Q&A: Chairman John Nelson Details Colombian Insurance Opportunities that Convinced Lloyd’s of London to Open Bogotá Office
Lloyd’s of London made major headlines last week when it confirmed that it would be opening an office in Brussels. The news came in the wake of the United Kingdom triggering the Article 50 provision to formally begin its exit from the European Union and highlighted the London financial community’s need to maintain ties with the rest of Europe after the split.
With its Brussels office, which the three-century-old specialty insurance market hopes to have running by mid-2018, Lloyd’s will maintain the ability to underwrite throughout the E.U. even if it proves unable to secure the so-called “passporting rights” to do so from the U.K. capital.
Photo: Lloyd’s of London Chairman John Nelson (left) tells Finance Colombia Executive Editor Loren Moss (right) that, in Colombia, “insurance penetration needs to increase — that’s the opportunity for Lloyd’s.” (Credit: Loren Moss)
While this is the international story of the day, it is far from the only recent expansion by Lloyd’s. Last year, the insurance pioneer that got its start in a London café in 1688 opened its first office in Colombia. By setting up shop in Bogotá, Lloyd’s hopes to capture more business in what it views as one of the most promising markets in Latin America.
Under the leadership of Chairman John Nelson, Lloyd’s has continued to grow in both the region and other areas outside of its traditional areas of strength in the United States and Europe. And he believes the opportunities in Colombia are numerous.
The country still has a low penetration rate, even compared to many of its Latin American peers, and various industries are set to benefit as the country moves into its post-conflict era following a peace accord with the Revolutionary Armed Forces of Colombia (FARC).
By while Nelson led this move into Colombia, he will soon be leaving it in other hands. The other big news for Lloyd’s this year was the announcement is that Nelson’s time as chairman will soon come to an end. In June, Bruce Carnegie-Brown will take over the role.
But Finance Colombia Executive Editor Loren Moss was fortunate to sit down with Nelson last year before he moved on. The two discussed the opportunities present in the Colombian insurance market, the strategic aims of Lloyd’s in the country, and the future of the Bogotá office.
Finance Colombia: What did Lloyd’s of London see to decide that now is the time to warrant opening an office on the ground in Colombia?
John Nelson: Lloyd’s is the only insurance market in the world. We’re not a company — we are a global hub for specialist insurance and reinsurance. All our business is basically commercial, so it’s B-to-B sophisticated risk, catastrophe risk, and so on.
Part of our strategy at Lloyd’s is to reinforce our position as the global hub for specialist insurance and reinsurance, so that means that, traditionally, our strongest position is in the United States. It’s 40% of our market. We are the largest excess and service lines provider in the United States, and we’re double the size of AIG, to give you an example, in the U.S. We’re the second largest reinsurer.
And then we have big business elsewhere: 15% in the U.K., 15% in the E.U., about 12% in Asia, 8% here in Latin America, and the rest in the rest of the world. So Latin America, talking generally, has been sort of challenged over the last 50 years — or 100 years — for different reasons: economically, politically, and in every other way. As economies have improved in Latin America over the last 30 or 40 years — in Brazil, Mexico, Chile, Peru and so on — our penetration in those countries has improved.
Our biggest market, for Lloyd’s, is Mexico, and the second biggest is Brazil. Brazil is probably our biggest infrastructure, and then we have good positions in Chile and Peru. Colombia has been a small market for Lloyd’s. We write about $1.5 billion USD of reinsurance business in Latin America. About a hundred million dollars of that is in Colombia — all written offshore.
But over the last three or four years, we’ve had a hard look at where we feel we could make a real difference, and in fact, if you look at Colombia and look at the Colombian economy, it’s grown well. It’s slowed down a bit now because of the oil price and geopolitical slowdown, but still we think it’s a very good economy.
Remember that it has industrialized and commercialized very well. You’ve got a strong, sustainable democracy and you have a good quality of governance in the country. I think it’s going to be helped by the peace talks with FARC. The Pacific Alliance is important, and the 4G infrastructure project is important. So we take a long-term view, and we think that the economy will grow.
Finance Colombia: Specifically in the Colombian insurance market, what opportunities do you see?
John Nelson: Colombia is heavily underinsured. If you look at insurance penetration in Colombia, it’s around 1.6% in terms of gross written premiums to GDP. The average worldwide is about 6.1%, so Colombia is about a quarter of where it should be. On top of that you’re seeing a greater concentration of risk because of urbanization. You’re seeing in Bogotá, for example, a huge concentration of risk. We did the Lloyd’s City Risk Index report, and you can see the risk that Bogota has become more efficient economically but that this creating greater risk — which is not being insured.
So by bringing in reinsurance to support the domestic insurers, it should allow those domestic insurers to increase insurance penetration, not just in capacity but also breadth of product. Because a lot of product isn’t provided by the domestic insurance, particularly sophisticated B-to-B, cyber, some supply chain risk, and so on is not provided. And that we can do.
“If you look at insurance penetration in Colombia, it’s around 1.6% in terms of gross written premiums to GDP. The average worldwide is about 6.1%, so Colombia is about a quarter of where it should be.” – John Nelson, chairman of Lloyd’s of London
The economic community, the business community, the governmental community, they all think this is important because Colombia and Bogotá are very susceptible to catastrophe risk. The country is also susceptible to man-made risk. So if we look at the key elements affecting Bogotá, as well as earthquake, it’s also things like market crash, pandemic, and cyber-risk.
We think that, over time, insurance penetration needs to increase. That’s the opportunity for Lloyd’s, but we also think it’s good for the Colombian economy and good for the Colombian insurance industry.
Finance Colombia: Certainly. We all know that Colombia sits in the Andes mountains, at least a lot of the country does. But apart from the obvious, such as seismic risk, what are the unique aspects of the Colombian insurance market? What makes Colombia different than, say, even neighbors like Peru or nearby Chile?
John Nelson: What’s different in Chile, for example, is that Chile has good insurance penetration. So when the massive earthquake hit in 2010, that was largely reinsured offshore. So capital was pumped into Chile and the economy recovered very quickly.
If you take New Zealand, after the Christchurch earthquake, we saw the same thing. It was insured offshore. So diversifying risk outside the country is pretty important. If a disaster of that size happened in Colombia today, that would not be the case. The hit would be taken by the government, taxpayers, and the communities to a large extent. It would not be cushioned by capital coming in from outside the country.
And I’ll give you the biggest example: the United States. The country is heavily susceptible around the coasts to natural catastrophes: earthquake in California, winds in Florida, and storms in Texas. But about 60% of the risk is reinsured outside the country.
Finance Colombia: With Colombia, one of the things that I’ve seen recently is the increased interest from institutional investors, and I imagine that the institutional investors coming in — with the more sophisticated mind-set and more sophisticated investment criteria — are going to demand certain levels of insurance written through certain carriers that are rated at certain levels.
John Nelson: Yes, and where they start is in evaluating the quality of corporate governance. One of the elements of that is risk management. On any board of directors I sit on, once a month you’re looking at risk. It may be item number one on the agenda. You’re looking at the top 10 risks and what the company is doing about it — how it is doing in terms of risk mitigation.
“By bringing in reinsurance to support the domestic insurers, it should allow those domestic insurers to increase insurance penetration, not just in capacity but also breadth of product.” – John Nelson, chairman of Lloyd’s of London
I’m sure that in the sophisticated Colombian companies, that is happening. But I suspect there’s further to go because, as I say, if you look at insurance penetration, a lot of the risk is just not covered. Cyber insurance, for example, hardly exists in Colombia.
Finance Colombia: How sophisticated are the domesticated insurers? We have some relatively large insurance companies — well, at least one relatively large insurance company.
John Nelson: Sura company.
Finance Colombia: Exactly. But then there are some others that are smaller. When it comes to the reinsurance opportunities in Colombia, do we see that? Other global or at least multinational insurers operating in Colombia? Or is a lot of that the domestic insurance?
John Nelson: Well, the domestic insurance market, as opposed to the reinsurance market, is dominated by domestic insurers. They’re pretty strong. Many of them are good, quality businesses. But they don’t yet provide the scale or the breadth that the economy is now requiring.
In terms of reinsurance, most or the reinsurance capacity comes from the international reinsurers. There’s some domestic reinsurance, but it is mostly provided by the international reinsurers who are here — and hopefully Lloyd’s as well.
Finance Colombia: Great. So what can you tell me about the office that you’ve opened in Bogotá?
John Nelson: It’s very small — very small. In any country where we open offices, it’s always very small. So we’ve probably got three or four people here at the moment, led by Juan Carlos Realphe, a Colombian who’s a very experienced insurance professional. We’re very pleased to have him. He’s been with us for around two years now.
And then the key thing is: how many of our managing agents come to be physically present. At the moment we have two, Brit and Advent, who’ve come to Colombia. I expect that number to grow slowly and gradually. That’s usually what happens.
If you look at our other platforms outside London, Singapore is a good example. That has taken 20 years to grow to where it is today — our biggest hub outside of London. China’s growing more quickly. We now have over half the managing agents on the Chinese platform in Shanghai and Beijing. Dubai has about 10, I think, and in Brazil we have 10, I think.
So here I wouldn’t expect it to be a very large number. But what will happen is that Lloyd’s tends to be a catalyst to increase penetration. More people come in around us: More brokers, more advisors, more insurance companies come in.