As growth in the developed world has slowed and recent financial volatility in

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1 BEST S SPECIAL REPORT Our Insight, Your Advantage. Country Risk Issue Review June 4, 2012 A.M. Best expects premiums in to reach USD 187 billion by Structural Changes Will Maximize Market Potential in As growth in the developed world has slowed and recent financial volatility in Europe and the United States has made investors wary of these traditionally lowrisk regions, investors worldwide are turning their attention to the emerging markets, evaluating their potential and trying to understand their risks., once a volatile region both economically and politically, has evolved into a large, relatively stable, attractive destination for investment. Global insurers have been increasing their participation in these markets and the regulatory environments are in a state of rapid change. Thus, it is worthwhile to evaluate the whole of the region from a macro perspective. This report evaluates the current state of the insurance market in and key drivers of its growth including trends that will sustain further development, such as economic, population and income growth. Based on these data, this report also presents projected premiums for the n region into While A.M. Best expects continued growth for the n insurance industry, it also acknowledges risks that can affect insurers operating in the region. Based primarily on observations from A.M. Best s Country Risk Model, this report provides insight on the strong inverse relationship between country-risk factors and insurancepremium penetration in a country. While the Country Risk Model results for the n region reinforce some of what is commonly known, relating to political instability and perceptions of corruption, they also offer a glimpse of the growth potential for this region if these obstacles were to be overcome. The economies of represent about 8% of world gross domestic product (GDP). However, the n insurance industry represents less than 3% of total global premiums, with a total value of USD 134 billion in This disparity is due in large part to the relative immaturity of these markets. However, premiums in the region have expanded at an increasing rate over the past decade and A.M. Best projects premiums to reach USD 187 billion by 2016 (see Exhibit 1). Exhibit 1 Direct Premiums Written ( *) $200 Analytical Contacts Andrea Keenan +1 (908) Ext Andrea.Keenan@ambest.com Nancy Snyder +1 (908) Ext Nancy.Snyder@ambest.com Editorial Management Carol Demyanovich Direct Premiums Written (USD Billions) $150 $100 $50 $ * Premiums from 2012 to 2016 are projected. Source: International Monetary Fund, and Axco Global Statistics, and A.M. Best research * 2013* 2014* 2015* 2016* Copyright 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. For additional details, refer to our Terms of Use available at the A.M. Best Company website:

2 Privileged Position of & As shown in Exhibit 2, s market, at USD 62.8 billion, represents half of the region s insurance activity in terms of premium. A distant second, s premiums accounted for about 16% of the region s premiums, totaling just under USD 22 billion. Following in market size are (USD 13.7 billion), (USD 10.9 billion), (USD 9.7 billion), and (USD 7.6 billion). Combined, the remaining nine countries account for 5.6% of the region s total premiums. Exhibit 2 Market Share of Premiums in Individual Countries (2011) Ranked by direct premiums written. 2.0% 0.8% 0.1% 0.2% 0.5% 0.4% 1.2% 0.6% 16.2% 5.7% 7.2% 10.2% Honduras 8.1% 46.8% 0.2% Source: International Monetary Fund, Axco Global Statistics and A.M. Best research. Exhibit 3 Market Share of Premiums By Aggregated Countries (2011) Ranked by direct premiums written. 63.0% Group 3 -,. 3.9% 33.1% Group 2 -,,,,. Group 1-,,,,, Honduras,,. Source: International Monetary Fund, Axco Global Statistics and A.M. Best research. Given this wide divergence in market size, it is useful for analysis to divide this highly heterogeneous region into three groups based on market size by premiums (in U.S. dollars): Group 1, smallest markets,,, El Salvador,, Honduras,, and ; Group 2, mid-size markets,,,, and ; Group 3, largest markets and. The Group 3 countries of and dominate the region (see Exhibit 3), comprising nearly two-thirds of the current Latin American insurance market. Moreover, the region s top 10 largest insurers are all domiciled in these two markets (see Exhibit 4). Stated another way, the combined premiums of the 13 countries in Group 1 and Group 2 are still less than the premiums of the two countries comprising Group 3. As such, insurers are inclined to make and a core part of their n strategy because operations in these two countries will provide access to the majority of the region s potential market. The size of these markets alone relative to their peers suggests it is more cost-efficient to concentrate start-up costs in these two countries. 2

3 Exhibit 4 Top Ten Largest Insurers (2010) Ranked by direct premiums written. (USD Billions) Rank Country Company DPW (USD Billion) Market Share in Country (%) 1 Bradesco Vida E Previdência S.A. USD % 2 Itau Vida E Previdência S/A Brasilprev Seguros E Previdência S/A Santander Seguros S/A Metlife México Itau Seguros S/A Porto Seguro Cia De Seguros Gerais G.N.P Bradesco Auto/Re Companhia De Seguros AXA Seguros Source: Federacion Interamericana de Empresas de Seguros (FIDES). Growing Wealth Drives Premiums As is typical in emerging markets, this region s insurance industry is developing on a base of strong economic growth. Exhibit 5 shows that growth in insurance premiums has generally tracked nominal GDP growth since For insurance penetration to expand, economic growth must have a direct positive impact on wealth, particularly of the middle class. As shown in Exhibit 6, GDP per capita has been trending up since 2000, based primarily on economic growth. GDP per capita, or a population s wealth, is an important prerequisite for strong insurance demand. For the 96 countries to which A.M. Best assigns a Country Risk Tier, there is a discernible correlation between GDP per capita and insurance penetration (see Exhibit 7) with higher levels of income being associated with higher penetration. Thus, based on the upward trend in GDP per capita in and forecasts of positive nominal GDP growth, penetration in the region should also gradually rise. Exhibit 5 Growth in Direct Premiums Written and Nominal GDP ( ) Year-Over -Year Change 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Change in DPW Change in Nominal GDP Source: International Monetary Fund and Axco Global Statistics While the current regional level of penetration in is still well below the world average of 6.6%, penetration varies widely by country and income group, as shown in Exhibit 8. These figures indicate that certain countries have much more potential for growth in penetration when compared with their peers in the same market group. In particular,,,, and Honduras have penetration levels below 2.1%, which is the average for Group

4 Exhibit 6 Gross Domestic Product per Capita ( ) 12,000 GDP per capita (USD) 10,000 8,000 6,000 4,000 Trend Line 2, Source: International Monetary Fund In Group 2, s relatively high penetration of 4.0% is not surprising, given its mature market and state of development (see discussion on country risk metrics on page 6). Alternatively, s relatively high penetration level is partially attributable to the fact that the oil sector a significant purchaser of property insurance accounts for a large share of its economy, representing about 12% of GDP. Finally, and further supporting their advantaged position, penetration rates in and are no greater than those in other n countries, implying that there is still potential for growth in these already relatively large markets. If and were to reach a penetration rate of just 3%, their market sizes would expand by 64% and 20%, to USD 35.6 million and USD 75.5 million, respectively. Likewise, if they were to reach penetration of 4%, their markets would expand by 118% and 60%, to USD 47.4 million and USD million, respectively. Exhibit 7 GDP per Capita and Penetration (2010) 14% 12% Penetration (%) 10% 8% 6% 4% 2% 0% $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 GDP per Capita (USD) Note: Red data points represent the following n countries:,,,,, Honduras,,,,,,,,,. Source: International Monetary Fund and Axco Global Statistics. 4

5 Exhibit 8 Penetration by Country and Market Group (2011) Ranked by direct premiums written as percentage of GDP Honduras Source: International Monetary Fund, Axco Global Statistics and A.M. Best research. Further income-level analysis by market group suggests that product split in these markets is impacted by income. The growth of wealth encourages the success of products that ultimately protect wealth. Thus, the ratio of life to non-life premiums increases as a greater portion of the population moves out of the lowest income categories. Indeed, as shown in Exhibits 9 and 10, Group 3 has the highest GDP per capita, matching its high relative portion of life insurance. Life insurance accounts for 21% of premiums in Group 1 and 32% of premiums in Group 2. The largest markets of Group 3 ( and ) are unique because their premiums are almost evenly split between life and non-life sectors., in Group 2, also fits that profile, with life business accounting for a slight majority of business, at 61% of the country s total premiums. The strong presence of life insurance in,, and is, in part, due to the relatively advanced markets, but also reflects the population s approach to personal savings. For example, in, retirement products drive the growth in life business and banks dominate the distribution channel. Specifically, A.M. Best assumes that populations with an average income of at least USD 6 a day or USD 2,190 a year are the likely purchasers of life insurance, as those with incomes below USD 4 a day or USD 1,460 a year are considered the market segment served either by microinsurance or humanitarian aid. As shown in Exhibit 9, 60% of Group 1 is middle Exhibit 9 Income Per Capita by Income Quintiles (2011) Per Capita Income (USD Thousands) $ st Quintile Group 1 Group 2 Group 3 4th Quintile 2nd Quintile Threshold 5th Quintile 3rd Quintile 0 Group 1 Group 2 Source: International Monetary Fund, World Bank and A.M. Best research. Group 3 5

6 Exhibit 10 Premiums in Life and Non-Life Sectors In (2010) 100% 80% 6 income or higher, whereas 80% of Groups 2 and 3 are middle income or higher. Moreover, the highest income quintile in Group 3 has a substantially higher per capita income than that of Group 2. 60% Country Risk and In February 2012, A.M. Best 40% released to the public its assessments of Country Risk Tiers (CRTs) 20% on 10 additional countries in Latin 0% Group 1 Group 2 Group 3 America, to complement its CRTs on Life Non-Life,, Honduras, Source: Federacion Interamericana de Empresas de Seguros (FIDES) and. Exhibit 11 presents the CRTs on all 15 n countries for which A.M. Best currently assesses country risk. A review of the country risk performance of the countries evaluated reveals that, and distinguish themselves in having relatively low country risk, and have experienced declining levels of country risk over time. A.M. Best defines country risk as country-specific risk factors that could adversely affect an insurer s ability to meet its financial obligations including economic risk, political risk and Exhibit 11 Country Risk Classification* (2011) Gulf of CRT-1: CRT-2: CRT-3: CRT-4: CRT-5: *CRT-1=least risk; CRT-5=most risk. Source: A.M. Best research The Bahamas Cuba Dom. Rep. Jamaica Puerto Rico Belize Honduras Haiti St Kitts & Nevis Antigua & Barbuda Dominica Caribbean Sea St Vincent & the Grenadines St Lucia Grenada Trinidad & Tobago Guyana French Guiana Suriname South Pacific Ocean Paraguay Uruguay North Atlantic Ocean South Atlantic Ocean financial-system risk. More information about how country risk is determined can be found in the Assessing Country Risk methodology, at com/ratings/cr/crisk.aspx. Country risk is linked to market maturity, which can be measured by penetration. Thus, lower country risk would contribute to industry growth. As shown in Exhibit 13, for the countries in which A.M. Best has assigned ratings, higher degrees of country risk are associated with lower penetration rates. The category of political risk is one where, as a whole, tends to underperform. Exhibit 14 shows the results of the A.M. Best Country Risk Model for as compared with the world average in several key components of political risk. A.M. Best has determined that the region has

7 Projecting Premium Growth Based on three years worth of penetration and nominal GDP-growth forecast data from the International Monetary Fund, A.M. Best has projected premiums for the region into 2016 as shown in Exhibits 12a -12c which on average, are expected to grow by about 6% annually from 2011 to Exhibit 12a Direct Premiums Written Growth by Country (Group 1) ( *) Direct Premiums Written (USD Millions) $2,500 $2,000 $1,500 $1,000 $500 $ Honduras * Premiums from 2012 to 2016 are projected. Source: International Monetary Fund, Axco Global Statistics and A.M. Best research * 2013* 2014* 2015* 2016* Exhibit 12b Direct Premiums Written Growth by Country (Group 2) ( *) Direct Premiums Written (USD Billions) $15 $12 $9 $6 $3 $ * Premiums from 2012 to 2016 are projected. Source: International Monetary Fund, Axco Global Statistics and A.M. Best research * 2013* 2014* 2015* 2016* Exhibit 12c Direct Premiums Written Growth by Country (Group 3) ( *) Direct Premiums Written (USD Billions) $100 $80 $60 $40 $20 $ * Premiums from 2012 to 2016 are projected. Source: International Monetary Fund, Axco Global Statistics and A.M. Best research * 2013* 2014* 2015* 2016*

8 higher risk than the world average in all the key components shown, with the most notable divergences being in the areas of government stability, labor flexibility, legal system, business environment and international transactions policy. Political risk has a direct impact on a company s operating environment and influences the general faith the population has in its economy and insurance industry. In more tangible terms, an efficient and transparent government and legal system enable a positive environment. Generally, the overall business environment in presents other challenges to insurers operating in the region as well that impede investment decisions, slow down business development and generally raise the costs of doing business. The World Bank Doing Business Indicators program ranks all countries in terms of ease of doing business, and as shown in Exhibit 15, most n countries rank among the most difficult places in the world to do business (higher rank). One of the more quantifiable costs of doing business in included in the World Bank s indicator is legal counsel. Navigating the legal systems in this region has costly and frustrating aspects that must be endured to take advantage of the growth prospects. Another measure of the political risk environment is the Corruption Perception Index (CPI) (see Exhibit 16), the results of which confirm that corruption is viewed as a common factor in business dealings in. This problem has been largely acknowledged and anti-corruption campaigns have been launched in the region. One such campaign is the OECD- Anti-Corruption Program, which serves as a forum on issues such as eradicating bribery of public officials, increasing dialogue with the business community and preventing corruption in international transactions. The n region also ranks higher than the world average in terms of government intervention, which can disrupt government stability, reduce investor confidence and Exhibit 13 Insurance Penetration and Country Risk Score * (2010) 14% 12% 10% Penetration 8% 6% 4% 2% 0% -2% (Lower Risk) Country Risk score (Higher Risk) *Direct premiums written as percentage of GDP. Red data points represent the following n countries:,,,,, Honduras,,,,,,,,,. Source: International Monetary Fund, Axco Global Statistics and A.M. Best research. 8

9 increase uncertainty for private businesses. Based on A.M. Best s assessment of a variety of indicators of government intervention in the economy, the regional average for was higher than the world average 3.1 versus 2.5 with the higher index score implying more government intervention (see Exhibit 17). Exhibit 14 Political Risk Summary n Region and World Average of Political Risks s Prospects In today s global environment, with Europe and North America showing a certain amount of economic uncertainty particularly in 2011 and 2012 is attractive Regional Stability Social Stability 1 0 for its growth prospects as well as for its risk diversification. It is Government Stability generally wealthier than other emerging regions and that wealth Average is expected to grow. A.M. Best believes that the region, in fact, is one that could experience Source: A.M. Best research strong and sustainable growth rates over the foreseeable future. and account for the majority of the current insurance industry in the region and will likely continue to do so, based primarily on the size of their populations and economies. Despite the current volume of premiums relative to other n countries, these markets are far from saturated and offer great potential for premium growth. Indeed, the Exhibit 15 Ease-of-Doing-Business Rank (2011) Rank is out of 183 countries. Honduras Source: World Bank Legal System 9 International Transactions 5 Policy Labor Flexibility Monetary Policy World Average Fiscal Policy Business Environment Easier To Do Business More Difficult To Do Business Rank (Out of 183 Countries)

10 Exhibit 16 Corruption Perceptions Index (2011) Higher score implies less perception of corruption. More Corruption Perceived 200 Out of 182 rankings World Average Less Corruption Perceived Source: Transparency International 0 Honduras entire n region seems poised for premium growth in the face of increasing economic and population growth. However, the positive outlook is tempered by some of the structural issues that are sources of inefficiencies. At their extreme, these issues are the root causes of hyperinflation and stagnated growth that occurred in the region, as a whole, in the 1980s. Thus, unlocking the full potential of this region, in general terms, is only possible if the region overcomes its problems with corruption, transparency, infrastructure, and labor and legal rigidity. Though various countries have experienced extraordinary levels of year-over-year growth, these rates typically are not consistent, nor are they sustainable over the longer term. The goal of strong, sustained premium growth should ideally go hand in hand with economic and political stability, which will serve to raise the confidence of businesses and the prosperity of citizens in this region. Exhibit 17 Government Intervention Index (2011) More Government Intervention 5 4 World Average 3 2 Less Government Intervention Source: A.M. Best research 1 0 Honduras 10

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12 Published by A.M. Best Company Special Report Chairman & President Arthur Snyder III Executive Vice President Larry G. Mayewski Executive Vice President Paul C. Tinnirello Senior Vice Presidents Manfred Nowacki, Matthew Mosher, Rita L. Tedesco, Karen B. Heine A.M. Best Company World Headquarters Ambest Road, Oldwick, N.J Phone: +1 (908) WASHINGTON OFFICE 830 National Press Building th Street N.W., Washington, D.C Phone: +1 (202) MIAMI OFFICE Suite 949, 1221 Brickell Center Miami, Fla Phone: +1 (305) A.M. Best Europe Rating Services Ltd. A.M. Best Europe Information Services Ltd. 12 Arthur Street, 6th Floor, London, UK EC4R 9AB Phone: +44 (0) A.M. Best asia-pacific LTD. Unit 4004 Central Plaza, 18 Harbour Road, Wanchai, Hong Kong Phone: A.M. BEST MENA, SOUTH & CENTRAL ASIA Office 102, Tower 2 Currency House, DIFC PO Box , Dubai, UAE Phone: Copyright 2012 by A.M. Best Company, Inc., Ambest Road, Oldwick, New Jersey ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. For additional details, see Terms of Use available at the A.M. Best Company Web site Any and all ratings, opinions and information contained herein are provided as is, without any expressed or implied warranty. A rating may be changed, suspended or withdrawn at any time for any reason at the sole discretion of A.M. Best. A Best s Financial Strength Rating is an independent opinion of an insurer s financial strength and ability to meet its ongoing insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company s balance sheet strength, operating performance and business profile. The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. These ratings are not a warranty of an insurer s current or future ability to meet contractual obligations. The rating is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. A Financial Strength Rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. A Best s Debt/Issuer Credit Rating is an opinion regarding the relative future credit risk of an entity, a credit commitment or a debt or debt-like security. It is based on a comprehensive quantitative and qualitative evaluation of a company s balance sheet strength, operating performance and business profile and, where appropriate, the specific nature and details of a rated debt security.credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. These credit ratings do not address any other risk, including but not limited to liquidity risk, market value risk or price volatility of rated securities. The rating is not a recommendation to buy, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information. A.M. Best does not offer consulting or advisory services. A.M. Best is not an Investment Adviser and does not offer investment advice of any kind, nor does the company or its Rating Analysts offer any form of structuring or financial advice. A.M. Best does not sell securities. A.M. Best is compensated for its interactive rating services. These rating fees can vary from US$ 5,000 to US$ 500,000. In addition, A.M. Best may receive compensation from rated entities for nonrating related services or products offered. A.M. Best s special reports and any associated spreadsheet data are available, free of charge, to all BestWeek subscribers. On those reports, nonsubscribers can access an excerpt and purchase the full report and spreadsheet data. Special reports are available through our Web site at or by calling Customer Service at (908) , ext Some special reports are offered to the general public at no cost. For press inquiries or to contact the authors, please contact James Peavy at (908) , ext SR