LatAm poised for growth but ‘double fronting’ creates barriers
Many organisations – particularly multinational companies – in Latin America are showing an increasing interest in captive insurance due to the many benefits they can offer, including direct access to the reinsurance markets.
This is according to a CICA 2018 International Conference Session, ‘Latin America and Emerging Captive Markets’, with speakers Nicholas Frost, president of Quest Management Services; Gabriel Holschneider, founder and president of Rainmaker Group; and Esperanza Borja Mead, principal of Actuarial Factor.
However, a challenge to the use of captives in Latin America is the existence of double fronting requirements in many LatAm countries’ legislation.
Many countries in Latin America have regulations where if a captive is not rated and registered in the country where the policy has to be issued, the captive will need what is known as double fronting – a local carrier and reinsurer, both registered in the country, will need to be used.
“The number one challenge in Latin America to establish a captive is the cost of double fronting 2-6 percent of the premium for each fronting,” said Mead.
Frost suggested that the double fronting regulations are not likely to go away in the foreseeable future. He explained that for the bigger clients this is not a huge problem, but can create problems for smaller clients.
“That’s where you might struggle to get the smaller clients interested. It’s hard to get them to do it,” said Frost.
Holschneider cited three Latin America captives in the session that have been rated by a rating agency - typically Fitch or AM Best – meaning the double front rule no longer applies.
Statistics given by Mead showed captives globally are worth some $90 billion in annual written premiums of which less than 3 percent comes from Latin American companies.
“What does that tell you? There is an opportunity for growth in Latin America,” said Mead.
Furthermore, there are over 7,000 captives in Latin America, with an 11 percent annual increase. Typical coverages include property and casualty, cyber, terrorism and catastrophe risk.
Hofschneider added: “A developing economy has stimulated an increased demand for insurance products and services, thereby exposing many companies to the need for a more sophisticated risk management strategy.”
