Low Penetration of Insurance in Panama Creates Opportunities

March 19, 2012

By Lee McDonald
A.M. Best Company, Inc.

In the past five years, Panama has seen an explosion of commercial development and an influx of insurance companies. The country is about to remake its insurance legislation, which is also aimed at helping the country become a regional hub for insurance and reinsurance, according to Carlos Abrahams, a director at Global Intermediaries. Global is a specialized reinsurance consultancy and brokerage in Panama City, Panama. He's also a veteran of the Caribbean, Central American and South American reinsurance markets, having worked in the United States and elsewhere, both before Panama's political upheaval and eventual resolution.

Q. Many in the Panamanian insurance community believe Panama may be returning to its roots as a reinsurance and insurance center. What does that mean?

A. Panama has been a financial center from at least the beginning of the last century. Since the construction of the Panama Canal, many banks established themselves in Panama to cater to the shipping lines. The Panama Canal takes only cash, no lines of credit. A cash payment has to be made to the Panama Canal every time a ship transits. As an international banking center and financial center, insurance tagged along. (Manuel) Noriega's regime destroyed the blooming reinsurance center in Panama. When the U.S. decided to forgo tax payments on U.S. corporations residing in Panama. Noriega in turn decided not to renew work permits on many of the executives. They had to find an alternative location.

That opened up the market in Miami. We were involved with the first wave of companies. The flight of capacity in Panama left a void for insurance companies, and mainly the financial centers or the banks. Panama is destined to become the financial center for Latin America. It has communications, transportation hubs and business structures, the U.S. dollar as currency and political and social stability.

Q. Where do you see Panama's market today?

A. We’re regional. We utilize our resources the best we can. Our countries in Central America are rather small, both in macroeconomic figures as well as insured population. We see opportunities. Why? Because a low penetration of insurance as related to GDP allows for sustainable growth. During the financial crisis that affected many markets, as insurance business was receding elsewhere, insurance grew in Central America at a rate of 5%.

As an example, Honduras shows growth in insurance penetration of 8%, which is again quite positive. Banks have opened up to lending and personal banking. They’re not only catering to the need of large businesses, they’re engaging in home loans, lines of credit and credit cards. That is generating a need for insurance. People are acquiring goods and want to protect them. Bear in mind that banks require that you protect their insurable interest in goods that are being bought by these lines of credit.

Nevertheless, we must heed signs of warning on the influx of excess capacity to these markets as it proves to maintain unsustainable conditions for insurance and reinsurance premiums.

Q. How are insurance markets in Panama and Central America different from other regions?

A. Personal relationships still play a big role in understanding how everything ties in. It’s market intelligence. It's much more than microeconomic figures. It's who is who and who is involved with whom. These are not financial groups. Another aspect which is quite interesting is the money that’s coming in. On the government side, there are millions of dollars coming in from foreign aid. We have the interest of the IFC (International Financial Corp.) and similar organizations. Our company has been involved in many of these large facultative risks.

Q. Can risks here be covered locally?

A. One issue is market size. Facultative business is what we mainly do but treaties are also a big part of the business in Central America. We have 3.5 million people in Panama. We’re the second-highest penetration of insured premiums per capita, second to Chile. Some companies in the U.S. would not look at that sample, would not consider the law of large numbers to apply to 3.5 million, depending on the product. A lot of the businesses that go out of Central America are not because of adverse risk. It is either excluded from the treaties because there is not enough of them to create a treaty need or a treaty inclusion, or they will skew any result by having a loss, or lack of capacity.

Q. Are major reinsurers interested in your market?

A. What I’m seeing is a lot of slips out of London, a lot of capacity. A dollar is composed of 100 cents. You can get them on four quarters, 10 dimes, 20 nickels or you can go at it cent by cent. The syndicates are starting to look at smaller business— business that is not competed for. You have to realize where the costs are. It’s not only loss ratios but administration.

Q. Panama has a new insurance law pending in its legislature. How will that affect the market for reinsurance and larger commercial risks?

A. New regulation creates an administrative unit within insurance companies in charge of taking care of claims and differences with insurance consumers. The superintendency is brought up to meet international norms of supervision; it grants the superintendency the facility to regulate the correct application of international norms of financial information for reserves and investments of insurance and reinsurance companies. There is also an obligatory registry in Panama of reinsurers as well as basic rights for insurance consumers.

(By: Lee McDonald: mailto:[email protected])

Copyright:  (c) 2012 A.M. Best Company, Inc.
Wordcount:  915


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