New Insights Article! Should You Start Writing Business in Latin America and the Caribbean?

Thu, 12/01/2016 - 14:22
by Joshua S. Pestano, CPCU, ACII, ARe

Insurance in Latin America and the Caribbean does not have to be a foreign concept for industry professionals, although it is often treated as such.

Because insurance is a global industry, the development and growth of different markets do not happen in isolation. While different countries may have varying levels of regulatory involvement and intervention, the core concepts of risk financing and transfer remain the same: an individual person or organization (insured) transfers the uncertainty of risk to a risk-bearing entity (insurer) and makes a fixed payment (premium) in exchange. An insurer accepts risks from many different insureds in the hopes that the premium collected will be sufficient to meet its obligations under the insurance contracts it has written. Insurers also employ different risk management techniques to increase the likelihood that they will experience positive overall results. One such technique is diversification.

In insurance, diversification is the act of spreading, or distributing, risk so that poor results in one area may be mitigated by good results in others. An insurer can diversify in various ways. One is to write different classes of insurance—for example, auto and home insurance. If an insurer experiences poor results in its auto insurance portfolio because of an increase in crashes caused by distracted drivers, it may compensate for these losses through improved results in its homeowners portfolio stemming from improved construction methods.

The same concept applies geographically: insurers spread loss exposures across different zip codes, cities, countries and continents because, all else being equal, the likelihood of separate loss exposures suffering a loss from the same event decreases as the distance between them increases. So the adverse effects of, say, an active hurricane season in Florida may be compensated for by writing homeowners insurance in Canada, where hurricanes are uncommon. Diversification can help protect the insurer against the accumulation of adverse results, which could lead to insolvency.



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