Latin America: Opportunities, Changes and Challenges

Latin America is already one of the great economic success stories of the 21st century. The major economies of the region are powering ahead, leaving behind their more established northern hemisphere counterparts still struggling in the wake of the financial meltdown of 2008. This has attracted significant investment to the region, and the Latin American economy should therefore carry on expanding for the foreseeable future, attracting treasurers looking for investment opportunities or businesses that are expanding in the region.

Brazil has been a poster child for economic success for many years now, and its gross domestic product (GDP) is expected to continue to grow by around 3.9% this year. It is, however, also interesting to see how well Colombia and Peru are performing, both with GDP increases in 2013 forecast between 4% and 5%, and Mexico closely following them at 3.8%.

From an insurance sector perspective, companies are showing strong interest in Brazilian risks across all sectors. Likewise in more mature markets, such as Peru and Colombia, there are encouraging signs of development: the Colombian insurance market alone grew by around 10% in 2012.

Eurozone Ripples and Middle East Tensions

So if the Latin American economy continues to expand, and the outlook across all industries for 2013 seems robust, why are there still whispers of darker clouds floating on the economic horizon? The answer to this lies in both external and internal influences on the region as a whole.

As we now all live in a more interconnected global marketplace, the challenges facing the rest of the world can present many additional concerns for Latin American companies. The most prominent of these is the economic downturn in the West.

Although the eurozone is physically far removed from Latin American shores, the economic instability being felt by European companies could have a direct impact on the amount of capacity that is available for insurance programmes in the future. A significant level of capacity for Latin American business is supplied from capital emanating from insurers which are headquartered in Europe, which includes Lloyd’s of London as well as the big European reinsurers.

For example, as much as 65% of the capacity for Latin American energy risks is supplied by European markets. If this were to suddenly disappear, many projects would simply not be able to continue.  Equally, of the US$8.2bn insured losses from the devastating earthquake that hit Chile in 2010, around 95% were covered by the international reinsurance market. In the more catastrophe risk (CAT)-exposed territories in Latin America, a shortfall in available capacity internationally would mean that local governments had fewer means to help their economies recover after large-scale disasters.

Political tensions in Europe and the Middle East can choke the life out of the global economy, which could also have an impact on Latin America. Disruption to oil production and distribution in the Middle East, such as the closure of the straits of Hormuz by Iran to gain political leverage, could affect around 20% of the world’s oil production. This could lead to supply chain failures and a potentially critical oil spike, with some experts suggesting that prices could reach up to US$300 a barrel. This, in turn, would put increased pressure on the global supply chain with demand outstripping supply in other large producing regions such as LatAm.

But perhaps the worst knock-on effects of conflict in the Middle East would be a breakdown of the ‘south-south’ ties of interdependency between nations that are being brought closer together by globalisation, just at the time when LatAm economies need to cultivate markets in the more developed world.

Local Issues

While there are wider global concerns that Latin American businesses need to stay attuned to, there are also more localised issues that may pose difficulties in the short term. Populist governments in Venezuela, Ecuador and Argentina could cause problems for a number of industries over matters such as currency control and resource nationalism. For example, in October 2011 Argentina’s government ordered the export contract proceeds of mining and energy companies to be repatriated locally. Likewise in Peru, mining companies that have not negotiated stabilisation clauses with the government are now being ordered to pay more taxes on their activities.

Legislative changes in these countries are also making commercial transactions more complicated, particularly for local insurers that need to purchase reinsurance. Stringent regulation can hold up payment, making the placement of programmes overly complex. The subsequent effect of wading through layers of red tape is that companies may be reluctant to purchase insurance altogether, which leaves them – and their balance sheet – far more exposed.

Natural catastrophes are a concern for much of the continent as, with the exceptions of Brazil and Argentina, all LatAm countries have some earthquake exposure. What exacerbates this risk is that, according to a recent report by Ernst and Young (E&Y), catastrophic risks are generally underinsured across Latin America. Aside from the obvious disastrous social and economic impact that any form of natural catastrophe can have on a country, as with a potential oil spike, the pressures on local supply chains and distribution channels can be ruinous. Companies in countries with any natural catastrophe exposures should ensure they have the right coverage in place to mitigate losses from any large-scale event.

Virtual risks are also a major threat for Latin American companies. A data breach can be extremely costly for all sectors, as can any form of cyber-attack that results in a period of prolonged network downtime and lost revenues.

Insurance Risks

At the moment, exposure to cyber risk is generally something that large companies do not necessarily think about until they actually have to suffer the consequences of a cyber-attack. As companies expand and their dependency on IT systems increases, naturally so do their cyber risk profiles. This is definitely an area that risk managers need to be better plugged into.

The increasing popularity of cloud computing and social media also brings new risks. The advantages of cloud computing are that it reduces the need and expense of physical data storage; however it also means that users relinquish some control over this data. Coupled with a lack of control over social media activity, companies have become increasingly exposed to defamation, breach of privacy, reputational risk, and even regulatory risk for violations of disclosure laws. 

So while the outlook for Latin America is fairly bullish across the board, companies operating in the region face significant challenges from both external and domestic influences. However these challenges present opportunities for insurers and reinsurers which, by helping local businesses build their resilience to such risks, can facilitate the continued development of this dynamic economy.

 

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