Stumbling off the Blocks
Lenckus, Dave, Global Finance
Investors are piling into rapidly growing markets such as Brazil and Argentina. Financing risk in such markets can be fraught with difficulty, but insurance options are available.
Economic data shows unexpected strength in foreign direct investment in Brazil and Argentina this year. But multinationals making those investments face highly complex markets when it comes to financing risk there through either global master insurance programs or captive insurers.
Most companies that are smaller than the Fortune 500 first discover those risk-financing restrictions at the eleventh hour. Insurance experts say they often have to educate clients that their decisions must extend beyond their risk managers and include their finance and tax departments.
For insurers/'that's where the real opportunity is to have a dialogue about the client's balance sheet, income statement and cash flow protection" and how all three could be affected by financing risk in Brazil and Argentina, says Alfred Bergbauer, the head of multinational casualty. North America, for XL Insurance America.
Yet in both markets, "foreign companies are still looking to get in there," says insurance brokerage executive Clyde Ebanks, chief operating officer of Aon Risk Solutions in Chicago. With Brazil set to host the Soccer World Cup in 2014 and die Summer Olympics in 2016, expectations are that the economy will continue to outperform die United States' and Europe's for years to come.
Brazil's central bank this summer boosted its 2012 estimate of foreign direct investment in the country by 20% to $60 billion. Meanwhile, despite high inflation, trade restrictions and die nationalization of a Spanish energy company, Argentina's 33% increase in FDI helped fuel Latin America's 8% growth during the first half of 2012, reports the Economic Commission for Latin America and the Caribbean and Argentina's central bank.
But after investing in Brazil and Argentina, many companies stumble over the countries' insurance restrictions. Brazil's 2010 insurance regulation reforms require local insurers to reinsure at least 40% of their risk into the Brazilian market. Permissible reinsurers are local Brazilian companies, admitted branches of foreign companies and so-called eventual reinsurers, which do not have to open offices in the country but face product restrictions.
Each class of reinsurer faces différent requirements on how much risk it can cede to retrocessionaires (reinsurer's of a reinsurer) outside the country. Insurance experts agree the key restriction is on admitted reinsurers because of the resulting impact on dieir policyholders' global master insurance programs. Those programs cover holes in policyholders' various local insurance policies around the world by providing differencein-conditíons coverage and DIC limits above those local coverages. Local insurers typically cede much of an insured's risk to a reinsurer, which then cedes it to an affiliate that writes the master coverage for the insured's parent.
But in Brazil, an admitted reinsurer is allowed to cede only 20% of its risk to an affiliated company. Meanwhile, multinationals that prefer self-insuring their exposures still can cover a large chunk - 60% - of their Brazilian risk in their captive insurers, according to insurance experts. However, that means the Brazilian market effectively would retain the insured's primary and low-excess layers of risk - the most predictable risk in terms of frequency and severity. …