Latin AmericaRapid Growth Creates Risk Management Opportunities and New Challenges

November 2012 • Lockton GlobalSM LLP

L O C K T O N G L O B A L SM L L P

Logan PayneAccount Manager

Lockton Global213.689.2345

lpayne@lockton.com

Manuel CasasVice President, Account Executive

Lockton Global213.689.2366

mcasas@lockton.com

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Long-Term Investments in Midst of Global Crisis

During the height of the global financial crisis, a $2.3 billion financing package was granted for the Panama Canal Expansion project. When completed in 2014, this expansion will double the capacity of the Canal and act as the catalyst to an explosion of growth in tourism, jobs and foreign direct investment. This level of investment and explosive growth is not limited to Panama though; it represents a trend across Latin America in the past decade as developed nations seek out new sources of investment and growth.

Latin America has demonstrated remarkable resolve in the face of the global financial crisis with Gross Domestic Product growth averaging 4 percent during the past five years. This growth can be attributed to the opening of markets, strong commodity exports, and increasing purchasing power of its domestic market.

These factors, along with various trade agreements signed in the past decade have led to a record $145 billion of foreign direct investment (FDI) in the past year alone, while current FDI reserves stand at $750 billion.

America has demonstrated

remarkable resolve in the face

of the global financial crisis

with Gross Domestic Product

growth averaging 4 percent

during the past five years.

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Rising Need for Risk Management

As more companies invest and expand throughout Latin America, there is increasing focus on protecting these investments through effective risk management and insurance approaches. Global insurers are increasing their participation and activities in the region while governments are adapting their regulatory approach.

Marcello Nowaski, of Lockton Brazil, illustrates the insurer response to growth: “Itaú Seguros, one of the largest insurers in Brazil, has recently organized an internal department to coordinate regional insurance programs for the affiliates abroad of their Brazilian clients.” It is crucial to understand what is happening across the region, as well as the ramifications and opportunities in the light of changing regulations.

Although the economies of Latin America have developed steadily during the past decade, there is still room for tremendous growth in the insurance industry. While Latin America represents 8% of the world GDP, written insurance premium represents less than 3% of the global premium spent.

As Latin America continues to grow, many anticipate that the insurance industry will see a large increase in premiums and an overall maturation. In a 2012 report, A.M. Best projects insurance premiums to grow from $134 billion in 2011 to $187 billion in 2016. Market penetration in the two largest insurance markets, Brazil and Mexico, sits around 2%, well below the world average of 6.6%.

In the last year, countries like Colombia have experienced a 90% increase in FDI and recently saw the

US-Colombia Free Trade Agreement come into effect on May 15, 2012.

Brazil is leading the region in their development of oil, timber, soybeans and investments by Chinese companies across the country. The 2014 World Cup and 2016 Olympics will generate important increases in foreign investments and economic growth.

Mexico continues to thrive in the manufacturing space with 82% of all exports coming from this important industry. Many multinational companies look to Mexico as an area for low cost manufacturing and ease of access to the US market to the north.

Isela Vela, of the Lockton Global office in Mexico states, “Many multinational companies are expanding their operations abroad in search of new markets.”

Big Risks Linger in Latin America

While the opportunities are plentiful, there are still risks and challenges associated with the region such as government intervention, corruption, political volatility and difficult legal systems.

Venezuela, once a magnet for FDI and a world leader in the energy industry, epitomizes the challenges of operating in Latin America. The political climate and government involvement in the private business sector has led to “record inflation, a cessation of foreign investment and general contraction of private industry,” according to Kay Boetticher of Makler Corretaje de Seguros, Lockton Global partner in Venezuela. The local insurance industry has been hit with restrictions in capacity and a tightening of the regulatory environment.

November 2012 • Lockton GlobalSM LLP

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Across the region, elements of the situation in Venezuela are seen. Latin America ranks higher than the world average in government intervention in the private sector, leading to reduced stability and higher levels of uncertainty for investors looking at opportunities in Latin America.

Since the insurance market in many Latin American countries is in the early stages of development, regulatory changes affecting consumers have transpired at a much higher rate than other regions in the world. According to Juan Mario Acevedo of Correcol, Lockton Global representative in Colombia, “Insurance brokers who understand market changes, deliver sophisticated solutions and offer international capabilities will be well positioned to compete in the future.”

In the largest country in the region, Brazilian companies have had to deal with new resolutions in the last two years restricting reinsurance cessations to foreign insurers and a renewed focus on penalizing unauthorized foreign insurers and brokers operating in Brazil.

Argentina, long a favorite destination of FDI given its relative wealth and favorable market conditions, recently announced the creation of the Strategic National Insurance Plan which will result in an estimated 20% increase in premiums across the board. Timothy Maitland Heriot of Makler Seguros, Lockton Global representative in Argentina states that in addition to these new

laws, “Companies are already struggling with new legislation restricting the reinsurance market and foreign currency flow.”

Exciting New Era Ahead?

These few illustrations represent but a few of the events in the insurance industry over the past five years and give a brief glimpse at the scope of the regulatory changes affecting the insurance markets, and consequently, companies all over Latin America.

Latin America is an exciting region given its prospects for growth, large consumer base and abundance of natural resources. More companies are turning to Latin America as a source of new revenue and those living in Latin America stand on the brink of an exciting new era. While the outlook for the region as a whole is bright, it is not without peril and challenges. Concerns about perceived corruption, political volatility and changing insurance regulations threaten to derail companies operating in Latin America. Recent regulatory changes in Brazil, Argentina and Colombia illustrate the changing regulatory landscape and affect on multinational companies. As a result, these companies are aligning themselves with strategic partners in the region who have cultural intelligence, as well as global expertise in identifying and solving these challenges. Lockton Global is leading the way with its mix of regional experts operating in local marketplaces, with global experience and capabilities.

There is increasing focus on protecting these investments

through effective risk management and insurance approaches.

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