Rapid GDP growth and fast-increasing internet penetration across the region leave the door wide open for direct sales to take the Brazilian insurance market by storm. Sherdin Omar, James Littlewood and Nuno Vieira take a closer look at the market that is offering opportunities for beleaguered multinationals and start-ups alike
Cocktail of growth factors signals change for Brazil
Rapid GDP growth and fast-increasing internet penetration across the region leave the door wide open for direct sales to take the Brazilian insurance market by storm. Sherdin Omar, James Littlewood and Nuno Vieira take a closer look at the market that is offering opportunities for beleaguered multinationals and start-ups alike
As Brazil's economy grows, its insurance market is also changing: an increasingly competitive marketplace is emerging within personal lines and companies are embracing the global trend of implementing a more rigorous enterprise risk management (ERM) framework.
Direct insurance in Brazil
At present, customers across Brazil have had little exposure to direct insurance and have yet to experience the deluge of advertising that has driven the US and European markets. There is only a limited culture of self service and a general expectation that a sales agent will be available to help customers.
However, Brazil is experiencing some of the fastest rates of GDP growth, and internet penetration across the region is growing rapidly. As the reach of the internet expands, so does the potential of internet-direct sales for personal lines insurance.
Naturally, the incumbent insurers and brokers are reluctant to cede their market share and have taken steps to strengthen their relationships against this potential change in distribution channels. This has left the door wide open for exploration of the direct channel to be led mainly by smaller players (which are typically part of larger multinationals) and other new entrants, all of which are keen to conquer a sizeable share of the market as first movers and capitalise on changing consumer trends. In a similar fashion, Direct Line stormed the UK market back in the 1980s, when its domestic market was dominated by brokers, as Brazil is now.
Could the landscape change?
Direct insurance is still at an embryonic stage, accounting for as little as 1 per cent of sales. However, a dramatic shift could be on the way, with four new price comparison websites being launched in the past year and the entrance of many new insurers that are backed by multinationals. Used to selling insurance direct to their customers, they will undoubtedly look to leverage their existing knowledge and systems to establish a significant market share.
These same multinationals face stagnant growth and intense competition in their domestic markets, leading to significant pressure to maintain profitability, and they see Brazil as a chance to achieve global growth and profitability. During the next 20 years, Brazil's economically active population is expected to exceed the dependent population (children and seniors), which provides huge potential for customer expansion. This cocktail of growth in internet usage, aggregators and economically active population could lead to a significant shake-up.
Benefits of enterprise risk management
There is a growing interest in ERM among larger Brazilian firms, which have embraced measures ranging from explicit and clear risk appetite statements emanating from the top of the organisation to the reinforcement of internal audit, actuarial and risk management functions.
One of the main reasons for this trend is the competitive landscape. With new entrants and price comparison websites burgeoning, the incumbent insurers are operating defensive strategies to halt the commoditisation of their products. Their approach is to deploy strategies orientated towards product diversification, innovation and sustainable yields, where the assumption of taking riskier positions in search of higher profits is secured by a solid risk management framework.
Another reason for embracing ERM is the historical drop of interest rates in Brazil, which is forcing insurers to sustain lower combined ratios and to move to alternative investments, such as equity and real estate, to seek higher financial returns.
This means new approaches to underwriting, claims management processes, asset and liability management, and risk-return optimisation of the portfolio.
For example, the automobile insurance market is characterised by strong players, fierce competition and a trend towards high combined ratios, exacerbated by the high frequency of fraud and litigation claims. Hence insurers need a constant improvement in data governance, combined with well-informed, risk-evaluating intelligence and technology throughout the processes of underwriting, risk classification, pricing, reserving and investment management.
Regulation
The other reason for an increased interest in ERM is regulation. In 2013, Brazil's supervisory authority, SUSEP, updated the 2008 risk-based capital framework. It issued several items of regulation to quantify capital standards for underwriting, credit and operational risk and allowing the introduction of internal models as an alternative framework to the current standard formula. SUSEP is currently reviewing the market risk framework and a new framework is expected to be released by the end of 2013.
Since 2004, SUSEP has required each insurance company to produce detailed monthly policy and claims data and an annual actuarial valuation report demonstrating the adequacy of all technical provisions as of the financial closing date. This includes making statements about data quality, methodological approaches and historical consistency of best estimates. The effect of this requirement was to reinforce the actuarial function within the governance structure in insurance companies.
Overall, the agenda for SUSEP in the next few years appears to be consistent with risk-based supervision and with the core insurance principles from the International Association of Insurance Supervisors and the International Actuarial Association.
Opportunities for actuaries in Brazil
Brazil is a market that is becoming increasingly competitive and has a population that is still growing. Changes in the market, led by competition and regulation, offer a wealth of challenges and hence exciting opportunities for actuaries, spanning product design (general insurance and life), technical pricing, risk and investments.
In summary, sound and effective risk management may be the best strategy for Brazilian insurers to maintain their competitive edge.
Sherdin Omar is a senior manager in Ernst & Young's financial services team and is based in the UK.
James Littlewood is a director in Ernst & Young's Global Insurance Centre and has a strategic business development role covering all of Latin America.
Nuno Vieira is a senior manager in Ernst & Young's financial services team and is based in Brazil.
