Local issues to global challenges: where does Latin America go from here?

The 4th Edition of the Miami Latin American Claims (Re) Insurance Forum, hosted by QLDG and Kennedys CMK between 11 and 14 June, 2018, brought together over 185 key international and Latin American insurance industry experts to discuss top claims issues, trends, and developments in Latin America & the Caribbean.

2017 was a year of intense activity for the insurance industry covering this region due to the multiple occurrence of natural disasters such as hurricanes and earthquakes, coupled with new cyber attacks. These events tested the market capacity, the solvency of insurers and the capabilities of service providers, especially those dedicated to handling claims. The market suffered losses and expenses that outpaced premium growth for many insurers and reinsurers as although catastrophic events could lead to increased premiums, premiums have not increased significantly in the aftermath of these events.

In the view of the market leaders (who opened the event), the Miami reinsurance market has nevertheless remained strong, in spite of the fact that it has no obvious incentives for development and growth as other Latin American countries might, such as Panama and Brazil. Why might that be the case? In part due to its privileged geographical location; proximity and access to all the countries in the region through Miami’s International airport.
This was proven for the Caribbean region following hurricanes Maria and Irma, where a significant section of the Miami market, especially service providers, had to hop on planes to the islands on a weekly basis for months to come. 

Business continuity

A Latin American hub based in the United States also offers the much-needed security across legal, economic and political matters, to attract the right workforce and bilingual talent with a unique and eclectic mix of local knowledge of the region residing in the United States. Miami is like no other city. The Miami reinsurance market will continue as long as there is interest in the Latin American and Caribbean region.

The key focus of this year’s discussion centered on the natural catastrophes seen in the region, from the hurricanes in the Caribbean, earthquakes in Mexico and Ecuador, and the Niño Costero in Peru.

Although there is no way to be fully prepared to face a catastrophic event, having a “to do list”, which includes and defines the roles of the parties, the response protocols, the communications channels, etc., before the catastrophe occurs, would help to facilitate the work for insurers and reinsurers. The importance of a good Business Continuity plan was discussed at length. There was also some discussion on the role of public adjusters in how claims are handled and the impact their involvement may have.

Another concept, that of wide area damage, was discussed on a panel that considered the recent hurricanes in the Caribbean, Maria and Irma, and even looked back at a case study of a massive landslide in Venezuela, which occurred after several days of uninterrupted rains, a natural phenomenon which killed 25,000 people and caused considerable damages to infrastructure and public and private services. Now, as with before, we have learned that even a single catastrophic event generates all kinds of damages, losses and claims of a different nature and claims of “wide area damage”, yet there is little case law that considers how such claims would be resolved. Furthermore, from a coverage perspective, and to avoid the E&O policies being triggered, the wording of the original local policy, the slip, and the reinsurance contract should match perfectly. This may sound obvious but it is a common issue encountered in the market and results in conflict. Additionally, there should be more awareness amongst all parties of the terms of the policy, clauses and endorsements wordings before its inception. 

Perhaps a lesser known catastrophe, that of “Palizadas” in the Amazon (large debris mass from trees) was analysed, as these Palizadas travel down the Amazon and have been tearing down bridges during construction, as illustrated by real case studies in Bolivia and Brazil. Are they sudden and unforeseen events, which attract coverage?  Before underwriting the risk, insurers need well-informed engineers/construction experts to determine how the projects are being undertaken and how insurers may need to consider more monitoring of construction projects to ensure that their risks are not being increased by the method of construction used. Across all cases studied, there was a lack of consideration of this local phenomenon during the design phase, perhaps due to foreign contractors, cutting costs and as the design did not consider the risk, especially when temporary structures were involved. 

It brought back home the importance of understanding the distinction between a defect and damage and how far construction and engineering policies do or do not go towards providing design coverage, and to what extent professional indemnity insurance needs to be more prevalent in the region.

Silent cyber

Beyond natural catastrophes, cyber threats also pose a challenge in the region. Some of the region’s leaders and champions of the nascent cyber market discussed the most pressing issues on cyber (re)insurance. Given that the product is still developing in the region, discussion was mainly geared towards overlapping coverage with other products - mainly directors’ & officers’ (D&O) liability, kidnap/ransom/extortion, and crime/BBB - and then moved to a discussion on the catastrophic effects a cyber event can have on (re)insurers and the dangers of providing some cyber cover inadvertently (via overlapping coverages) in what is known as “silent cyber”. It is evident that cyber security remains a concern and will be a hot topic for years to come.

However, maybe one of the most controversial and dynamic discussions was the panel on common issues experienced in handling complex claims in Latin America. The discussion invited representatives of local insurance companies, brokers and reinsurers, to explain the recurrent concerns they face when dealing with claims in the region. Particularly, topics such as the use of “control clauses” versus “claims cooperation clauses” and how these clauses have impacted the way local players manage their claims and their insured’s expectations were very interesting for the audience. The key takeaway was how important it is for the international players doing business in the region to understand the regulatory challenges and obligations the local players are subject to and, therefore, to engage more actively in the communications with brokers and local insurance companies.

Clearly there are significant lessons to be learned, especially the preparedness of the market in respect of natural disasters. The open sharing of concepts and solutions amongst the different players in the insurance sector shows that the industry is evolving in the right direction.