arm and is generally responsible for supervision of the insurance business. It sets capitalization levels, approves new products and reviews contract language. Many insurers, especially the new entrants, complain that SUSEP is overly intrusive, impedes product development and stifles competition.)
While Brazil’s insurance market offers many opportunities, there are also plenty of impediments. In short, Brazil is not an easy place to do business. Other weaknesses include corruption and social inequalities, an economy that is heavily dependent on foreign capital, and a lack of skill labor.
Coface rates the Brazilian business climate as A4. The A4 rating means that while the business climate is acceptable, corporate financial information is often not readily available or sufficiently reliable. An A4 also indicates a country where debt collection is not always efficient and the institutional framework has shortcomings. In addition, intercompany transactions may run into appreciable difficulties in an acceptable but occasionally unstable environment.
For a more detailed view of business conditions in Brazil and other countries, visit: www.Coface-usa.com