News, LatAm Insurance Review – September 2016
In LatAm Insurance Review, insurance and risk management professionals put their skills to the test, as the nation faces severe crisis.
As appeared in LatAm Insurance Review, September 2016.
By: Alicia Dimas
Venezuela is a country on the verge of chaos: the economy is crumbling down, society is in turmoil and the country is politically divided between those who still believe in Nicolas Maduro’s socialist government and those who blame the president for Venezuela’s collapse.
In fact, Jose A. Villasmil, vice-president and placement leader for Marsh Venezuela, says the main risks faced by businesses operating in Venezuela at the moment are riot and civil commotion. Social instability is expected to worsen, as the International Monetary Fund (IMF) predicts a 1600% increase in the cost of goods and services in Venezuela next year.
This increase will also bring other challenges for business companies operating in the country. Jose Astorqui, CEO at BMS Latin America, says this will affect risk management strategies in two ways, directly and indirectly.
“Directly, the higher value of losses will lead to higher insurance premiums. Indirectly, the market contraction, due to a decrease in income among the population, will make it difficult to obtain asset protection from an insurance company.”
“The situation has led to the introduction of new products that can be used as models for emergent and crisis economies. To give an example, there is currently a massive shortage of car part replacements, which have therefore become extortionately expensive.
“In response to the situation, Venezuelan insurance companies have designed a policy where, instead of covering any damages or the whole car replacement cost in case of total loss, they offer to provide cover up to a fixed number of replacement parts,” Astorqui explains.
Villasmil says that the volatility of prices versus official exchange rate, which does not have large variations, causes a rapid depletion of policy conditions and local insurance capacity. “Hence, the ability to replace a claim through an insurance policy is greatly diminished, directly affecting the assets of the insured.”
He adds that the risk manager needs to periodically review the company’s policy conditions, to avoid any nasty surprises when there is a claim. “On the other hand, the exchange rate volatility has created a situation of uncertainty on the value of the assets to be insured,” he says.
“With high inflation, the increase in costs of goods is leaving many companies without the ability to pay premiums, especially in individual policies and SMEs.”
However, companies with capacity to generate dollars in their cash flow (due to exports, for instance) can buy insurance coverage in foreign currency, which provides a solution for some current difficulties, according to Villasmil.
Lack of official statistics
Although all the statistics published by international organisations, such as the IMF or the World Bank, are scary numbers, the Venezuelan government has avoided publishing its own statistics and when it does, its numbers are questioned by independent entities that suspect the government is covering up the harsh reality in the country.
Villasmil says that “the lack of official statistics, fosters, beyond the factual conditions, a speculative level which feeds the inflationary phenomenon itself, making it even more serious.” He adds that this impacts the valuation of companies’ assets turnovers.
Astorqui says that this also makes it difficult for companies to conduct effective strategic planning. Six-month plans have come to contain a lot of uncertainty, making forward provisions for insurance and reinsurance companies incredibly complex.
He says: “Uncertainty often translates into an increase in premium or restrictions in the underwriting of new business.”
He adds that those who believe their cost of risk could exceed their premiums tend to purchase insurance or stay with their current policy. On the other hand, those who believe the opposite, that their premium might exceed their cost of risk (due to better health, less vehicle exposure, being active in more secure areas, etc.) will tend to reduce the level of cover or insure themselves.
However, Carlos Rivera, head of RGL Forensics in Miami, says: “Sometimes, the problem does not manifest due to a lack of information or data, but an overwhelming volume of information – often of poor quality or not in formats which other markets may be accustomed to.
“The information may arrive disorganised, incomplete or limited in scope, but there are many ways of vouching/tracing information in order to substantiate or reconcile the claim. More than missing data, in an inflationary economy like Venezuela, the major issue more often pertains to potential underinsurance due to the volatility of the currency.”
Rivera talks about his experience in the country in 2013 and 2014, when he was there managing claims: “It was a volatile time to be working within the country as Hugo Chavez had just passed away and the country was experiencing economic turmoil. In one of the claims, the insured could not mitigate his loss by purchasing third-party products from outside of Venezuela due to political statutes at the time, which prohibited them from doing so. That caused additional strain and complexity to the claim for both the insured and the insurer.”
Light at the end of the tunnel?
Despite the desperate situation, there are still those who believe recovery is possible. Villasmil highlights that Venezuela has the world largest oil reserves and is rich in many raw materials. “Venezuela also has infrastructure and size to be attractive to local and international capital. We think that, with an adequate plan, the level of recovery can be important and fast in a very short period of time.”
Astorqui, from BMS, also believes that “despite facing a number of significant economic problems, Venezuela is a resource-rich country, with the potential to receive significant foreign denominated revenues.”
He adds that this situation creates investment opportunities for both international and local companies in the areas of energy, health, construction, commerce and public services.
However, signs of recovery are still nonexistent, as the situation seems to be deteriorating. In fact, just recently UN secretary general Ban Ki-moon said he was “very worried by the humanitarian crisis in Venezuela” caused by “political instability”.
In the meantime, people from Venezuela will keep hoping that the oil-rich nation will someday soon recover its losses and go back to its former glory.