As managing director of Finpro & Casualty at Latin Re, Rafael Caminha (pictured) has a front-row view of the key trends shaping the financial lines market in Latin America and beyond.
Offering his perspective on the market, he noted that it paints a mixed picture at present, and it’s not the easiest time to be in the financial lines space. Why? Because, from 2021/2022 until now, there was a huge influx of new capital into the marketplace, he said. This created an unstable environment because when you compare the level of capital in the market today against the level of new business, the cracks begin to show.
Looking at the directors’ and officers’ (D&O) liability market, he highlighted that it’s facing pressures across the world, with low new business volumes coming up against the conditions of the last two/three years, which have decreased the level of premium globally. “For a better perspective, shortage in new business has been caused by the low traction of new IPOs which has always been a premium driver due to the complex regulatory environment that surrounds it.”
IPO proceeds in the Americas year-to-date, as of Q3 2024, saw a 37% increase versus the same period in 2023, which a recent report from EY noted was driven primarily by several large deals across multiple sectors. Seventeen (17) deals have raised more than US$500 million this year, more than doubling the full-year total of seven in 2023. Meanwhile, Q3 2024 saw three such deals, including the largest IPO of the year to date globally, which raised US$5.1 billion and accounted for 19% of YTD IPO proceeds in the Americas.
“In order to bring some numbers,” he said, “although we had an upward curve in the IPO proceeds compared to the previous year at a 37% increase, or US$27.3 billion, this number is still far away from the 2021 global peak. But even more interesting is Brazil, one of the biggest D&O markets in gross written premium in Latam. In previous years, the country bought probably the largest number of companies for the US exchanges in the region, but it just had its first operation going public in NY since 2021 and locally, in the Brazilian local exchange, the scenario isn´t much better.”
These factors combined, caused by high interest rates in response to inflation concerns, drive the competition up on the top of the renewal portfolio. From the other side of the equation, he said, after three years of a hard market and high rates for the agents of the marketplace, between 2018 and 2021, there was a good volume of new stamp capacity. In Brazil, this was an increase of around 200% compared to 2020. “So, on the one side, you have more capacity and, on the other, you have a decrease in new opportunities. It’s the combination of the two factors that is creating a lot of instability and competitiveness.”
In Brazil specifically, Caminha said, 2023 saw the highest downward curve in one year, in premium, certainly for the past 10 years and possibly in its entire history.
“I would say that we have reached an influx point where several carriers are underwriting below rating adequacy,” he said. “However, we are talking about a long tail line of business. So, those results will come through in a few years. Concerned about the sustainability of their own operations, I´ve been seeing a movement coming from the biggest players in the region, trying to slow down the discounts - but only the future will say.”
The conditions in the market today do not yet look set to abate, he said, as there are still new MGAs joining the market. “We are still seeing new carriers join the financial lines marketplace so I would say, in 2025, we’re going to have another year of between 20% and 25% downward pressure in terms of discounts, etc. We do have some financial lines agents with the hope that 2025 will represent a plateau leading to greater stability. But I’m not one of those.”
From Caminha’s perspective, the challenges presented by this scenario are also a real opportunity for players across the market to step up and be disruptive. That disruption might look like improvements and innovations in wordings, he said, and also the potential for new blended products. “There’s an opportunity and we are already investing time and energy by improving the usual concepts and structural approaches of the local marketplace. In other words, we’re looking to use that high receptiveness from the marketplace on other fronts rather than only pricing. D&O should not be seen as a commodity and innovation is needed.”
Looking across the market today, he spotlighted some of the opportunities for innovation that he’s seeing playing out, such as the tailor-made products being distributed by specialists for specific industries such as the crypto sector, gaming companies, among others and he added: “We are discussing how we can add value to our clients by adding some ingredients of innovation at a market that historically tends to be quite traditional 24/7.”
