Life, health and retirement insurance have together seen the most significant amount of growth in Brazil's insurance industry over the past 5 years. The interest of foreign insurers has been driven not only by the stabilization of the economy since 1994, but also by the market’s size and growth potential. Almost 50% of the South American continent’s insurance activity is accounted for by Brazil while the average rate of growth of the local insurance industry since 1993 has been almost 100% in dollar terms.

High inflation led to an underdeveloped insurance market
Brazil has long had a low rate of insurance penetration relative to developed countries. Insurance represented just 1% of GDP in 1993. By the end of 2001 it represented 2.3% of GDP - still well below average levels of 7% in developed countries.

Falling inflation has improved income distribution rapidly, and this will provide a large new customer base for insurers in the next 5-10 years. Traditionally, insurance has been aimed at the wealthiest 5% of the population; however, in the coming years, insurers will focus on capturing the next 30% or so of the market, equivalent to some 8 million households.

Pattern of development
We see Brazil's insurance industry following 3 stages.

The first stage typically saw insurance playing a role supporting infrastructure development and trade. This was the position that insurance in Brazil occupied for most of this century until the early 1990’s.

The second stage of development involves an increased emphasis on the protection of personal wealth, with the growth of life, health and retirement insurance. This is the stage that Brazil has now reached. We believe that the life and retirement markets in Brazil will continue to grow during the next 10-15 years.

The third stage will see a wider distribution of income and wealth among the population, encouraging a greater level of ownership of cars and homes, and an increase in the purchase of property and casualty insurance. Auto insurance in Brazil is likely to grow significantly in the next 10 years. The number of cars on the road is forecast to double in the next 15 years to 50 million, while in the shorter term the take-up of insurance (mainly casualty insurance) is likely to increase well beyond the current level of 20% of vehicles.

An influx of foreign insurers
Despite the economic uncertainty that seems to be part of Brazil’s fabric, insurers are still very attracted to the country. Some 30 foreign firms already have a significant presence in Brazil.  

These include Aetna, AIG, Cigna, Hartford, HSBC, and Prudential. Most of their investments have been made in the last 4 years. In 1993, only 4% of total insurance activity came from firms with foreign ownership - the equivalent figure by mid-2000 is 28%. The preferred method of entry has been through joint ventures and acquisitions, mainly to overcome foreigners’ weaknesses in the areas of brand recognition and distribution. New and prospective entrants have included Axa, ACE, Reliance, Principal Financial and Canada Life.

The influx of foreign insurers is helping to change the rather complacent culture that has long existed among Brazilian insurers. The message is beginning to get through to local insurers that success will come not only from gaining scale, but also from establishing productive distribution arrangements. In the next few years, many insurers will make a conscious effort to get closer to and more responsive towards customers, by communicating well, by harnessing technology such as data mining and relationship management tools, and by trying to maximize the yield of distribution channels for multiple products.

Profitability of the industry
Insurers made pre-tax profits of R$1.5bn during the first half of 2000 (equivalent to $0.8bn at current exchange rates). Operational profits from insurance activities were negligible, while investment profits were very healthy. This has been a familiar pattern in Brazil. Before 1994, insurers relied on inflation to provide profits; today the focus is on high investment yields. However, with increasing competition, the next few years will see a greater emphasis on improving operating results with much greater pressure on improving risk selection as well as on cutting administrative and distribution costs.

Distribution and administrative costs are higher in Brazil (equivalent to 34% of total premiums in 1998) than in the USA (25%) and the UK (21%). This level has fallen from 39% in 1995 due to competition. Brokers dominate distribution in Brazil (the figure of the ‘agent’ does not formally exist) although they now face pressures from sales through banks and from direct marketing.

Economies of scale from consolidation, new technology and outsourcing will help firms to reduce administration costs. Training and competition will improve productivity, and employment in sector is likely to fall. The use of outsourcing will increase, making costs more flexible and predictable, but only once more viable outsourcing suppliers make this feasible.

Life and retirement
Life and retirement insurance products are becoming more sophisticated as the Brazilian government tries to encourage private retirement provision. Group term insurance has traditionally dominated the Brazilian life market, but 1998 saw the first permanent life insurance products (endowments and whole life). During 1999 and 2000, poor marketing and recently imposed insurance taxes hit permanent life insurance sales.

Nevertheless, life and retirement insurance have been the fastest growing area for insurers. Retirement vehicles are beginning to use mutual funds as their underlying assets and this will lead insurance companies to compete with mutual funds offered by banks. This is likely to be accentuated with the introduction of insurance-investment products such as annuities and unit-linked life insurance.

Corporate customers
Corporate demand for insurance will also strengthen as industrial activity from local and multinational companies continues to develop in Brazil. The influence of foreign insurers and clients will gradually lead to the development of demand for more sophisticated and customized services, including risk management programs.

Brazil’s huge privatization program, spanning areas from railways to telecommunications, is gradually helping to boost the property and casualty market. Privatization has transferred many publicly-owned assets to the private sector. Many of these assets were previously either underinsured, or self-insured. Additionally, privatization has meant that when it comes to renewing insurance contracts, competition among insurers is becoming more transparent.