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Opportunities in Latin America

The Latin America insurance outlook for 2015 is generally favorable, with high-single-digit premium growth across the region presenting complex risks and opportunities. Although real economic growth has slowed recently in the largest markets of Brazil and Mexico, stronger economic growth and inflation in some areas continue to drive premiums. Long-term trends (reduced poverty, shrinking unemployment and a population increasing above the pace of most mature markets) are bolstering consumer demand for insurance products.

In general insurance, catastrophic risks from floods, hurricanes and earthquakes are driving premium growth in a number of Latin American countries. Premiums peak following major losses as demand increases and supply becomes more costly. In contrast, the underwriting cycle slowly reduces premium rates after benign catastrophe-loss periods, such as those experienced in the last few years. The development of efficient distribution systems to increase insurance market penetration and encourage product acceptance remains a critical challenge.

As economic, political and regulatory environments evolve inconsistently across the region, inflation risk continues to persist at varying levels. While Chile’s, Peru’s and Colombia’s annual inflation rates averaged 2% to 3% from 2009 through 2013, Argentina’s and Venezuela’s percentages were the highest in the region. Argentina’s battles with its creditors, and its governmental hand in business, have destabilized its currency. In contrast, Mexico’s government remains stable and is progressing with reforms to modernize insurance and other business sectors.

From a tax perspective:

  • Brazil imposes the highest income tax in the region, with insurer profits taxed at 40%. Popular products include health insurance and term life insurance, as well as auto and property covers, which are sold by independent brokers. Tax incentives for retirement accumulation plans are growing in popularity.
  • Mexico’s tax incentives, promoting retirement savings and a reasonable income tax structure, are contributing to growth. In a country where third-party auto liability coverage is mandatory in several cities, auto insurance generates the highest premiums.
  • The scenario is similar in Chile, where auto insurance is also compulsory and characterized by intense price competition. Provisional life and retirement products are part of the national social security system. Approximately half of all insurers are subsidiaries of international firms. Although an open market has led to stability and a competitive balance, insurers continue to adapt in the wake of earthquakes and other natural disasters.
  • In Argentina, independent agents and brokerage firms account for an estimated 75% of total premiums. The nationalization of private pension funds in 2008 changed the insurance industry structure, sharply reducing the size of the life and annuity market and the number of insurers in the country. Argentina imposes a high income tax burden, with profits taxed at 35% and a 10% dividend withholding tax.
  • Colombia, the fifth largest Latin American insurance market,
    is partially focused on investing in infrastructure to encourage demand for guaranty bonds. Automobile insurance, compulsory personal auto accident protection and reinsurance and earthquake insurance are the most important product lines. The industry aims to develop catastrophe insurance markets and enhance risk models, hoping that a stable commercial market will help deter government response to gaps in market coverage.
  • Peru has upgraded its economy in recent years to manage its rapid growth. Significant changes are being made in consumer protection, tax legislation and new regulation. Peru’s growth forecast is 6% this year, compared with predicted growth of 1.5% for Brazil and 1.1% for Mexico. Many foreign companies are considering Peru as a safe and desirable country for investment.

The Latin America insurance environment is becoming more similar to mature markets. Strong economic growth rates and regulatory reforms in the past decade(s) have attracted a number of global insurers, reinsurers and insurance brokers to the region. Mergers and acquisitions continue to help these global players build their positions. And cross-regional expansion efforts by Latin American-based insurers have increased their size and market reach, as well. These deals are enhancing insurers’ capabilities in product development and risk management. The implementation of new Solvency II insurance capital management regulations in 2015 is expected to result in a shift toward greater insurance industry consolidation and increased sophistication in risk management.

Low penetration rates in Latin America are caused by a number of factors and afford significant room for growth if economic expansion continues. Factors include:

  • Wealth disparity
  • Insufficient tax incentives for retirement products
  • Lack of knowledge among the general population about the value of insurance

Also contributing to potential opportunity is the changing perception of insurance as a necessity or investment, rather than a cost. This comes about with a change to the region’s income disparity, which in most countries is shrinking. Brazil is expecting double-digit declines in premiums across many low-hazard markets. In this heightened competitive environment, many insurers believe they can accelerate premium growth by targeting rapidly growing market clusters.

In comparison, Argentina is experiencing high inflation, tight regulation and a fluctuating economic market; nevertheless, insurance is a fast-growing industry that continues to show resilience in premiums and tolerance for expansion in a challenging environment. Argentina and Venezuela also have strict foreign-exchange control regimes. These generally do not allow residents to pay dividends or inter-company services/royalties outside of the country — in some cases, also limiting the deductibility of certain payments.

In general, it is worth discussing the value added tax (VAT) system in these countries,which is a key concern for insurers.TheVATpaid on the local purchase or importation of goods or services constitutes “input VAT” that typically should be credited against the “output VAT” generated on the taxable sale of goods or services. VAT should not be a cost of doing business. However, VAT is often an unexpected cost when entering a market. In the case of Latin American insurers with VAT taxable and non-taxable activities, the VAT calculation methodology is complex and usually generates some level of irrecoverable VAT.

Some products sold by insurance companies are exempt from VAT, meaning that any VAT incurred on the local purchase of goods or services becomes an irrecoverable cost for the insurance company (although deductible for local corporate income tax purposes). For example, the following are exempt:

  • Argentina’s life insurance and workers’ compensation policies
  • Mexico’s life and pension insurance
  • Certain insurance contracts in Chile, including those related to international trade, insurance of assets located outside of Chile and earthquake-related coverage

Brazil deserves a separate analysis because Brazilian insurance companies are subject to Social Integration Program (PIS) and Contribution for the Financing of Social Security (COFINS) taxes on gross revenues, at a combined rate of 4.65%. PIS/COFINS are not a VAT type of tax but, rather, they are paid on a cumulative basis: any PIS/COFINS paid by the local insurance company is not a recoverable cost. Brazil has a state VAT (ICMS) and a federal VAT (IPI), but these taxes do not apply to the sale of insurance products.

Property/casualty, auto insurance, professional liability, environmental and finance solutions are generally subject to VAT in Latin America, so any VAT paid should be fully recoverable for the local insurance company.

In addition to the VAT, some Latin American countries impose additional layers of indirect taxes that should be carefully reviewed by local insurers (e.g., gross revenue taxes, taxes on financial transactions, net worth taxes and stamp taxes, among others).

How Law Firms Can Win Panel Positions

Managing partners at many insurance defense law firms across the country are on an elusive quest to get on more insurance panels.

Defense law firms traditionally build client relationships with insurance carriers, self-insured entities and municipalities over many years. In today’s rapidly changing legal climate, however, these relationships are increasingly being replaced with a formalized application process.

Being named as panel counsel is not easy. For starters, it is frequently difficult to determine who is in charge of the hiring process.

This article provides some insight into the panel counsel selection process.

How to Become Panel Counsel for an Insurance Company

At one level, every insurance company panel is different. Listed below are the most common ways that insurance companies are organized to manage the panel process:

  • National overseers may review all panel counsel applications
  • Regional managers may have responsibility for multiple states
  • State-level coordinators may be the point of entry
  • Panels for multi-subsidiary insurance companies may be consolidated in one division
  • Purchasing departments increasingly are screening interested vendors
  • Online applications are also becoming popular

In some insurance companies, there may be multiple points of entry that could be used to gain consideration for a panel. Many carriers, for example, maintain multiple panels. Examples might include a separate employment practices (EPLI) panel or a construction defect panel. There may be an independent panel manager for each of these claims areas who has some independent hiring capabilities. While a variety of panels adds opportunities to counsel selection, it also adds to the complexity of the business development effort.

There are also many similarities in the panel application process:

  • Personal referrals are the best way to gain panel consideration
  • Periodic panel reviews (every one to two years) may be used
  • Even if a law firm gets on a panel, it may take time to establish a consistent stream of new cases

Finding the Panel Manager

There are several ways to identify the best point of contact within an insurance company, including:

  • Ask around within your network
  • Attend industry conferences
  • Conduct Internet research
  • Review insurance company websites
  • Make telephone calls to the carrier

Insurance company websites typically do not specifically identify an individual as the actual panel manager, but they might point an interested party in the right direction.

Claims adjusters used to play a significant role in panel counsel selection, but this is becoming less common. A law firm in search of new insurance defense panel positions may, however, find it worthwhile to explore professional meetings of insurance adjusters in its geographic area, particularly if there is an active claims association. A recommendation from a local adjuster can certainly help to reinforce a panel application.

Starting the panel research process from a blank piece of paper can be an extremely time-consuming and frustrating process. Trying to balance this research with the demands of a very busy law practice is particularly challenging.

Background on the Insurance Market

There are 2,700 property and casualty (P&C) insurance companies in the U.S., according to the U.S. Federal Insurance Office and A.M. Best. Insurers are regulated at the state rather than the federal level, meaning that each state maintains a department of insurance with information on the insurance carriers admitted to do business in that state. Insurers with primary corporate headquarters located in a given state are called domestic insurers.

Law firms starting a search for panel positions may find data posted on the website of their state’s insurance commissioner to be useful. Annual market share reports are frequently available, which identify the top 25 carriers in the state by service line, such as auto, commercial general liability, medical liability, etc.

Additionally, the department of insurance within each state typically provides an online list of all carriers admitted to sell insurance in that state. While this may appear to be helpful at first glance, the researcher who downloads a list of admitted carriers is frequently faced with hundreds of different insurance company names to sift through. Upon closer inspection, it becomes clear that many of the carriers admitted within a state are actually subsidiaries of larger insurance companies.

Business Development Is a Numbers Game

As discussed earlier, a personal introduction to the panel manager is generally the most productive approach. In today’s world of carrier consolidation and litigation centralization, however, it can be difficult to stay abreast of panel managers.

The law firm is faced with the challenge of first identifying the panel manager and collecting accurate contact information. Next, the firm’s managing partner or lead rainmaker needs to reach out to the manager and make an introduction to the firm. An in-person meeting is ideal, but difficult to achieve initially. Generally, an introductory letter or email can be used to try and arrange a phone call to start the business development process.

Here are some of the responses a law firm is likely to get from panel managers during this early outreach effort:

  • Request for more information about rates and services
  • Agreement to set up an in-person meeting (which is likely to involve travel)
  • Notification of the panel review cycle, with a promise of notification prior to the next cycle
  • Indication that the panel is full, with a promise to contact the firm in the event of a conflict
  • Silence (meaning no response)

While many law firms optimistically hope to be engaged by one out of every two or three carriers they contact, the more common reality is that business development can be a long and arduous process.

A law firm is best served by constantly screening dozens of insurance carriers, self-insureds and other prospective clients for business development opportunities. Firms that are expanding geographically or into new product lines may also be creating panel opportunities. Insurance companies that are consolidating because of mergers or the growth of in-house counsel should be avoided.

Never Stop Marketing

The best time to start looking for new clients is while the law firm is operating from a position of strength. Business development can have a long timeline, and it is impossible to predict when a prospect’s needs for legal services may develop. Delaying the start of a campaign until the law firm is desperate for new business is not advisable, because the firm may then be forced to accept a lower-quality client at less than ideal rates.

After making an initial introduction to a carrier, the challenge is to keep the conversation going. Reaching out to the panel manager in a substantive way every four to six months can be an effective way to build a positive impression for the law firm. Meaningful ways to stay in touch can include the following:

  • Send an article written by the law firm.
  • Keep carriers informed of favorable case outcomes
  • Offer to teach an in-house CLE
  • Submit an analysis of pending legislation or emerging market trends
  • Maintain an active social media profile, especially on LinkedIn

Dropping the ball on prospect communications, while understandable, can be deadly to a business development effort. Rejection is a common first response, but the successful rainmaker will be best served by considering a negative initial response from a panel manager to simply mean “not now.” An exception is the carrier that says something like, “We have used ABC law firm exclusively for the past 10 years and have no reason to change” or “Our case volume is so low that we handle most matters internally.”

The administrative assistant to the panel manager can also be your friend. Treat all members of the panel management team respectfully to build a positive impression of the law firm.

Industry conferences can be an ideal forum for meeting panel managers. Of course, many law firms are thinking the same thing, so it can be helpful to make advance appointments. The Claims & Litigation Management Alliance (CLM) and DRI are two leading organizations that bring claims executives together with insurance defense lawyers.

Specialized organizations targeting selected industries can also be helpful. Examples include the Trucking Industry Defense Association (TIDA) and the National Retail and Restaurant Association (NRRDA).

Maintain Attractive Marketing Materials

The business development cycle will generate the best results when backed by attractive and informative marketing materials.

The law firm’s website is an important foundation for any marketing effort, because the attorney bio pages are frequently the starting point in a prospect’s effort to become better acquainted with a candidate.

A “beauty contest” can be an apt descriptor for the competitive process of vying for coveted panel positions. While the primary goal is to have a law firm stand out from the competition in substantive ways, the techniques outlined below can significantly enhance an RFP or business presentation.

  • Graphic design. Extend the law firm’s brand by using the logo, color scheme and photo styles from the website.
  • Attorney photos. Four-color head shots start the get-acquainted process and help the prospect to envision a lawyer in a court representation.
  • Credential icons. Martindale, A.M. Best and the CLM logos all have high recognition value within the insurance industry.

When including a list of clients or references, client confidentiality guidelines suggest that the law firm first obtain written informed consent from each client.

In Summary

Marketing is a process and not an event. Managing partners of insurance defense law firms are advised to get started on a serious business development effort, perhaps backed to an active law firm marketing committee. Staying actively committed to an expansion effort, while challenging, will yield the best results in the long run.

Is It Possible to Insure Bitcoin Technology?

In the mid- to late 1990s, the insurance industry was struggling with “the Y2K crisis,” not only in connection with its own systems but, more importantly, with the systems of all its policyholders. As the chief underwriting officer of one of the largest subsidiaries of one of the largest insurance companies in the world, AIG, I had to determine our potential exposure if the computer systems of our policyholders failed. My conclusion: hundreds of millions of dollars of potential liability payouts.

Y2K — a problem that threatened to confuse computers about chronology beginning on Jan. 1, 2000, because years had historically been represented in software with just two digits, meaning that the year 2000 (represented as “00”) was indistinguishable from 1900 (also “00”) — was the insurance industry’s introduction to the hazards of insuring technology. To reduce that exposure, we had to figure out a way to motivate our corporate policyholders to take reasonable steps to manage their Y2K problem. Because one of the central purposes of an insurance policy is to motivate specific risk-reducing behavior, such as wearing a seat beat, the question became how to motivate risk reduction in connection with the impending problem.

So we created “Y2K insurance” and made it available only to those companies that took the right steps.

Well, the Y2K crisis came and went, and the insurance industry was relatively unscathed. Whether the introduction of a new insurance product helped, we will never know. What we do know is that the Y2K experience inspired the insurance industry to contemplate other technology risks we might insure. In the year 2000, the answer was immediately clear: yhe Internet. Many of us realized that the Internet presented a permanent change in the sociological and economic system; that life would never be the same. But how does one insure a new technology and a completely new way of conducting business? It was scary thing to contemplate.

Fundamental to the insurance business is an analysis of historical actuarial information about frequency and severity of loss. We have decades of data on automobile accidents, broken down in every way imaginable. But how do you determine the right premium for a risk that has never existed?

For most carriers, the answer was, “You don’t.” But for a few, a different response emerged. A response that arose from a different culture—a risk-taking culture. A culture of innovation. “Cyber insurance” was born.

It took a while, but eventually we became comfortable with underwriting the frequency and severity of potential cyber attacks against our policyholders’ computer systems. Today, 15 years later, cyber insurance is a robust $1.3 billion industry, with more than 45 carriers providing some type of cyber insurance. And, despite the almost daily reports of cyber attacks, the industry is somehow making enough money to stick around.


Once again, the insurance industry is faced with a new risk in the technology space. Once again, the global economy is being transformed with a new way of conducting transactions. Once again, the insurance industry is faced with a dilemma: Do we ignore this new risk or face it head on?

There are more than 8 million Bitcoin “wallets” in existence today, and this is expected increase to 12 million by the end of the year. The total value of Bitcoins worldwide is around $4 billion. There are more than 100,000 Bitcoin transactions happening every day. More than 80,000 companies, from Microsoft to Dell to Expedia.com, accept Bitcoins as payment.

But how do you insure Bitcoins? More specifically, how do you insure the theft of the electronic private keys that are used to access Bitcoins? A smart insurer realizes that such a task is an exercise in both the familiar and the foreign. A private key is, after all, an electronic file. In many ways, the policies and procedures used in the network security space to protect any computer system holding any file are the same as those used to protect an electronic private key file. Equally true is that a good portion of private keys are stored in “cold storage,” meaning that they are not held in a computer that has access to the Internet. Some are actually stored in a bank vault. Storing valuables in a bank vault is also a well-understood risk and insurable. Finally, many companies that would be interested in purchasing Bitcoin theft insurance are themselves technology providers. Insurance for technology companies has existed for some time.

However, that’s where the analogy ends, and things begin to become difficult. First, the “cyber” insurance policies provided today actually do not insure the intrinsic value of the electronic file stolen. The policies do not cover the “value” of a Social Security number, for example. Furthermore, best practices in the securing of private keys in “hot storage” (computers connected to the Internet) rely upon the multisig, or multiple signature, technology, something with which insurance underwriters are generally unfamiliar. At best, underwriting the theft of Bitcoins requires coordination of multiple underwriting departments within an insurance company. More likely, it means creating new underwriting techniques and protocols.

Will the insurance industry be able to respond to the call? The insurance industry historically has not been known for innovation. So, how will we respond when we are faced with a new and potentially important risk, for which there is no historical actuarial data? Do we run away, or do we embrace a new need and a new opportunity as we did 15 years ago?

In February 2015, one company successfully designed the first true Bitcoin theft insurance policy along with a global “A”-rated insurance carrier for the benefit of BitGo, a leader of multi-sig technology. Will this policy be the only of its kind? Or, as with cyber insurance 15 years ago, will that be only the first of hundreds of thousands of “Bitcoin theft” policies.

Only time will tell.

Cyber’s Surprising Importance for M&A

Although many people think of cyber insurance when confronted with a data breach, cyber insurance may not be quite so top of mind in the context of corporate mergers and acquisitions. Cyber insurance should be, because policies typically contain provisions that are directly affected by such transactions. Enterprises should take a close look at their cyber insurance policy provisions early on in the deal-making process so that coverage for the affected enterprises can be maximized.

The focus on cyber should be especially acute now, both because M&A activity continues to rise and because the importance of cyber coverage is surging on the heels of recent, headline-making data breaches.

Cyber insurance policies, like most other policies, typically provide coverage to the named insured identified in the policy, as well as to any subsidiary of the named insured that was created by the date the policy took effect. Carriers generally ask enterprises to identify all such subsidiaries during the application process.

Although disclosed subsidiaries may generally be considered “insureds” at the time cyber policies are issued, cyber policies may contain provisions that specify the steps the insured must take to obtain coverage for subsidiaries acquired or created, or for entities involved in mergers or consolidations.

Insureds that are considering mergers or acquisitions should ensure compliance by carefully reviewing their cyber insurance policies early in the transaction process. Relevant provisions might be found in various places in cyber policies, including within the policy’s conditions, definitions and exclusions.

Mergers and newly acquired or created subsidiaries

The steps an insured must take to secure coverage for a newly acquired subsidiary vary from policy to policy and may depend on the financials of the subsidiary. For example, under one cyber policy, if the acquired entity has revenue greater than 10% of the named insured’s total annual revenue, the named insured must: provide written notice before the acquisition, obtain the insurer’s written consent and agree to pay any additional premium required by the insurer.

Another insurer requires an Insured that merges with, acquires or creates an entity with assets exceeding 10% of the total assets of the insured to provide full details of the transaction as soon as practicable The insurer is entitled to impose additional terms, conditions and premiums, at its sole discretion.

Under the terms of a different policy, if the named insured acquires or creates another organization in which the named insured has an ownership interest of greater than 50%, the organization is covered for insured events that take place after the date of acquisition or creation, but only if the named insured provided notice to the insurer no later than 60 days after the effective date of the acquisition of creation, along with any information the insurer should require. The insured may be exempted from that process if, among other things, the new subsidiary’s gross revenues are 10% or less than those of the named insured.

Relevant terms are implicated under another cyber policy if the insured acquires or creates an entity that becomes a subsidiary, acquires an entity by merger or purchases assets or assumes liabilities of an entity without acquiring the entity. If the total assets of the acquired or created entity, or the combined total amount of the purchased assets or assumed liabilities, are less than 30% of the consolidated assets of the insured, the new entity may be entitled to certain coverages under the policy if the named insured provides written notice as soon as practicable, but in no event later than 60 days after the effective date of the transaction. The named insured will have to provide any requested information and may be subject to an increased premium.

A different insurer requires the named insured to provide notice of a newly formed or acquired subsidiary within 60 days of the transaction if the named insured has more than 50% of the legal or beneficial interest of the entity. If, however, the total assets or total revenues of the new entity exceed 15% of the total assets or revenues of the named insured, the named insured must provide the “full particulars” of the new entity, and the insurer must agree in writing to provide coverage. The insurer may charge an increased premium and amend policy terms.

Divested entities and changes in ownership

Provisions of cyber policies also may be affected by changes affecting entities that initially are covered under the policy. For example, policies may provide that if the named insured’s legal or beneficial interest in a subsidiary becomes less than 50%, the entity will no longer qualify as a subsidiary under the policy and will lose coverage.

Cyber policies also may contain provisions that will be triggered in the event of a takeover of the named insured.


Corporate transactions may have important effects on the coverage provided under a cyber insurance policy. Because there are no standard-form cyber policies, the provisions that might be implicated by any such transaction, including important notice requirements, will vary from policy to policy.  Entities should carefully review their coverage at the very outset of the deal-making process to ensure that they full understand their rights and obligations and comply with all policy provisions so that coverage can be maximized.