GAIA 7
LatAm Report
1
Insurance and Reinsurance
路 2014 路
RAC 2014 Regional Advisory Council Latin America Meeting 2014 Buenos Aires - Argentina
RAC Meeting 2014
www.zurichseguros.com.br
Index Summary 4
Editorial Antonio Cássio
Photos
8 16 27 40
Welcome Dinner - May 26th Meetings - May 27th Meetings - May 28th
Presentations Latin America: A progress report after 30 years of reforms José A. Scheinkman
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Colombia - Economic / Social / Regulations and Perspectives Andres Pastrana A.
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Argentina and Chile riding very different shocks Alfonso Prat-Gay
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Economic Opportunities: Future of Latin America - Mexico Guillermo Ortiz
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Economic Opportunities: The Future of Latin America Brazil / Venezuela Paulo Rabello de Castro
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New Solvency Regime Recaredo Arias
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Executive Summary
80
Survey
José Talarico
4
Editorial
The 2nd RAC Meeting was held in Buenos Aires, the main topics being “Final Political Cycles in Latin America” and “Economic Opportunities - Future of LATAM”. The meeting was attended by the effective members of IAC, Minister Ellen Gracie, President Andrés Pastranas and the economist Guillermo Ortiz, who also gave interesting talks on the “electoral scenario in Brazil”, the political/social/economic situation in Colombia and Mexico’s prospects and economic opportunities under the leadership of President Enrique Peña Nieto. Specially-invited external guests were: the Swiss Ambassador to Argentina, Mr. Johannes Matyassy, who contributed the Opening Remarks, and the Mexican Ambassador to Argentina, Fernando Jorge Castro Trenti; and as speakers, the journalist Andrés Oppenheimer, José Alexandre Scheinkman, Professor and Economist at the University of Columbia (NY), the economists Alfonso Praty-Gay (Argentina) and Paulo Rabello (Brazil) and the General Manager of AMIS (Mexico), Lic. Recaredo Arias. In addition to the CEO of Regional Life, José Orlando, the following CEOs were also present: Argentina (Fabio Rossi), Venezuela (Facundo Montenegro), Mexico (Javier Rodriguez and Sylvia Martinez), Colombia (Victoria Bejarano), Brazil (Richard Vinhosa) (Life), Zurich-Santander LatAm (Raul Vargas), Zurich-Santander Argentina (Carlos Nogueira Gonzalez) and Global Corporate LatAm (Michael Raney). From Head Office, Lucas Marighetti, Group Head of Strategy and Francis Bouchard, Head Global GAIA, also honored us with their presence. You will find all the presentations on the following pages of this Special GAIA Report, as well as the Executive Summary prepared by our LatAm GAIA, José Talarico. The RAC Meeting discussions provide interesting inputs that express a Long-Term Vision for Latin America, and merit thorough reflection by each one of us:
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Long-Term Vision: • Latin America remains as a land of opportunities for Zurich in next few years. It´s a region to think in the long term. Insurance market has a fertile field to develop all the product lines as the middle class emerges across countries. The faster Latin America exemplified by countries like Peru, Colombia, Chile and Paraguay is likely to keep higher growth rates besides the downside risks • Legislation and regulation will play a key role in determining the attractiveness of the region as a place to do business and the competitiveness of the insurance sector. • Populism and interventionism are losing strength. Rational economic policies may set the tone for most governments in LatAm in the near future. After surfing the commodities’ price boom during most of the 2000´s first decade, Latin America will have to deal with plateaued price level as China is slowing down. Reliance in commodities exports is not sufficient anymore. Such price moderation may drive countries to change internally. • In India, a very pragmatic and pro-market set of policies will create a tremendous impulse for Latin America to follow suit. India may become the next locomotive to compensate for China's slowdown. This may help the region in terms of selling its commodities. • The tide is shifting toward a "Pacific Alliance" mind-set. External factors will help foster a more pro-business attitude in Latin America. The perspective of a US-Europe Trade and Investment Partnership will speed up a pro-trade attitude from the region's main countries. US economic recovery can also give a push into the region. The presidential election in 2016 may bring a more pro-Latin American agenda. Both next presidential candidates in the US, Hillary Clinton and Jeb Bush, are more sensitive towards the region. • In Mexico, President Enrique Peña Nieto is still working to ensure that his potentially monopoly-busting constitutional reforms will be implemented. Mexico is poised for sustainable growth, several of the earlier headwinds facing activity recovery have eased. Main indicators are solid and economy seems to rebound to higher growth. • Colombian voters handed President Juan Manuel Santos a mandate to continue his efforts to negotiate a peace deal with leftist guerrillas. Colombia is forecast to continue
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expanding at fairly rapid rates. Multiple trade agreements have had a great effect in the economy. The Colombian economy has been growing faster than the region’s average. New regulation in insurance may bring extra protection and growth prospects. • In Peru, GDP is likely to continue expanding at fairly rapid rates. Domestic consumption remains strong, supported by record-low unemployment rates and solid growth in real wages. Meanwhile, overall economic activity in Chile is projected to moderate. Another shock by the drop in price of copper is on course. • Brazil’s elections in October may be a window for change. A shift toward economic rationalism and new social trend, like the increase of the Protestant and evangelic creeds in the Brazilian population are creating a strong middle class with a completely different mind-set. • Argentina and Venezuela are expected to face a recession this year and more problems in 2015. The gap between official and market exchange rates remains large in both countries. Erroneous macroeconomic policies have led to high inflation and a drain on foreign exchange reserves. The election in Argentina next year brings some hope for a change. The tumultuous Venezuelan picture will be turning as the petrodollars are becoming scarcer. Maduro´s government will not be toppled by the opposition but, rather, because of the poor shape of the local economy. • Education remains as the main long term challenge for the region. Disastrous PISA results still occur all the time in most regional countries. Low labour productivity leads to a weak sectorial competitiveness.
Key Zurich Take-Aways • Latin America remains a key market for Zurich. The region will contribute to a significant proportion of the Group’s profitability. High growth localities will generate fast expanding per capita incomes. Dynamic sectors will help to improve business environment and the demographic window will have an impact for contribution-defined pension plans. • Zurich should enhance its engagement with policy-makers in order to positively influence its environment and commercial prospects.
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• Constitutional reforms in Mexico will make the country a key market for Zurich. Banking penetration is very low and credit for the informal market is done through small companies called as “Microfinancieras”. There is an immense window to explore. • Latin America has turned into an example of democracy. Massive civilian movement towards better education, public transportation and better health standards have become a constant popular demand upon politicians. • Finally, the US may "return" to Latin America as an active player. Both prospective presidential candidates in the US, Hillary Clinton and Jeb Bush, are somewhat more sensitive towards the region.
Surprise Events to Watch Out • Infrastructure projects following trade agreements could create a vast field for Zurich to explore in the region. • In Mexico, the consolidation of energy reform will create a “tipping point” to its economy. An opportunity that cannot be missed. • October election in Brazil may create a new optimistic trend in the private sector. If an opposition candidate wins that will create a huge opportunity for some essential reforms to be finally implemented. Public pension reform is a key issue for Zurich.
As you can see, these issues definitely warrant a special edition of the GAIA Report. I hope you enjoy reading it!
Antonio Cássio dos Santos Chairman Latin América CEO General Insurance
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Welcome Dinner May 26th 2014
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Meetings May 27th 2014
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Meetings May 28th 2014
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Presentation: Latin America: A progress report after 30 years of reforms 40
8/26/14
José A. Scheinkman
La*n America 1982-‐2012 • 1982 debt crisis. • Several countries started reforms in the wake of debt crises, specially a8er Brady debt relief plan.
La*n America: A progress report a8er 30 years of reforms
• Mexico starts late 1982. • Brazil only in the 90’s.
José A. Scheinkman Edwin W. Rickert Professor of Economics at Columbia University 1
2
La*n America 1982-‐2012 • • • • •
Plan I. Review some of the major changes. II. Show that impact in aggregate growth and produc*vity has been, for the most part, modest. III. Show that performance was not uniform across sectors. IV. Argue that important produc*vity differences across sectors and even across firms in same sector are present in many other economies.
Social and educa*onal reforms. Fiscal and monetary reforms. Microeconomic reforms. Lowering of trade barriers. …
3
4
Plan
Condi*onal cash transfers
V. Discuss some factors that influence produc*vity and La*n America’s performance in these factors. VI. Conclude.
5
• • • • •
Mexico (1997, Progresa) Colombia (2001, Familias en Acción) Brazil (2001, unified in 2003 as Bolsa Família) Chile (2002, Chile Solidario) Argen*na (2002, Programa Familias)
6
• José A. Scheinkman - Latin America: A progress report after 30 years of reforms
8/26/14 41
Lat Am: Net secondary school enrollment (%)
Infla*on
80
70
60
50
40
30
20
10
19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11
0
WDI. Private es*mate of Argen*na's infla*on in 2012 = 26%
7
Ra*o of reserves to external debt
8
Trade in merchandise as % of GDP 80" 70" 60"
Argen1na"
50"
Brazil"
40"
Chile"
30"
Colombia"
20"
Mexico"
WDI
2012"
2008"
2010"
2006"
2004"
2002"
1998"
2000"
1996"
1994"
1992"
1988"
1990"
1986"
9
GDP per capita rela*ve to USA (PPP) Lat Am vs. East Asia
WDI
1984"
0"
1982"
10"
10
GDP per capita rela*ve to USA (PPP)
11
WDI, Argen*na 2006
12
8/26/14
42
Output per hour-‐worked rela*ve to USA
Produc*vity • Output per hour worked = labor produc*vity • May also correct for capital employed to calculate Total Factor Produc*vity (TFP) • Picture for La*n America are similar. • Growing slower than USA • Growing much slower than East Asian economies.
Conference Board TED
13
Differences in produc*vity
14
Produc*vity gains vary across sectors
1. Differences in produc*vity across countries. 2. Differences in produc*vity between industries in a country. 3. Differences in produc*vity between firms in the same industry in a country. • (2) and (3) explain a substan*al por*on of (1).
• Produc*vity in farming and financial intermedia*on sectors in Brazil increased at least 4% per year in 2000-‐2009. • Produc*vity in manufacturing and construc*on decreased by at least 1% per year • Gains in the farming sector were widespread in Lat Am.
15
Food produc*on growth rela*ve to USA (1982:2012)
16
Livestock produc*on growth rela*ve to USA (1982:2012) 6"
6
5
5"
4
4"
3
3"
2
2"
1
1"
0
Argen*na
Brazil
Chile
WDI
Colombia
Mexico
0"
Lat Am
17
Argen.na"
Brazil"
Chile" WDI
Colombia"
Mexico" 18
3
• José A. Scheinkman - Latin America: A progress report after 30 years of reforms
8/26/14
43
Produc*vity varia*ons across firms in same industry in USA • Even a8er accoun*ng for differences in capital stock, there are substan*al differences in produc*vity in firms in same industry. • Difference in produc*vity between the 90th percen*le and the 10th percen*le of an American firm in the same SIC 4 digit sector is, on average, 2:1.
SIC 4 digits: Example • Industry Group 206: Sugar And Confec<onery Products • 2061 Cane Sugar, Except Refining • 2062 Cane Sugar Refining • 2063 Beet Sugar • 2064 Candy and Other Confec*onery Products • 2066 Chocolate and Cocoa Products • 2067 Chewing Gum • 2068 Salted and Roasted Nuts and Seeds
19
Varia*ons in produc*vity across firms in same industry: China and India • Hsieh and Klenow (2008) es*mate that the same varia*on is 5:1 in China and India. • If firms in China had the same distribu*on of produc*vity as in the USA, China would have 30-‐50% higher produc*vity. • China (and India) have an excess of firms that are too small, and to a less degree, too many giant firms. 21
20
Factors influencing produc*vity • Educa*on (1).* • Quan*ty and quality.
• Health (1). • Legal and regulatory environment (1,2,3). • Policies that protect less efficient producers (3). • Informality. • Barriers to interna*onal trade (2,3).*
22
Net secondary school enrollment: Lat Am vs. Korea
Trade in merchandise as % of GDP La*n America vs. Korea 120"
120
100"
100
Argen.na"
80"
80
Brazil"
60"
60
Chile" Colombia"
40"
Mexico"
40
20"
Korea"
23
2012"
2008"
2010"
2006"
2004"
2002"
1998"
2000"
1996"
1994"
1992"
1988"
1990"
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
1986"
0
1984"
0"
1982"
20
24
4
8/26/14
44
Factors influencing produc*vity • • • • •
Infrastructure • The beter the infrastructure, the higher is produc*vity even a8er correc*ng for educa*on and capital stock. • Differences in investments in infrastructure explains a por*on of the difference in performance between East Asia and La*n America in the last quarter of the 20th century.
Industrial policy (2). Infrastructure (1,2). * Investment in IT (2,3). Investment in R&D (1, 2,3).* Management prac*ces. (3) *
25
26
WEF: Quality of port infrastructure (scale 1 to 7)
Investments in R&D
6
• R&D affects produc*vity in two ways.
5
a) New technologies b) Increase capacity to imitate
4
•
3
2
OECD study shows that in 74-‐90 in less advanced OECD economies (Finland, Norway. Italy), 40% of benefits of R&D came through absorp*on of foreign technologies.
1
0
Argen*na
Brazil
Chile
Colombia
Mexico
China
India
Korea
27
28
Investments in R&D
New Patents (La*n America)
• Evidence of externali*es in R&D.
700
• In US social rate of return es*mated 40-‐60%. • In 21 OECD countries rates are even higher, except Portugal.
600
500 Argen*na
400
• Jus*fies subsidies to R&D.
Brazil Chile
300
Colombia Mexico
200
100
0
29
1999
2000
2001
2002
2003
2004
2005
2006
OECD
2007
2008
2009
2010
2011
30
5
• José A. Scheinkman - Latin America: A progress report after 30 years of reforms
8/26/14
45
New Patents
R&D
18000"
• Israel, Finland and Korea started large R&D effort when their per-‐capita income was not different from current levels of income in large La*n American countries • Brazil’s EMBRAPA and the tropical agriculture revolu*on.
16000" 14000" 12000"
China"
10000"
Israel"
8000"
Finland"
6000"
Korea"
4000"
Brazil"
2000"
19
99 20 " 00 20 " 01 20 " 02 20 " 03 20 " 04 20 " 05 20 " 06 20 " 07 20 " 08 20 " 09 20 " 10 20 " 11 "
0"
OECD
31
32
R&D
Management Prac*ces • • • • • •
Monitoring Goals Incen*ves Extensive interna*onal data from survey. Firms with higher scores are more produc*ve. Mul*na*onals use management prac*ces of headquarter country • Expor*ng firms have beter management prac*ces.
• Chile’s public agriculture R&D played an important role on the development of wine, fruit and salmon industries. • A8er 1999-‐2002 crisis Argen*na increased rapidly expenditures in public agriculture R&D. • Mexico has also increased expenditures in agricultural R&D.
Figure 2: Management Practice Scores Across 33
US
34
Brazil
1
Average management score (weighted by employment)
Management scores: Brazil (bars) vs. USA (curve)
-1
.67 .41
.5
us sw jp ge ca gb mx po it au cl nz fr br cn ar pt ir gr-.98
.32 .23 .19 -.05 -.08 -.13 -.14 -.16 -.22 -.25 -.33 -.34 -.5 -.51 -.53
-.73
0
Fra action of Firms
Figure 6: Management Scores Across Countries (weighted by employment shares)
-.5
0 mean of man
.5
1
France
35
India Bloom at al.
36
South
0
.5
1
Notes: Firm scores are weighted by share of employment in the country. 2006 wave. Bloom et al. 2013. Scores are corrected for response biases.
6
8/26/14 46
Differences in management scores • Argen*na, Brazil, Mexico, China and India have many more firms in le8-‐tail. • Suggests that in these economies it is easy to survive even when you are less efficient.
Conclusion • La*n America made much progress in last 30 years. • Results concerning GDP growth and produc*vity are in general modest.
• Regula*on • Informality • Protec*on from external compe**on.
• Chile is excep*on among larger economies.
37
Conclusion • Successful sector: Agribusiness • Rela*vely deregulated. • Integrated with world economy. • Benefited from public expenditures in R&D.
• Further work needed in factors that affect produc*vity at country, industry and firm levels.
39
38
Presentation: Colombia - Economic / Social / Regulations and Perspectives Andres Pastrana A.
47
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8/26/14
50
A rela3vely stable situa3on, measured by the number of companies opera3ng maybe changing, fuelling deteriora3on of terms of compe33on:
Nega3ve technical results impac3ng significantly over profitability measured as return on equity (ROE):
50
ROE
31%
20%
44 2
45
25%
47 2
47 2
21
21
24
24
44 2
44 2
44 2
44 2
45 2
44 2
19
19
19
19
19
19
23
23
23
23
24
23
40 19% 17%
17%
35
13%
13%
12%
9%
8%
20
30 6.1%
6%
25 20
Market-‐entry of new players: Berkley, AXA, Mutual Madrilena among others.
15 22
5
2013
2010
2012
2011
2009
2008
2006
2005
2007
2004
2003
2002
10 2001
2000
-‐14%
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 P&C
ROE
Sources: Oxford business group, The World Bank, IMF, Fundacion Mapfre, Swiss Re, Fasecolda, DANE
5/22/2014
19
New regula3on aimed at enforcing prudent reserving prac3ces and overall consumer protec3on:
Life
CooperaVves
Sources: Oxford business group, The World Bank, IMF, Fundacion Mapfre, Swiss Re, Fasecolda, DANE
5/22/2014
20
Summing up:
• Regulatory and supervisor authority role centered in protecVon of consumer rights and on the
• Orthodox and consistent macro economic performance make Colombia a well posiVoned
adopVon of internaVonal accounVng standards (IFRS).
desVnaVon for foreign investment.
• New regimes for calculaVon of technical, earthquake reserves and new mortality tables, being
• Significant economic and societal transformaVons give Colombia a prominent regional role
draged, or due to become in force. A transiVon regime is included.
regarding sustainable insurance growth opportuniVes.
• New rules and procedures for public aucVoning of mortgage-‐related pormolios (group life)
• Growth opportuniVes can be found in both corporate and personal lines segments.
• Draging of regulaVons for Micro-‐insurance.
• Price pressures coming from external and internal forces do not automaVcally guarantee
• Other areas of policy intervenVon:
short term profitability.
• Cross border business. • Compulsory motor insurance (SOAT)
• If properly implemented, new regulaVon could strengthen the industry, adding to the bright
• Low speed in implementaVon of the new reserves regime, and the simultaneous disembarking of
growth prospects, an improved mid to long term financial sustainability.
new players with significant growth appeVte, may hinder in the short term a move towards a healthier technical results. 5/22/2014
Sources: Oxford business group, The World Bank, IMF, Fundacion Mapfre, Swiss Re, Fasecolda, DANE
21
5/22/2014
Sources: Oxford business group, The World Bank, IMF, Fundacion Mapfre, Swiss Re, Fasecolda, DANE
22
4
Presentation: 8/27/14 Argentina and Chile riding very different shocks Alfonso Prat-Gay
ARGENTINA AND CHILE
CHILE: DEALING WITH THE ONGOING EXTERNAL SHOCK
RIDING VERY DIFFERENT SHOCKS MAY 27 2014
RAC MEETING
ALFONSO PRAT-GAY
LIKE 2008 BUT LONGER
… AND AN EVEN BIGGER INTERNAL SHOCK
Source: ECLAC
FROM CIVIL RIGHTS TO SOCIAL RIGHTS
Average tax rate on capital (%)
OUTCOME: A CLASSICAL SLUMP IN INVESTMENT
51
8/27/14
52
CHILE: DEALING ONGOING EXTERNAL ARGENTINA ALSOWITH HITS THE AN AIR POCKET SHOCK
EVEN IF STILL ENJOYING A VERY POSITIVE EXTERNAL SHOCK
SURFING LATIN AMERICA
ARGENTINA: WHAT´S NOT NEW
International Reserves 2002-2005=1
SOME TOOK ADVANTAGE OF, SOME NOT
WHAT´S KEY: TO KEEP RESERVES AT BAY
YET ANOTHER POPULIST CYCLE
WHAT´S WRONG: NOT WHAT THE DOCTOR WISHED FOR
THE STEEPEST RECESSION SINCE 2001
2
• Alfonso Prat-Gay - Argentina and Chile riding very different shocks
8/27/14
53
WHAT´S MISSING: DOLLAR INFLOWS
WHAT´S NEW: 1) (HOLY) DEAD COW
AMPLE ENERGY FOR THE NEXT 5 GENERATIONS
2) FISCAL RESOURCES ARE PLENTIFUL NOW
3) NO EXTERNAL BREAK AROUND
SO LONG “STOP-AND-GO” CURSE
4) NO SIZABLE MACROECONOMIC IMBALANCES THIS TIME
IN A NUTSHELL
EXTERNAL SHOCKS
TIME HORIZON
INTERNAL (POLITICS)
POSITIVE ▲ GRAIN PRICES ▼ SOVEREIGN RISK NEGATIVE END-OF-CYCLE MISTAKES
SHORT RUN
PAIN
LONG RUN
BOOM
NEGATIVE ▼ COPPER PRICES TAPERING NEGATIVE BEGINNING-OF-CYCLE DEMANDS
PAIN DEVELOPED?
ALL YOU NEED IS TRUST
3
!"#$"%&'
Presentation: Economic Opportunities: Future of Latin America - Mexico 54
Guillermo Ortiz Outline
!! Background for the Mexican Economy !! Future Prospects Economic Opportunities Future of Latin America - Mexico
"!International Position "!Fundamentals "!Competitiveness "!Reforms "!Demographics
Guillermo Ortiz
!! What to Expect in 2014 !! What to Expect in the Medium and Long Term !! Final Comments 2
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â&#x20AC;˘ Guillermo Ortiz - Economic Opportunities: Future of Latin America - Mexico
!"#$"%&' 55
Future Prospects: Global Conditions Turn Favorable
Future Prospects: US to Lead in the Developed World 0B9E;G"1B=RGS"
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56
Future Prospects: Structural Reform to Revert Long Term Stagnation
Future Prospects: Labor Reform 5>H=B"b=B<9"
7@`=BA>I"8B=EQ<?=@" >'9`'012'
-QDD;>@"b9E9B>?=@" .B>J;I" 0=I=AH;>" aQBd9U" )9:;<=" 7G>IU" 8=I>@E" F=QGS"/`B;<>" f=B9>]"-9OQHI;<"=`" 6Q@^>BU" FO>;@" 7@E;>" 7@E=@9D;>" FR9E9@" 0J9<S"-9OQHI;<" 19BA>@U" 0>@>E>" /QDGB>I;>" ,@;G9E"f;@^E=A" 0S;@>" j>O>@" ,@;G9E"FG>G9D"
Energy reform
Financial reform
Fiscal reform
*<=@=A;<>IIU"/<?T9" 8=OQI>?=@e" '!XM")"
Injunction Act
Telecommunications reform
a=G>I"8=OQI>?=@e"##'")"
Education reform
Fiscal reform for Federal States & local govt
Government accounting reform
Labor reform
Economic competition law
2<J/76'5,3L793'LNL8,X'-,`9-X'
[<4.,8'j'dL6*/'-,L593L7J7/78N'/*:'
B7,`9-,L"U`9-,L'
fUFSU'
Banxico’s autonomy
X7//793'
b=BA>IIU" *AOI=U9Ee" *AOI9 #'XM")"
7@`=BA>I" k=Bd9BDe" $(")"
="" `=BA>I e"
"""#MM%"""""""""""""#MMN""""""""""$!!!""""""$!!("""$!!N""""$!#$"""$!#%"
“Semi-formal” Workers: 9 M
!"
#!"
$!"
%!"
&!"
'!"
B9<-6,C'DfK0D'*34'Z9-/4'[*3R'
13
14
Future Prospects: Education Reform ,@E9B9EQ<>G9E"8=OQI>?=@"
8=OQI>?=@">^9E"$'K(&"R;GS">G"I9>DG"QOO9B"D9<=@E>BU"9EQ<>?=@" lVm"
73476*89-L'`9-'VKG1'69<38-7,L'
L'" N'" ('"
Mexico
&'" %'" $'"
#'"
$!"
$'"
8>B?<;O>?=@";@"I>@EKI;@9"
#((W'2DBU'B69-,L'
%!"
%'"
=>?"
MP' PVI' fk\' f\1' KBS' EGM' fVI' BgP' TBU' GkK' UTS' KB2' MIg' TUK' BI[' TIn' EKm' OVI' PUk' UkK' lUS' P0k'
M'"
''"
Future Prospects: Telecom Reform
8==B"*EQ<>?=@>I"89B`=BA>@<9"
/@@Q>I"9:O9@E;GQB9"O9B"DGQE9@G"B9I>?T9"G="1W8"O9B"<>O;G>"
8>B?<;O>?=@";@" HB=>EH>@E"
=>?"
50th Place E*8;' B67,36,' I,*473.'
!"
f98,C'295</*A93':78;'<55,-'L,6934*-N',4<6*A93'4*8*'7L'`9-'#((W_'B8<4,38',Q5,3478<-,'4*8*'`9-'#((!_' B9<-6,C'VKG1'
'!!"
#!!!"
#'!!"
$!!!"
15
Households with Broadband % of Households
!"
$!"
&!"
(!"
L!"
#!!"
B9<-6,C'Z*//'B8-,,8'O9<-3*/'*34'VKG1'
16
Future Prospects: Financial Reform .>@d;@^"F9<G=B"89@9GB>?=@"
4Hn9<?T9e " " 7@<B9>D9" H>@d" O9@9GB>?=@" 73' E,Q769' *7X73.' 89' *6;7,+,' 8;,' 4,X96-*AH*A93' 9`' ;7.;' 5-94<6A+78N' *X93.' 69X5*37,L' *34' `*67/78*8,' 693L<X5A93' LX998;73.'`9-'7347+74<*/L'`-9X'*//'L967*/'' )>;@' O=;@GDe ' 7AOB=T9" <=@GB><GDK9@`=B<;@^" OB=<9DD9D' `9-' 69XX,-67*/' J*3RL^' BEK' .<*-*38,,L' 5-9.-*XL' `9-' 1,+,/95X,38' J*3RL' *34' 393)J*3R' J*3RL' -,.</*A93' 8B=O=D>Ie ''U<.<L8'#(%b' /OOB=T9Ee '1,6,XJ,-'#(%b' 7AO><G'=@'O=G9@?>I'1W8e'(_$i>'
>'9`'012'
*@`=B<;@^"0=@GB><GD"7@E9:#Z" 1B99<9" )9:;<=" FO>;@" 0>@>E>" 8=I>@E" j>O>@" *DG=@;>" 8=BGQ^>I" FR;GJ9BI>@E" 6Q@^>BU" bB>@<9" ,@;G9E" 3=BR>U" f=B9>]"-9OX"
L" N" (" '" &" %" $"
!"
&!" %'" %&" %#" $N" $$" $#" $!" #L" #(" #'"
.>@d;@^"F9<G=B"89@9GB>?=@"C"b=B9<>DG" >'9`'012'
#(!"
LN" NM" N(" (M" (&" (%" ($" '(" '("
&X!" %X'"
Future Prospects: Energy Reform 0BQE9"4;I"8B=EQ<?=@"
8;9<L*34L'9`'J*--,/L'5,-'4*N'
%X!" $X'" $X!" /OBK!!"
j>@K!%"
4<GK!'"
jQIK!L"
/OBK##"
j>@K#&"
4Hn9<?T9e " " 7AOB=T9" 9:OI=;G>?=@" =`" 9@9B^U" B9D=QB<9D^' 73' 5*-A6</*-'`9LL7/'`<,/L' )>;@" O=;@GDe ' /II=R" OB;T>G9" CE=A9D?<" >@E" `=B9;^@K]" O>B?<;O>?=@" ;@" 9:OI=B>?=@]" =;I" OB=EQ<?=@" ;@" E99O"D9>D">@E"DS>I9"^>D_'D36-,*L,'*34'X*R,'X9-,' 8-*3L5*-,38' 5*-A675*A93' X,6;*37LXL' 73' ,Q5/9-*A93'*34'5-94<6A93'9`'6-<4,'97/'73''L;*//9:' :*8,-L' 8B=O=D>Ie " "U<.<L8'#(%b' /OOB=T9Ee " "1,6,XJ,-'#(%b' 7AO><G"=@"O=G9@?>I"1W8e"%_((>'
4QGOQG"_"W9A>@E"=`"3>GQB>I"1>D";@")9:;<=" FS>I9"1>D"-9D9BT9D" X7//793'6<J76'`,,8'
8-7//793'6<J76'`,,8'
L" ("
0=@DQAO?=@"
&" $" !" K$"
8B=EQ<?=@"
K&" '!"
#!!"
#'!"
%"'E,-6*3A/,'6938-*68L' B9<-6,C'[*39-8,)DQ,':78;'4*8*'`-9X'[*369'4,'EeQ769'*34'Z9-/4'[*3R'
17
8>B?<;O>?=@";@"A=H;I9" OS=@9D"
=>?"
KOR ISL SWE DNK NLD FIN GBR NOR DEU CHE BEL CAN AUS AUT FRA USA LUX SVN EST IRL JAP CZE NZL ESP POL HUN PRT SVK ITA GRC TUR CHL MEX
$!!"
K("
)>BK#$"
jQ@K#$"
F9OK#$"
W9<K#$"
)>BK#%"
B9<-6,C'[*39-8,)DQ,':78;'4*8*'`-9X'BKfKI'
18
b'
• Guillermo Ortiz - Economic Opportunities: Future of Latin America - Mexico
!"#$"%&'
57
Future Prospects: Energy Reform 8=G9@?>I"0>O;G>I"*:O9@E;GQB9";@"GS9"*@9B^U"F9<G=B" TB1'J7//793'
Future Prospects: Strong Demographics /^9"0=S=BG"W;DGB;HQ?=@"
W9O9@E9@<U"->G9">@E"k=Bd9BD"
>'9`'898*/'595</*A93'
oL'" L!KL&" N'KNM" N!KN&" ('K(M" (!K(&" ''K'M" '!K'&" &'K&M" &!K&&" %'K%M" %!K%&" $'K$M" $!K$&" #'K#M" #!K#&" 'KM" !K&"
4,5,34,38L'"':9-R73.'*.,'595</*A93'*34'X7//793'
#!!" Men 48.8%
Women 51.2%
Dependency Ratio
Working Age Population
M!" L!" N!"
Working Age
(!" '!" &!"
("
&"
$"
B9<-6,C'E*-69L'N'UL967*49L' B9<-6,C'E*-69L'N'UL967*49L
B9<-6,C'GVfU2V'*34'Tf'295</*A93'17+7L793'
19
20
!"
$"
&"
("
%!"
#ML!" #MM!" $!!!" $!#!" $!$!" $!%!" $!&!" $!'!"
Future Prospects: Increased Security to Support Growth
What to Expect in 2014
WBQ^K-9I>G9E"2;=I9@<9"0U<I9"
-9>I"1W8"1B=RGS"
3<XJ,-'9`';9X7674,L'
>'
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l%m"b;D<>I"0S>@^9D"
l&m"-9`=BAD"
B9<-6,C'[*39-8,)DmK':78;'4*8*'`-9X'KE2IU'
21
22
What to Expect for the Medium and Long Term FGBQ<GQB>I"-9`=BAD">@E"8=G9@?>I"1W8"
Final Comments
1W8"1B=RGS"
>'6938-7J<A93'89'598,3A*/'012'.-9:8;'-*8,'
>'
39R"8=G9@?>I"1B=RGS"->G9"
'X'!"
!! Economic Prospects in Mexico are Very Positive
0QBB9@G"8=G9@?>I"1B=RGS"->G9"
%X!!"
!! Economic Outlook in the Medium Term Driven by:
a=G>I"lB9`=BADm"
$X'!"
''''\*J9-'l$!#$m"
(_#i'
''''F7L6*/'l$!#%m"
(_i('
''''F73*367*/'l$!#%m"
(_$i'
''''K3,-.N'l$!#%m"
%_(('
"!Favorable Global Position "!Solid Fundamentals "!Strong Demographics "!Structural Reform Program
!! Economic Grains from Reforms are Expected to Begin in 2015 – with Growth Accelerating to around 5%
B9<-6,C'DfK0'*34'[*39-8,)DQ,'
23
24
&'
Presentation: Economic Opportunities: The Future of Latin America Brazil / Venezuela 58
Paulo Rabello de Castro
Economic Opportunities: The Future of Latin America Brazil / Venezuela
Brazil Economic Outlook: Challenges Ahead
May 27, 2013 Paulo Rabello de Castro
INTERNAL USE ONLY INTERNAL USE ONLY
The World Economy and Brazil
Brazil: GDP Performance 9
GDP change vs Investment (% GDP) 12%10%
Pre (Avg. 2003-07) Post-Crisis - Crisis (Avg2008-12)
GDP Growth GDP (%) (%)
11% 9% 10%
8% Nigeria
7%
Argentina
9% 6%
Argentina
8% 5% 7%
6%
4%
Turkey
Brazil
3% 2%
5% 1% 4% 0% 3%
2%
-‐1%
POL
China
China
(EM´s) Indonesia
6,1
6
-‐2% -‐3%
-‐5%
5
India
INTERNAL USE ONLY
25% 25%
30%
30%
230 230 230 210 210 210
Avg. 2,0% y.o.y
2
CAPEX (% GDP) CAPEX (% GDP)
110 110 110
1,5
35%
35%
40%
40%
45%
2008
2009
2010
2011
2012
2013
2014 P
2015 P
Source: IBGE. (P) RC Consultores forecast
50% 45%
3
Source: IMF
-0,3
2007
INTERNAL USE ONLY
(+) Taxes (-) EBITDA = (-) Investment
Federal Government Budget Federal overnment udget Federal GGovernment BBudget
Index (Base 1997=100) -‐ Real rate ohange f change Index Base 997=100) -‐ Real rate Index ((Base 11997=100) -‐ Real rate oof f cchange
Revenues
+ 5,7% a.a
Expenditures Expenditures
§ § §
IPO issuances Housing loans
§
Corporate Debt
§
FDI
§
BNDES loans
§
Reinvested Profits
External lending
+ 55,2% ,2% aa.a .a +
150 150 150
130 130 130
1,9
0 (1)
190 190 190 170 170 170
2,3
1,0
1
Where does the problem come from? 250 250 250
2,7
3
Australia JPN World Spain Espanha PT MEX UK Italy USA France Mature Economies (ME´s) Japan Germany Portugal Italy Greece 20% 20%
Avg. 4,6% y.o.y
4 South Korea
Peru TUR BR -‐ Dilma World Australia CHI RSA COL RUS MEX Indonesia Mature Economies POL USA RSA Greece (ME´s) Coréia do Sul DEU FRA
15% 15%
5,2
India
Nigeria Chile
7,5
7
Brazil UK
1% -‐4% 0%
Russia COL
Real GDP yoy growth (%)
8
Emerging Markets (EM´s)
Peru Emerging Markets
2
Real GDP Real GGDP DP Real
+ 3,1% a.a + + 33,1% ,1% aa.a .a
90 90 90 1997 1998 1999 2000 2001 2002 1997 2005 2006 2007 2008 2009 2010 2011 2012 2013 19971998 19981999 19992000 20002001 20012002 2002 2003 2003 2004 2004 2005 2005 2006 20062007 20072008 20082009 20092010 20102011 20112012 20122013 2013 Source: Resultado do Tesouro Nacional – Resultado Primário do Governo Central. RC Consultores. INTERNAL USE ONLY
Source: Redução da taxa de poupança e financiamento dos investimentos, Centro de Estudos do IBMEC. Elaboração: RC Consultores. INTERNAL USE ONLY
• Paulo Rabello de Castro - Economic Opportunities: Future of Latin America - Mexico
59
Brazil: Opportunities Ahead
October Election: a Window for Change Challenges ahead: The 2015 Economic Agenda...
• High growth localities They generate fast expanding per capita incomes
• A new control rule for public expenditures
• High growth sectors
• Interest rate easing (including local governments)
They will help to improve business environment
• New tax system: (1) simplification; (2) redistribution
• Demographic window
• Private investments: EBITDA recovery measures
Contribution-defined pension plans
• Productivity enhancement
• Popular consensus around the need for change
...will lead to a higher growth path INTERNAL USE ONLY
Health, education and public transport are top priorities
7
National DATAFOLHA survey with over 2,000 respondents in 120 brazilian cities
INTERNAL USE ONLY
8
SWOT Brazil 2015 by RC Consultores • Political stability • Central Bank Autonomy
• Taxes are more burdensome now than over the past three years?
74% said YES
• How well does the government allocate the taxes it collects? Grade 0 to 10 =
4,4
(average)
• How to prioritize future investments: more infrastructure or social welfare?
• Widespread corruption • Urban violence
• Fiscal responsibility awareness
• Weak public management
• Diplamatic skills - peaceful neighborhood
• Poor government planning system
• Entrepreneurial drive
• Low labour productivity
• Agribusiness potential
• Low investment rate
• Huge natural resources
• Widespread inflation indexation
• Large scale domestic market
• Low investment rate
• Demographic bonus • Credit and capital markets potential
(average)
• Public services performance, as compared to a “Fifa Standard”... Grade 0 to 10 = 5,4 (average)
INTERNAL USE ONLY
• Infrastructure fragility
• High Reserve / Debt ratio
W
• Political diversity / Absence of Extremist Forces
• How well represented by Brazilian politicians, according to the voters
3,6
• Brazil cost (Bureaucracy)
• Emerging middle class
77% responded they prefer infrastructure Grade 0 to 10 =
S
• Rule of law
9
O
• Crazy tax system • Absurdly high interest rate
• Renewable energy, electric power, mining, oil and gas
• Political insulation
• Hi-tech farming
• International trade shyness
• Forestry, pulp and paper conservation
• Poorly structured of public debt
• Housing and real state
• Social security burden
• "Creative" areas (fashion, design, entertainment)
• Chronically overvalued currency
• Education (Universities, technical schools)
• Diversion of forced savings into consumption
• High-tech products
• Rate of increase of public expenditures
• Bilateral trade agreements
• Price controls
• Infrastructure expansion
• Disguised protectionism
T
INTERNAL USE ONLY
In high speed towards chaos Political and economic instability faces a new level • Public spending still out of control
Venezuela Outlook:
• Explosive inflation and foreign reserves shortage
More Trouble Ahead
• High dependence to oil price • Corruption, abusive nationalizations, rampart subsidies • Violent protests: human rights at risk
...all of this will lead to economic disintegration INTERNAL USE ONLY
11
INTERNAL USE ONLY
12
60
Surfing in the oil wave... 20
Increasing indebtedness...
18,3
Brent Oil Price US$ / barrel
15
10,3
10
50
100
40
80
30
60
20
40
10
20
0
Real GDP Growth -‐ (%) Annual 3,7
5,6
5,3
1,0
0,3
-‐0,5 -‐1,5 -‐3,2
-‐10
0
-‐6,0
General government net borrowing -‐ % GDP
-‐7,8 -‐8,9
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
-‐20
-‐20
14 F
98
Source: IMF. Forecast: IMF and RC Consultores
13
Social discomfort index... 50
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Source: IMF. Forecast: IMF and RC Consultores
INTERNAL USE ONLY
55
General government total expenditure -‐ % GDP
4,2
3,4
-‐5
-‐10
(%)
8,8
5
0
9,9
120
INTERNAL USE ONLY
14
Violent unrest and political fracturing...
(%)
50,7
45 40,7
40 35,8
35
31,1
30
Inflation -‐ Consumer Prices Official 28,2 26,1
27,1
25
23,6
22,4
20
15
30,4
21,7
21,1
18,2 14,5
16,2
14,0
12,2
16,0
18,7 15,1
13,4
16,0
13,7
12,2
12,5
10,0
10
Unemployment Rate (%) Official 8,5
7,4
7,9
08
09
8,5
8,2
7,8
10
11
12
11,2 9,2
5 0
98
99
00
01
02
03
04
05
06
07
13
...is the sure formula for more trouble ahead
14 F
Source: IMF. Forecast: IMF and RC Consultores INTERNAL USE ONLY
Offices:
15
São Paulo – SP Rio de Janeiro – RJ
Phones: (011) 3053-0003 (021) 2263-7456
www.rcconsultores.com.br
RC Consultores has prepared this report using information available until May 22, 2014. In spite of taking our care for data accuracy, RC Consultores is not responsible for the full accuracy of the information herein delivered. For the same reason, RC Consultores cannot be responsible for any financial decision taken on the basis of our data and/or prognoses.
INTERNAL USE ONLY
INTERNAL USE ONLY
16
8/27/14 Presentation: New Solvency Regime Recaredo Arias
Agenda 1. Insurers Convention AMIS 2014 Proposals 2. SOLVENCY II:
New Solvency Regime
I. General Concepts II. Solvency II
Recaredo Arias
III. Mexico’s situation
CEO
Asociación Mexicana de Instituciones de Seguros
IV. Solvency in Latin America V. Conclusions 2
1. Insurers Convention AMIS 2014 Proposals Victims protection in car accidents • To create a national policy on liability insurance, which guarantees safety
and protection for victims in road accidents.
• To release a significant portion of the economic burden of governments expenditure on hospitals and public clinics, by the use of insurance policies. The insurance industry would bear these costs of the injured population caused by accidents.
1. Insurers Convention AMIS 2014 Proposals
• To promote a change in the driving, pedestrian, and cycling culture and to implement safety standards, taking into account FIA (Automobile International Federation) recommendations.
4
1. AMIS Proposals 2014’ Insurance Convention Natural Catastrophic Hazards • To promote research funding to develop new and strengthen existing building codes nationwide. • To develop Risk Atlas on zones without them. • To inform and educate the general public on civil protection issues and practices. • To create a common coverage of "microinsurance" to extend the protection against catastrophic risk to the entire population in coordination with the Fonden. • To strengthen public policies on urban and territorial development. • To develop a public-private mechanism with insurers to integrate technical and financial capabilities for the underwriting of the assets of states and municipalities. AMIS proposes to share experiences with Zurich NatCat experts, to follow up on these proposals, as we successfully did with Solvency II on 2013, by Jose Talarico’s initiative
2. SOLVENCY II General Concepts
5
61
!"#$"%&'
62
Solvency is measured by the capital required, which can be… Regulatory •! Capital that a company must maintain to be solvent in accordance with regulation •! It is usual to keep an additional margin (buffer) to the regulatory capital to ensure the compliance after an adverse event
Economic: •! Simply defined, economic capital must answer the question: What amount of assets is needed today to ensure a reasonable level of confidence of future obligations fulfillment(' •! A buffer doesn’t applies in this case, as it is determined according to the risk appetite of the company
For rating agencies:
Capital and Solvency
•! The required capital to obtain a credit rating that reflects the level of confidence (risk) on the company receiving the rating •! Institution seeks it to convey to the public an opinion of its financial strength %"
Capital/Reserves/Solvencia Ratio
Economic Capital
Reserves cover: !!
!!
Entities taking risks need to have enough capital to cope with adverse scenarios.
Estimated obligations In some cases include margins for deviations
Solvency
!! !!
Extreme events Atypical situations out of expected parameters
Increase in Net Assets
Required Capital
Required Capital covers:
Possible scenarios sorted according to their result
Margin
These margins are not always validated to avoid overlaping with capital Assets
0
Solvency
!!
Decrease in Net Assets
Reserves
Capital copes with scenarios representing losses in most cases, except in extreme scenarios
This is the risk of the insured related to insolvency and poor performance
Solvency considers Required Capital and Reserves comprehensively
Cumulative probability &"
'("
'
The Role of the Supervisor New European Architecture Macro prudential supervision
European Systemic Risk Board (ESRB) Chaired by the BSE President BCE/SEBC Members'
EBA EIOPA ESMA President
INFORMATION
EBA'
Risk management
Micro prudential supervision
National Supervisors BANK"
Commission'
ALERTS
EIOPA'
ESMA'
National Supervisors
National Supervisors STOCK MARKET "
INSURANCE
PENSIONS
Source: Luis Bautista - DGS Spain
'!"
#'
â&#x20AC;˘ Recaredo Arias - New Solvency Regime
!"#$"%&'
63
Insurance Risk Management"
In recent years, both the new regulatory requirements and market expectations, of the rating agencies for example , have increased the use of ERM in the insurance sector.
The Enterprise Risk Management (ERM = Enterprise Risk Management) in insurance companies is used to identify, evaluate / measure and manage risks (and yields) in a more effective way than traditional risk management techniques . Insurers use ERM to improve performance and manage related risk / return issues, but also to support strategic decision making and capital management.
2. Solvency II
')"
Solvency I weaknesses
What is Solvency II? Includes the revision of the capital adequacy regime project for the European insurance industry.
Few standardizati on among member countries of the EU
Slight adaptation and flexibility to market evolution
Solvency magnitudes based in parameters that improperly replace technical or subscription risk
*+,-' ./' 0-.123+-4' 1' 506+-07' -0.' /8' 91:+.13' 50;<+50,0=.-' 1=7' 5+->' ,1=1?0,0=.' ' -.1=7157-' +=' @<5/:0A' B4+94' B+33' 50:3190'.40'9<550=.'-.1=7157-C Diversificatio n or certain forms of risk transfer were not considered
Credit ratings of reinsurers was not appraised
Establishes requirements that seek to reduce the probability of insolvency of insurers and reinsurers. It is a strengthened solvency regime that should reduce the loss potential for consumers, as well as disturbances in the operation of the insurance market. '$"
What is Solvency II?
'*"
Solvency II structure â&#x20AC;&#x201C; Three Pillars Solvency II is based on 3 fundamental principles called pillars applied along market, credit, operative, underwriting and liquidity risks.
It is a Solvency Integral Regime based on : !! More accurate and precise capital requirements. !! Solid corporate governance. !! Better Risk Management. !! A deeper review by the Insurance Supervisor. !! Greater transparency and information disclosure.
'+"
'%"
)'
!"#$"%&'
64
Pillar 1 – Quantitative Requirements
Pillar 1 – Quantitative Requirements How do we find the reserves market value of an insurer?
Asset market value
How do we find the asset market value of an insurer?
Liabilities ,-./01." "
Liabilities market value
Assets
Reserves
2-3456"75"3/5.4 Risk margin "
Liabilities best estimate
'&"
!("
Pillar I – Included Risks
Pillar I – Solvency Capital Requirements
SCR
The Solvency Capital Requirement is calculated in terms of the risks to which insurers are exposed to, with a 99.5% level of trust and a time horizon of one year.
SCR structure is composed by a series of modules which in turn are integrated by sub-modules.
Life underwriting risk
Health Underwriting risk
P&C Underwriting
Mortality
Of premiums/ of reserves
Of premiums/ of reserves
Market
Mortality / Longevity
Catastrophic
Interest rate
Longevity Morbility
The Solvency Capital Requirement derived from these modules and sub!!-modules are aggregated using a correlation matrix.
Operative risk
Disability
Derivatives
Expiration
Sickness / Morbility
Spread
Other debtors
Outbreak
Legal
Reinsurers
Equity
Expenses
Operative processes
Counterpart
Disability
Catastrophic
'
Market risk
risk
Technological
Currency Real state
Expenses
Concentration
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Pillar II – Supervising process
Pillar II – Supervising process
Regulator should: Supervise insurance and reinsurance companies. Ensure compliance with Board requirements. Identify those companies with financial and / or organizational weaknesses likely to generate greater risks.
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Monitoring process supported by 6 basic principles:
Entities should:
Management and risk monitoring system
'Conduct an effective risk
Strategy and Risk Appetite
management
Capital Assessment (ORSA) Internal Control Function
Elaborate a prospective analysis through an internal assessment of risks and solvency (ORSA).
Redefining the Actuarial Function " Use of outsourcing !)"
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Risk Appetite Framework Establishment of operative limits
Pillar 2 – Corporate Governance Responsibility of:
“Risk appetite is the amount of risk a company is willing to accept to be aligned with the strategic objectives in order to maximize shareholder value.”
Responsibility over: Investments
BOARD OF DIRECTORS
It can serve as a tool to: •! Merge capital requirements and uses •! Understand solvency and capital key risks, as well as alternative management evaluation methods •! Alignment between risk profile and strategic goals
Reinsurance DIRECTORS
Retention Reserves
INTERNAL CONTROL AUDITORS
Models
•! External •! Internal
Stress Testing
Results includes:
Audit
Entities should have management autonomy and demonstrate the rules compliance to the supervisors
•! Capital allocation •! Risk tolerance and operative limits •! Goals measurement
Comptrolling !$"
Own Risk and Solvency Assessment (ORSA)
What should a corporate governance model consider? Three defense lines as a framework The three defense lines of the model have been used to illustrate the impact on the typical insurance functions, such as providing the principles for the risk management framework. '.8"75956.5":/65""
I.! ORSA requires the company to assess their own funds necessary to ensure that the overall solvency needs are covered at all times
rity ula an
Risks and Solvency Assessment Key Characteristics
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III.! It should consider all significant risks, make prospective analysis and be integrated into the business strategy.
Management Responsibility
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II.! Includes all processes and procedures used in the identification, assessment, monitoring, management and reporting of short and long term risks.
ess n sin Bu gratio inte
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e ctiv spe Pro vision
•!
Risk coverage !%"
Pillar III – Market Discipline Insurance and reinsurance companies obligation of publishing relevant information to market participants
Data characteristics:
Transparency of information based on:
Rating
•! Frequence (at least anually ) •! Policies and processes •! Confidenciality •! Internal / External Audit •! Information policy (approved by Board of Directors) •! Market qualitative and quantitative reports •! Validation of the disclosed information content
3. Mexican Experience / Process
•! Insurance companies rating by an agency
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Solvency II project Objectives
Tasks performed by AMIS In preparation for the new regulatory framework implementation, AMIS has taken the following actions: Insurance, Surety and Bonds Institutions Law (LISF) and its Secondary Level Regulation (CUSF) analysis
Start
Negotiations held with the Ministry of Finance (SHCP) and the Insurance, Surety and Bonds National Commission (CNSF).
Objectives
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•! June 2009
•! Inform the industry on the Status of Solvency II in Europe and possible adjustments in Mexico. •! Generate a QIS (database that allows modeling, with a unique and flexible development, the impacts of changes in Mexican law). •! Provide a supported opinion to the CNSF about the proposed regulation. •! Develop a work plan that helps insurers in the regulatory transition for the Solvency II adoption. •! Prepare the appointed sector officers to the new responsibilities derived from the regulatory change.
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Mexican QIS 1
Mexican QIS 1
Mexican QIS1 Results 28 Companies (83.5% of total market)
Participation
Results April 26 2010
Assigned rating
Good information
Poor information (Excluded)
Grouping criteria of companies with "good information”
Criteria 1: Companies with an internal model for the BEL of long term life insurance .
Criteria 2: : Companies with and without an internal model for the BEL of long term life insurance. ))"
Correction of information and methodologies analysis
Companies with good information
Solvency index
1.39
2.01
2.51
SCR Increase
113%
59%
21%
Reserves decrease
7.0%
10.8%
11.2%
Eligible assets / SCR
0.89
1.19
1.51
Risk margin/ BEL
2.49%
2.13%
1.73%
Note: Currently the ratio between eligible assets and the minimum guarantee capital is 1.88
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Study advantages Results of the evaluation sessions
Greater involvement of the companies (voluntary participation / concern of the sector to prepare for change)
Increased awareness of the use of information and the related problems
QIS Reprocessing
Stage I – Troubleshooting
Stage II –"Detailed review of the rest of the information and proper processing
Gap analysis
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Time implementation studies
Readiness I
To properly estimate the time required for a successful implementation of the LISF, AMIS made !the following studies:
45 companies participated with 171 questionnaires
A Gap Analysis questionnaire
Had sufficient information to measure their risks
64%
•!• July 2010 ' ••! 28 companies, representing 76% of total market ••! The market estimated to require 33 months to implement the LISF
Had conducted a study related to the quality of their data There is few information related to operational risks 29%
PJ'Q/5,13'
33% - 40% Two Readiness studies, supported by E&Y to assess the readiness of companiesY'
•!• At the enforcement of the LISF' ••! Corporate Governance
Were interested in using an internal model to measure their risks Did not have all the capabilities and resources to meet the bill requirements
+55% 23%
Had an appropriate and sufficient organizational structure
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Readiness II - Results Survey on the state of preparedness in Corporate Governance aspects. It was applied in the first quarter of 2012 involving 38 companies with 237 questionnaires. Functions and organizational structure
General aspects •! 71% perceived that their corporate governance is adequate •! 89% have a mandatory conduct code
•! 79% believe that people are able to perform their duties •! 91% think that the function lines of responsibility are clearly defined •! 95% mentioned that there is a well defined organizational structure
Processes •! 70% said they have appropriate processes to achieve objectives •! Less than 20% believe that there are mechanisms for process documentation updates systematically
Insurance, Surety and Bonds Institutions Law
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LISF structure
LISF Elements
LISF consists of 510 articles divided into 13 Titles:
LISF contains measures to achieve: More precise Capital Requirements.' Strong Corporate Governance.' Better Risk Management.' A more effective review from the Insurance Supervisor. Wider and deper transparency and information disclosure.
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Title 1 Preliminary Provisions
Title 2 Institutions
Title 3 Organization and Corporate Governance
Title 4 Other participants in the insurance and bonding systems
Title 5 Performance, operation and prudential standards
Title 6 Procedures
Title 7 Institutions prohibitions
Title 8 Institution Accounting and Reporting
Title 9 Preventive and corrective measures for intervention and revocation
Title 10 Mutual Insurance Companies
Title 11 CNSF
Title 12 Commercial Insolvency and Liquidation
Title 13 Notifications, coercive measures and sanctions
Article 218 – BEL and Risk Margin Article 235 - Solvency Capital Requirement #!"
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Agreements reached with the authorities November 20, 2012
Position Paper Agreements Entry into force: January 1st, 2014 (24 months)
Only a mandatory credit rating will be requested
Do not consider the reputational and strategic risks within the standard model of Solvency Capital Requirement (SCR)
Article 247 will be modified so that the surplus capital of insurance companies do not hold a particular investment scheme
The size, scale and complexity of the risks in all aspects of LISF (the principle of proportionality in all three pillars of Solvency II) will be recognized
Shares of Real Estate Companies eligible for Reserves coverage and Solvency Capital
Recognition of
Return period on catastrophic risks
non-proportional reinsurance in the SCR
Summary of agreements reached with the authorities Entry into force of LISF
Allow preventive actions in mayor health expenses insurance
730 days since the law publication and an additional time to apply the regime gradually for the SCR coverage
Payments for preventive medicine services may be offered as additional benefits in these policies, only with a compensatory nature
Accident line of business in the Health Products of ISES
Compulsory Insurance (LSCS)
ISES can operate personal accident products, to expand their market
Institutions should specify in the policy in the case of compulsory insurance
Product Registration Additional clarifications
Risk Selection Standard model for the SCR"
Four points of the Position Paper will be negotiated in the CUSF of the LISF
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Do not strengthen the risk selection definition within the LISF
It was agreed to realize some clarifications regarding the competency of the Bank of Mexico and the Law enumeration and intricacies to respect the legislative technique
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LISF approval process LISF initiative was issued by the Treasury and Public Credit Commission of the Senate. December 11, 2012
The Senate voted, approved the law and sent it to the House of Representatives. December 13, 2012 April 4, 2015 Entry into force February 28, 2013 Approval in the House of Representatives.
LISF Implementation Process / CUSFâ&#x20AC;&#x2122; Consultation
April 4, 2013 Release in the Official Journal
45
LISF Implementation Process
LISF Implementation Process
A comprehensive secondary level regulation (CUSF) will be released, establishing all requirements in the law for the 3 pillars in April 2015 when it entry into force. Currently a consultation (negotiation) process is being held, consisting of three components: 1
The consultation on the general regulations articles project to be issued by the CNSF and derived from the LISF (CUSF)
3
2
2013
2014
2015
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4
CUSF Consultation Methodological presentation and comments for QIS Adjustments to Executable QIS Completion of QIS
Quantitative Impact Studies performance
CIS previous presentations
Qualitative Impact Studies performance
Completion of CIS CUSF release Systems trial LISF entry into force 47
48
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CUSF Consultation Process status
LISF and CUSF date of entry into force
CUSF Titles During the CUSF Consultation Process 36 of 39 Titles were analyzed and comments were sent. The CNSF, as pointed out by the guide consultation document, responsed to the analysis and comments posted.
Reviewed To be reviewed Two rounds
1
9
17
25
33
2
10
18
26
34
3
11
19
27
35
4
12
20
28
36
5
13
21
29
37
6
14
22
30
38
7
15
23
31
39
8
16
24
32
The CUSF consultation process, in itself, lacks of an analysis and discussion point between AMIS and CNSF achieving substantive agreements that facilitate the LISF implementation - Analysis Groups '
Staggered terms need to be defined for the entry into force of the various items included in the CUSF.'
Within the Consultation Group 10, the CNSF already includes a transient project that is under analysis by the sector.'
49
Consultation Process from AMIS perspective
Topics directly related with Solvency II principles
50
Consultation Process from AMIS perspective
•! Corporate Governance. A high degree of rules prescription, operative functions are assigned to Board of Directives. •! Information disclosure. Maintains dogmatism in market discipline criteria, imposing requirements prevailing detail, amount and depth, on the relevance and quality of the disclosed information. •! Insurance Special Funds. Duplicates the new solvency requirements which by regulatory design should be sufficient. Will impact on premiums costs and will affect insurance penetration and users. It must have a very slow pace of creation. •! Topic where CUSF goes beyond the LISF scope "! Third party services (outsourcing)
51
•! Distribution Channels "! Fee disclosure, this measure may further inhibit the development of distribution channels and create market distortions.
Strategic and Priority Issues •!Of the development sector agenda •!Pendings to address during LISF negotiation
•! Investment regime. Avoid regulatory inequity with other financial institutions. •! Product Registration •! Selection and underwriting, are not clearly specified, and is a basic insurance principle. •! Defines and states product features which are insurers scope (benefit period, dividends, deductibles, etc.). •! Claim payments are not allowed to be conditioned to renewal. •! Must clearly specify that companies can establish the method to recognize the risk transfer of nonproportional reinsurance. •! Review of Catastrophe Risk methodologies.
52
Consultation Process from the perspective AMIS Quantitative Impact Studies. •! Incomplete materials and inefficient tools. High loads and operating costs for insurers without the benefit of evaluating the appropriateness of the methodologies.
Quantitative aspects
•!Comprehensive analysis of the operative impacts as result of the CSR model application and Economic Balance (assessment with less than a year periodicity). •!Analysis and definition of the accounting transition
Qualitative Impact Studies (CIS)
•! Regulatory Report Generation and system adjustments (including SIIF). 53
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CIS
Sector summary
!! CNSF plans to run three Qualitative Impact Studies (CIS). !! The objective of these studies is to examine the impact of LISF implementation regarding Pillars II and III issues. !! CIS-1 was conducted in the months of May, June and July 2013. !! CIS-2 was held from October 21, 2013 to February 28, 2014. !! CNSF provided a program to answer a questionnaire with 121 questions related to the following topics: !! Corporate Governance !! Information disclosure !! Third party Services
TOTAL MARKET EIC-1
EIC-2
EIC-1 p
EIC-2 p 30
100
25
80
20
60
15 40
10
20
Companies should do an assessment of their degree of progress in the implementation of each concept and deadlines for completion.
0
5
GC
AR
CI
AI
FA
CF
FC
ST
RI
0
56
Size summary for the CIS-2 90 80 70 60 50 40 30 20 10 0
RI
ST
GC
CIS-2 AR
CI
FC
!! T*KM@' !! L@UGVL' !! WJW*T' L*KX@W' !! EL*TT'
Quantitative Impact Studies (QIS)
AI
CF
FA 57
AMIS position on the QIS-1
QIS CNSF plans to run three Quantitative Impact Studies (QIS) QIS-1 process formally began in June 2013 and ended in December of the same year. CNSF provided methodological notes, manuals for information integration and and an executable program. Methodological notes sent by the CNSF have a academic structure that does not correspond to the level that is used in its implementation. AMIS performed exhaustive analysis of these materials and provided comments that have been considered in the QIS-2 implementation, currently underway. In November 2013, AMIS stated its position regarding the QIS-1 to the regulator.
AMIS considers that some of the specific objectives of QIS-1 were acomplished, however the aim of assessing the relevance of the models, as well as the data used for the calibration of the parameters remain pending, as long as there is no appropriate statistical analysis and various methodological issues are resolved.' Thus AMIS Associated companies have indicated that the results obtained in the first year are not representative of the new solvency requirements under the new law.'
We agree with the CNSF that the model calibration process will gradually mature, but it can not be expected to assess the relevance of a model without having made !the appropriate statistical analysis.' 60
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Preparing for the QIS-2
QIS-1
•! There is a broad agreement between AMIS and CNSF visions about the additions and adequations required in the standard model, for the QIS-2. •! In that sense AMIS proposals have sought to adapt to the structure of the standard formula.
!! AMIS received 68 QIS 1 result reports, with the following distribution by company type:
From our point of view, for the quantitative model to achieve the remaining objectives of QIS-1 it is essential to conclude at least: "! Validation of information. "! The parameter estimation analysis and its properties. "! The evaluation and comparison of interest rates models (financial model) "! The evaluation and comparison of life long-term decrease model. "!The health insurance model "! The evaluation of the model disaggregation level.
!! The market share achieved with these reports, based on premiums as of December 2012, is 92.63%.
62
Preparing for the QIS-2
QIS 3!
The QIS-2 process formally began on February 4 and was scheduled to conclude on April 4.
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Due to process ambitious schedules, methodological notes show a downgrade regarding the new QIS methodologies.
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The industry believes that it is important that CNSF has adequate timeframes to properly document the materials that underlie the QIS (manuals and methodological notes) and to solve implementation problems of their tools (executable, validators, etc.).
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As of today, deadlines have been extended for the submission of information and results to April 30, 2014.
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In order for AMIS to support its members and complement the understanding of methodologies, CNSF provided it with the QIS-2 program code, under high confidentiality standards.
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CURRENT STATUS OF THE CUSF PROCESS !
CURRENT STATUS OF THE CUSF PROCESS !
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CUSF pending issues with the CNSF and SHCP
CUSF pending issues with the CNSF and SHCP
Quantitative requirements
Products Registration
Title 22, Accounting & Economic Balance
Bancrupcy Complementary Funds (Mutual Trust)
Information Disclosure to Stakeholders
Corporate Governance
Third Party Services (outsourcing)
Implementation measures (enforcement schedules)
Intermediaries Commissions Disclosure
Investments Regime
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1. Quantitative requirements
•! Mismatching due to market valuation of assets and liabilities. •! Exhaustive documentation is required (manuals and methodological notes) and transiency •! Financial and health model proposal.
2. Title 22, accounting & Economic Balance
•! Comprehensive analysis with technical titles of the CU •! Extension of consultation period and appropriate transiency for the adoption of the economic balance.
3. Bancrupcy Complementary Funds
•! Duplication of solvency requirements •! Financing impacts premiums. Regulator seeks to achieve 4% of the premiums in 10 years.
4. Intermediaries commissions disclosure
•! Milestone compliance : 3% premiums / GDP •! Condition the market development and provide greater transiency.
5. Products Registration
•! Define and states product features which are insurance scope •! Set transiency and a second consultation round.
6. Information Disclosure to Stakeholders
•! Significant progress in simplifying requirements •! Need to simplify and / or eliminate some reports that are considered essential regarding sensitive information.
7. Corporate Governance
•! Remove the operating elements assigned to the Board, reduce prescriptivity and redefine the degree of supervision.
8. Investment Regime
•! Proposal avoiding regulatory inequity with other financial institutions. Pending response from the regulator.
9. Third Party Services (Outsourcing)
•! Simplified documentation verification framework and reporting for non-nuclear activities •! Align the drafting of Transfer Pricing Studies with the Income Tax Law(LISR).
10. Implementation measures (enforcement schedules)
•! In negotiations with CNSF. Up to 90% of agreement. •! More implementation measures need to be foreseen.
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Process’ lessons learned Regulators should seek close cooperation with the industry in the process of implementation of any initiative like Solvency II.' A first effort ought to be redefining the role of the supervisor, so when defining Corporate Governance requirements, a balance in business management can be achieved.' Similarly any consultation process should consider adequate times considering that the institutions should continue managing the business in accordance with current regulations and do not have unlimited resources to meet all the requirements demanded by a process with too ambitious deadlines.' It is preferable to start with a Capital Requirement model that allows insurance companies risk management, and promote strategic discussions in the insurance companies.
4. Solvency in Latin America
The process must be fully documented and it systems to execute models must comply with programming standards. 67
Solvency Status / Europe and Latin America CambiosIIen Marcos Legales
Natural evolution in legal frameworks
Countries that are making or just made changes to laws or insurance regulation
Valuation Risk Models
Country
Integral
S II
Country
Brazil
NO
YES
Guatemala
Chile
YES
YES
Honduras
Colombia
NO
Partial
Costa Rica
YES
El Salvador
YES
España
YES
Bolivia
YES
Integral
S II
Risk dependency
YES
NO
Risk measurement
NO
YES
Mexico
YES
YES
Partial
Panama
YES
NO
Partial
Peru
YES
YES
YES
Venezuela
YES
NO
YES
Nicaragua
YES
Partial
Financial risk Operational risk Stress tests Technical reserves
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Solvency II was postponed to January 1, 2016 (crisis, markets, economic balance, and IFRS effects) Long Term Guarantees.
Transition Solvency II Consistent with the market Stochastic Models / No Risk based factors Internal models No No Yes Tail VaR / VaR No VaR (90-97.5%) (99.5%) No Yes No Yes (Life) Yes No Yes Retrospective Methods Prospective Methods Sufficiency Best Estimator (BEL) Unearned premium Actuarial models + Risk Margin Quantitative limits Investment Policy No Credit ratings No
Partial
Yes
No
Partial
Yes
FIDES efforts on Solvency II
Status Solvency II / Europe and Latin America
Europe
Investments Reinsurance ORSA (Own Risk and Solvency Assessment) Information disclosure
Solvency I Statutory
Coordinate a Gap Analysis between 19 countries (FIDES’ members)'
Latin America
Associations perspective" Chile
Peru
Mexico
Brazil
Colombia
Approved by Senate, in discussion by deputies CBR Law. Implementation time (3-5 years). Model analysis , 2 QIS in process
Advances in some risk assessment regulation. Peru: Insurance Sector Gap Analysis. Bill drafting.
LISF approval on April 4, 2013, implementatio n April 4, 2015, via CUSF, which is in process.
Advances in regulation of some risks, reserves calculation with BEL methodology. SUSEP will start to implement SII
Solvency Capital calculation for some financial and counterpart risks. Calculation of sufficient reserves. +'"
Insurance companies perspective"
Regulators perspective
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Conclusions and Final Comments Solvency II will have a great impact on the insurance companies risk management . Elements of Pillar I are essential for insurance companies to understand their risks behavior, which will be managed throughout Pillar II. Strong Corporate governance plays a key role in this new model to manage the insurance companies. Organizational structure changes will be required, and a properly assignment of responsibilities and functions. A standard model is a mechanism to begin the understanding of the risk behavior, but the most proper risk management will be achieved only with an internal model that adequately capture the companies risk profile.
5. Conclusions
The Board of Directors and the CEO are the owners of ERM processes and Risk Capital management , so it is important they understand the Risk Capital Requirement model. +#"
Conclusions and Final Comments The ORSA test is a key element that allows the quantification of solvency comprehensive needs and ensures their compliance in the long run. A clear definition of risk appetite is essential to incorporate the capital requirement model in the business management process.
Thank you for your attention
From this definition, the processes of decision making based on risk should monitor that the limits set by the risk profile are observed. Through the elements of Pillar II and Pillar III, the regulator must define its new role in the supervision of insurance companies. Achieving a risk management system embedded in the firm requires a considerable investment beyond building actuarial / quantitative skills. Companies need to understand the scope of regulatory changes and design work plans and allocate budget for the new regulatory framework transition. +$"
Acuerdos Documento de Posición 2010 y 20 de noviembre del 2012 Entrada en Vigor: 730 días a partir de la Promulgación de la LISF (5 de abril del 2015)
No considerar riesgos reputacional y estratégico dentro del modelo estándar del Requerimiento de Capital de Solvencia (RCS)
Permitir prevención en Únicamente se solicitará seguros de Gastos de forma obligatoria Médicos como indemnización. una calificación Permitir Accidentes crediticia Personales a las ISES
Reconocimiento del Reaseguro No Proporcional en el RCS
Período de retorno en los riesgos catastróficos
No se sujetó el capital excedente de las aseguradoras a un régimen de inversión particular
Se reconocerá tamaño, escala y complejidad de los riesgos en los 3 pilares de la LISF (principio de proporcionalidad)
Registro de Productos
Acciones de Sociedades Inmobiliarias computables para Cobertura de Reservas y Capital de Solvencia
Modelo estándar para el RCS'
Cuatro puntos del Documento de Posición serán negociados en la CU de la LISF
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%)'
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Executive Summary • Latin America remains as a land of opportunities for Zurich in next few years. It´s a region to think in the long term. Insurance market has a fertile field to develop all the product lines as the middle class emerges across countries. • Legislation and regulation will play a key role in determining the attractiveness of the region as a place to do business and the competitiveness of the insurance sector. • Populism and interventionism are losing strength. Rational economic policies may set the tone for most governments in LatAm in the near future. • After surfing the commodities’ price boom during most of the 2000´s first decade, Latin America will have to deal with plateaued price level as China is slowing down. Reliance in commodities exports is not sufficient anymore. Such price moderation may drive countries to change internally. • In India, a very pragmatic and pro-market set of policies will create a tremendous impulse for Latin America to follow suit. India may become the next locomotive to compensate for China's slowdown. This may help the region in terms of selling its commodities. • The tide is shifting toward a "Pacific Alliance" mind-set. External factors will help foster a more pro-business attitude in Latin America. • The perspective of a US-Europe Trade and Investment Partnership will speed up a protrade attitude from the region's main countries. • US economic recovery can also give a push into the region. The presidential election in 2016 may bring a more pro-Latin American agenda. Both next presidential candidates in the US, Hillary Clinton and Jeb Bush, are more sensitive towards the region. • In Mexico, president Enrique Peña Nieto is still working to ensure that his potentially monopoly-busting constitutional reforms will be implemented.
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• Beyond short-term uncertainties in its the presidential election. Colombia is very well positioned for foreign investment. The Colombian economy has been growing faster than the region’s average. New regulation in insurance may bring extra protection and growth prospects. • Brazil’s elections in October may be a window for change. A shift toward economic rationalism and new social trend, like the increase of the Protestant and evangelic creeds in the Brazilian population are creating a strong middle class with completely different mind-set. • The tumultuous Venezuelan picture will be turning as the petrodollars are becoming scarcer. Maduro´s government will not be toppled by the opposition but, rather, because of the poor shape of the local economy. • Education remains as the main long term challenge for the region. Disastrous PISA results still occur all the time in most regional countries. Low labour productivity leads to a weak sectorial competitiveness.
· Business Session I: “Latin America Opportunities Ahead: a Political, Socio-Demographic and Economic Outlook” Session Summary Latin America remains a land of opportunities for Zurich in next few years. Insurance market has a fertile field to develop all the product lines as the middle class emerges across countries. Economic activity in Latin America and the Caribbean is expected to stay on a low speed path in 2014. However, there is a considerably divergent growth dynamics among countries. The faster Latin America exemplified by countries like Peru, Colombia, Chile and Paraguay is likely to keep higher growth rates besides the downside risks. On the other hand, Brazil, the biggest economy in the region, is still on a very slow path. In Mexico several of the earlier headwinds facing activity recovery have eased, especially with the U.S. demand picking up. The outlook in Argentina and Venezuela is subject to high uncertainty. Arguably, some of the major commodity-importing economies, especially China, are slowing down. The decline in commodity prices caused by weaker perspective of demand growth in emerging markets, may lead to a complete turnover of the economic model adopted in the region. The recovery in the United States and other advanced economies is expected to bolster export growth, but lower world commodity prices and rising global funding costs are likely to weigh on activity across the region.
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Reliance in commodities exports will not be sufficient to sustain the economy growth as it used to be in the early 2000â&#x20AC;&#x2122;s. Policy adjustments are needed in order to a clear focus on reducing financial vulnerabilities, and stepped-up structural reforms to remove obstacles to growth. These external factors will help foster a more liberal and pro-business attitude in Latin America. Populism and interventionism politics are losing strength across the countries. The tide is shifting toward a "Pacific Alliance" mind-set. Countries are realizing that in the new era of globalization a more openness to trade is needed. The perspective of a new US-Europe Trade agreement will speed up a pro-trade attitude in the region. As a reaction, Mercosur is also improving its efforts to achieve an agreement with EU. In India the new prime minister Narendra Modi has come to power with a very pragmatic and pro-market set of policies. This will create a tremendous impulse for Latin America to follow suit. India may become the next locomotive to compensate for China's slowdown. The announcement of a big investment plan for the LatAm region, focused in expanding infrastructure integration, may help the region in terms of selling its raw materials. Mexico is poised for sustainable growth. Main indicators are solid and economy seems to rebound to higher growth. Enrique PeĂąa Nieto is still working to
ensure that his potentially monopolybusting constitutional reforms will be implemented. The reform in energy sector is a key challenge looking further ahead. Most important move in 70 years and will produce short term results allowing the private companies, mainly foreign, to speed-up the investment in the sector. Pemex invests $20 billion per year today and it is assumed to double in a decade. Mexico has huge non-conventional resources but no shale gas. Texas now produces more oil than Mexico and more gas than Canada. Gas Pipelines from Texas to Mexico will allow the latter to bring down the 70% gap against Mexico. Basic petrochemical sector has been opened and will become very efficient. Opening up the oil sector is a huge political change. Telecom reform is a very key issue as well, the market leader controls over 70% of all services. The regulator will act to foster competition and reduce costs to the consumers. But there is a tale of two Mexicos. One shows high productivity, and is very dependent upon the US economy, the other Mexico is stagnant or negative. It relates to the southern part of the country where there is a clear lack of infrastructure and social welfare. There is arising civic pressure for better public education, infrastructure and health services. Brazil and Argentina are facing a strong civilian movement as well, where there is a really clear desire for a change.
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Colombia is forecast to continue expanding at fairly rapid rates. Multiple trade agreements have had a great effect in the economy. Besides uncertainties regarding the Presidential election, Colombia is very well positioned for foreign investment. Poverty, unemployment, inflation are decreasing while prospect of peace may increase the GDP growth rate by 2 p.p every year. New regulation in insurance may bring extra protection and growth prospects. The figures in insurance have been double digit. As the other countries structural bottlenecks have to be eliminated. In Peru, GDP is likely to continue expanding at fairly rapid rates. Domestic consumption remains strong, supported by record-low unemployment rates and solid growth in real wages. Activity in Chile is projected to moderate. Another shock by the drop in price of copper is on course. Current account has been in the red for three years. Investment growth is falling quickly and became negative as entrepreneursâ&#x20AC;&#x2122; confidence remains at a low level, including in the mining sector. Bachelet's agenda has shifted dramatically. In order to reduce wealth disparities, a fiscal reform raised taxation upon the richest bracket and increased the tax rate on capital. The direction is fine but the waters are unchartered for this social upgrade. Argentina and Venezuela are expected to face a recession this year and more problems in 2015. The gap between official and market exchange rates remains large in both countries. Erroneous macroeconomic policies have led to high inflation and a drain on foreign exchange reserves. The election in Argentina next year brings some hope for a change. Currently government is trying to begin the adjustment but more policies are needed to restore macroeconomic stability, specially a rule to control public spending. A recent discovery of a huge shale Oil & Gas reserve in Argentina can play an important role in the future. Stagflation is contributing to feed a strong civilian movement. Venezuelaâ&#x20AC;&#x2122;s picture is turning as the petrodollars are becoming scarcer. Maduro´s government will not be toppled by the opposition but, rather, because of the poor shape of the economy. Brazil remains on a slow path. The average growth between 2011-14 is likely to be less than 2% per year. The swelling of the government size and the extremely high and complex tax burden associated to a swollen public sector have become the main challenge for the next Brazilian administration. Corporate capacity to fund its own investments out of retained profits is falling year after year. The public inefficiency in public management has been leading to a ratio of investments as a percentage of GDP to be quite smaller than comparable emerging economies and even mature ones. The October election may be a window for change. Dilma Roussef has been seeing her approval rate decrease to a dangerously low level. Now there is a bigger chance for change in power after 12 years. The 2015 Economic Agenda has to contemplate a new control rule for public expenditures, leading to interest rate easing and low inflationary pressure. A new tax system is absolutely vital
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to increase the private investments allowing an EBITDA recovery. Finally, the economy will be able to enhance productivity leading growth rates to recover toward a higher path. For Latin America as a role, people’s education remains as the main problem as can be proven by the disastrous PISA results in the last survey (2012). The best positioned country was Chile, ranking only 51th among 65 countries. Low regional labour productivity leads to a weak competitiveness. There is only an incipient innovation activity as measured by the small number of patents registrations in the LatAm region. The improvement of education skills will create a better environment to the development of insurance products. Key Zurich Take-aways • Latin America remains a key market for Zurich. The region will contribute to a significant proportion of the Group’s profitability. High growth localities will generate fast expanding per capita incomes. Dynamic sectors will help to improve business environment and the demographic window will have an impact for contribution-defined pension plans. • Zurich should enhance its engagement with policy-makers in order to positively influence its environment and commercial prospects. • Constitutional reforms in Mexico will make the country a key market for Zurich. Banking penetration is very low and credit for the informal market is done through small companies called as “Microfinancieras”. There is an immense window to explore. • Latin America has turned into an example of democracy. Massive civilian movement towards better education, public transportation and better health standards have become a constant popular demand upon politicians. • Finally, the US may "return" to Latin America as an active player. Both prospective presidential candidates in the US, Hillary Clinton and Jeb Bush, are somewhat more sensitive towards the region. Surprise Events to Watch Out • Infrastructure projects following trade agreements could create a vast field for Zurich to explore in the region. • In Mexico, the consolidation of energy reform will create a typing point to its economy. An opportunity that cannot be missed. • October election in Brazil may create a new optimistic trend in the private sector. If an opposition candidate wins that will create a huge opportunity for some essential reforms to be finally implemented. Public pension reform is a key issue for Zurich.
José Talarico Head of Government & Industry Affairs - LATAM
· 2014 Zurich RAC Latin America Participants 79
Chairman Latin America CEO General Insurance
CEO Latin America Global Life
Andrés Pastrana Arango Ellen Gracie Guillermo Ortiz
Antonio Cássio dos Santos
José María Orlando
GAIA
RAC meeting Guests
Guest Speakers
Francis Bouchard José Talarico
Abel Picchio Alejandro Raffin Carlos Nogueira Gonzalez Cristiano Fakhoury David Colmenares David Stoll Emanuel Baltis Fabio Rossi Facundo Montenegro Gustavo Bortolotto Helio Flagon Javier Rodriguez Jose Manuel Camposano Luca Marighetti Luis Reis Michael Raney Nora Vignolo Radamés Lopez Raffaella Russi Richard Vinhosa Samuel Berner Santiago Gallo Sylvia Martinez Raul Vargas Victoria Bejarano Werner Stettler
Alfonso Prat-Gay Andrés Oppenheimer José Alexandre Scheinkman Paulo Rabello de Castro Lic. Recaredo Arias
IAC Members
Special Guests Johannes Matyassy – Swiss Ambassador in Argentina Fernando Jorge Castro Trenti Mexican Ambassador in Argentina
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GAIA 7
LatAm Report Insurance and Reinsurance
RAC Meeting 2014 Produced by Zurich Latin America José Talarico Head of Government & Industry Affairs - LATAM
The entire content of this Gaia Latam Report edition is subject to copyright with all rigths reserved. The information may be used for private or internal purposes, provided that any copyright or other proprietary notices are not removed. Reproduction in whole or in part or use for any public purpose is permitted only with the approval of Zurich Latin America.The information provided is for informational purposes only and no way constitutes Zurich Latin America position. In no event shall Zurich Latin America be liable for any loss or damage arising in connection with the use of this information.
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