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Introducing 10 million Brazilians into
the life insurance market – out of a
total of 36 million that make up classes C, D and E – is one of the goals of the Private Insurance Superintendence (Susep, Superintendência de Seguros Privados), according to its superintendent, Renê Garcia Jr. He explains that there will be low-cost premiums and the policy value may total R$ 10,000. This will create a social protection network, since families will be covered in case of the loss of the individual who supports them. Susep also intends to create educational insurance, the purpose of which is to keep children in school in case of the death of the head of the family. To explore the great potential of society’s less favored classes, Susep is seeking unconventional solutions, such as agreements between insurance companies and supermarkets, department stores, and churches. An evangelic church, for instance, has a project for a policy with one million beneficiaries.
Renê Garcia also points out that the increase in private pension fund and insurance activities provides conditions for growth of internal savings within the country (such as the growth observed in the United States and Spain), consequently reducing interest rates. In addition, it promotes the social inclusion of significant population segments (according to cases observed in African countries) that start counting on insurance coverage and pension fund income. And there’s more: the intensified performance of these institutional investors generates many transactions in the capital market, transforming shares into interesting investments for individuals, ultimately resulting in an improvement in terms of income distribution. In short, a virtuous, sustainable circle is created.
Susep’s superintendent adds more details: “Over the past 10 or 15 years, the United States and France went through similar experiences. The accumulation of reserves from pension funds and the growth of institutional investors, such as insurance companies, definitively contributed to the expansion of these countries’ savings. In Spain, for instance, there was a change from 3.5% of the GDP (stock reserves from pension funds and insurance companies) to 38% over eight years. Consequently, Spain’s interest rate dropped to two-thirds of what it used to be. There’s an extremely positive impact. First, the public deficit experiences sustainable growth, since such deficit is refinanced at much lower rates than before... Another positive effect is that, at the same time, companies have access to long-term funding at competitive rates, compatible with their incomes. In America, the scenario was even more impressive. Throughout 15 years, the accumulation of pension funds and insurance companies changed from about 20% of the GDP to almost 120% of the GDP. This corresponds to financial assets totaling US$ 12 trillion, which contributed significantly to the Clinton administration´s economic boom. The United States grew 58% over eight years.”
According to Renê Garcia, historical evidence shows that institutional investors have a very positive role when an adequate tax system is in place. Therefore, stimulating the initial investment isn’t enough; the deferral of such yields must also be encouraged. Those who invest over longer periods have higher tax discounts. Another important factor is that as the pension fund and insurance market grows, principally life insurance, a lending/borrowing relationship is established in society: “In South Africa, there’s a very interesting experience. Because of apartheid, the South African society had very few references of social actions aimed at black people. What happened then? People got together in cooperatives and created a lending/borrowing system. Soon they had a kind of collective insurance that protected the community in case of death, loss of income... Today, 13.5% of South Africa’s population has insurance and a private pension fund. It’s the emerging country with the highest rate. How did they get there? Because society reacted to a situation in which the Government did not provide what they needed. The same happened in Zimbabwe, which today has almost 5% of its GDP invested in insurance and pension funds. It’s twice as much as the Brazilian percentage. Society finds ways for meeting its needs.”
Renê Garcia points out that there’s another important aspect. With the stabilization of relationships, opportunities appear, because the assets of insurance companies and pension funds are made up of public and private securities and shares. When a stable system is created with long-term sustainable growth, it stimulates funding by companies, first by offering shares and second through a drop in interest rates. “Capital markets, as well as insurance and pension fund markets, trigger these beneficial transactions in the economy when they come together with an equally efficient banking system. This is important because the banking system recycles credit and contributes, in a definitive and very expressive way, to the improvement of economic growth in some countries. This was the case in the European Community after economic integration, and in the Netherlands, Spain, Denmark, Sweden, Ireland and some emerging countries as well – all experienced very expressive growth because of the reorganization of the insurance and pension fund market. South Korea’s phenomenal growth is related to mechanisms for stimulating the creation of insurance and pension fund instruments”, says Susep’s superintendent.
According to Renê Garcia, Brazil is beginning to initiate a major process – first, people are beginning to understand the function of an insurance and pension fund market. Not long ago, people believed that pension funds were subject to an inflation process that didn’t allow the consumer to have effective protection. Although this point of view might have a certain basis, it was mistaken. Since inflation was very high, contributions became diluted over time. Monetary stability resulted in a sector boom. In Brazil, private pension funds are experiencing a growth of 55% per year. About five to six years ago there was zero activity in this area, and today it represents 0.6% of the GDP. Total assets related to reserves used as pension fund warranties went from zero, in 1995, to R$ 50 billion over the past five to six years. “However, the process is still being improved... Some critics say that pension funds in Brazil are actually disguised investment funds. In my opinion, somehow the criticism is true. But this is what happened in several countries, meaning that credibility is only attained after we go through a certain process. The redemption period is still very short; therefore, the investments don’t have a long-term portfolio feature. But I think that over the next few years the market will trust us more, allowing a longer savings period to be attained. This is why Susep’s actions are based on three principal points. The first is defending the consumer, that is, assuring that the contracts will be respected and defended by the regulatory agency upon implementation. The second is guaranteeing the solvency of institutions, in other words, assuring the consumer that the company in which he invested his money has good financial conditions. The third is reorganizing the regulatory agency so that it may anticipate potential risk situations as a form of protection. We’re reviewing agreements with other institutions, some of which have a worldwide presence, for exchanging monitoring technology. I believe we have great potential. I’d say that in the pension fund area, Brazil might very well double the GDP share within the next four to five years. The natural migratory movement between short and long term will take us there. If we succeeded at changing the tax legislation in force today, that encourages short-term capital gain, giving benefits for extended periods, I’d say that we could experience a boom in reserve accumulation, as was the case in Spain,” says Renê, who justifies his statement. “The investor is encouraged to have a more aggressive profile when long-term tax benefits are given.”
Susep’s superintendent highlights other aspects:
“Another very important point is that pension funds and life insurance, especially the latter, have a very specific social role. We can see that through the experience of some emerging countries, in which life insurance contributed for social inclusion. This is what happened in South Africa. In countries with a low per capita income, the rate of social inclusion in the insurance area corresponds to 47% of the population from classes C, D, and E. It’s amazing! First of all, it allows the creation of a social protection system. Second, in these countries when the individual who supports the family dies, the family’s average income is preserved for at tries) that start counting on insurance coverage and pension fund income. And there’s more: the intensified performance of these institutional investors generates many transactions in the capital market, transforming shares into interesting investments for individuals, ultimately resulting in an improvement in terms of income distribution. In short, a virtuous, sustainable circle is created.
Susep’s superintendent adds more details: “Over the past 10 or 15 years, the United States and France went through similar experiences. The accumulation of reserves from pension funds and the growth of institutional investors, such as insurance companies, definitively contributed to the expansion of these countries’ savings. In Spain, for instance, there was a change from 3.5% of the GDP (stock reserves from pension funds and insurance companies) to 38% over eight years. Consequently, Spain’s interest rate dropped to two-thirds of what it used to be. There’s an extremely positive impact. First, the public deficit experiences sustainable growth, since such deficit is refinanced at much lower rates than before... Another positive effect is that, at the same time, companies have access to long-term funding at competitive rates, compatible with their incomes. In America, the scenario was even more impressive. Throughout 15 years, the accumulation of pension funds and insurance companies changed from about 20% of the GDP to almost 120% of the GDP. This corresponds to financial assets totaling US$ 12 trillion, which contributed significantly to the Clinton administration´s economic boom. The United States grew 58% over eight years.”
According to Renê Garcia, historical evidence shows that institutional investors have a very positive role when an adequate tax system is in place. Therefore, stimulating the initial investment isn’t enough; the deferral of such yields must also be encouraged. Those who invest over longer periods have higher tax discounts. Another important factor is that as the pension fund and insurance market grows, principally life insurance, a lending/borrowing relationship is established in society: “In South Africa, there’s a very interesting experience. Because of apartheid, the South African society had very few references of social actions aimed at black people. What happened then? People got together in cooperatives and created a lending/borrowing system. Soon they had a kind of collective insurance that protected the community in case of death, loss of income... Today, 13.5% of South Africa’s population has insurance and a private pension fund. It’s the emerging country with the highest rate. How did they get there? Because society reacted to a situation in which the Government did not provide what they needed. The same happened in Zimbabwe, which today has almost 5% of its GDP invested in insurance and pension funds. It’s twice as much as the Brazilian percentage. Society finds ways for meeting its needs.”
Renê Garcia points out that there’s another important aspect. With the stabilization of relationships, opportunities appear, because the assets of insurance companies and pension funds are made up of public and private securities and shares. When a stable system is created with long-term sustainable growth, it stimulates funding by companies, first by offering shares and second through a drop in interest rates. “Capital markets, as well as insurance and pension fund markets, trigger these beneficial transactions in the economy when they come together with an equally efficient banking system. This is important because the banking system recycles credit and contributes, in a definitive and very expressive way, to the improvement of economic growth in some countries. This was the case in the European Community after economic integration, and in the Netherlands, Spain, Denmark, Sweden, Ireland and some emerging countries as well – all experienced very expressive growth because of the reorganization of the insurance and pension fund market. South Korea’s phenomenal growth is related to mechanisms for stimulating the creation of insurance and pension fund instruments”, says Susep’s superintendent.
According to Renê Garcia, Brazil is beginning to initiate a major process – first, people are beginning to understand the function of an insurance and pension fund market. Not long ago, people believed that pension funds were subject to an inflation process that didn’t allow the consumer to have effective protection. Although this point of view might have a certain basis, it was mistaken. Since inflation was very high, contributions became diluted over time. Monetary stability resulted in a sector boom. In Brazil, private pension funds are experiencing a growth of 55% per year. About five to six years ago there was zero activity in this area, and today it least three years, giving great social peace of mind. In Brazil, we’re working on a large insurance development project for the general public, including low-value premiums and policies varying between R$ 5,000, R$ 6,000 and R$ 10,000. According to studies performed by Susep, we already have the potential for introducing into the life insurance market over the next three to four years, 10 million Brazilians out of a total of 36 million people from the C, D, and E classes, who are potential buyers. This is important because it establishes a social protection network. Together with life insurance, an allowance for basic food items could be included, which would guarantee an unemployed person to meet his/her basic food supply needs for six or seven months. We’d also like to stimulate the educational insurance, which assures that children continue to go to school in case of the death of the individual who supports the family. These mechanisms can be used in Brazil, as they were in other parts of the world, to transform an economic relationship into a social inclusion relationship. We have great potential, especially when exploring non-traditional instruments, because we have a serious problem – the cost of bank fees, which are very high. Thus we are discussing agreements between insurance companies and convenience stores, supermarkets, department stores, also acting together with the churches, since they can be important instruments in stipulating insurance policies. We already have a concrete example involving an evangelic church that has a very interesting project that includes one million followers in a collective policy. It’s possibly Latin America’s biggest collective policy. It’s extremely positive, because this policy gives great stability in terms of the personal relationships among the very large number of insurance holders.”
Renê Garcia adds that an adequate preparation is required for reaching these objectives: “Another very important point is the continuous improvement of insurance institutions for facing the world of social insertion. Suppose we manage to insert 10 million people over the next four years, which is a plausible hypothesis. If we have a complaint rate of 1%, there will be 100,000 complaints/year. Today Susep deals with 64,000 complaints/year. The number of complaints would be almost twice as high. For this reason, we believe that low-income consumers should have preferred treatment. As a result, we have been stimulating the creation of listening mechanisms in institutions to prevent conflicts between consumers and insurance companies, that is, to obtain the highest possible degree of consumer satisfaction and the lowest possible degree of errors. Our motto is zero tolerance towards institution deviations regarding insurance policies for the general public.”
According to Renê Garcia’s forecasts, there will be changes – for the better – in this market.
“We believe we can change the nature of the relationship among the insurance company, the financial institution and the person. If we take a close look at the events that took place over the past few years, we’ll see a growing degree of impersonality in the relationships between the customer and the banking institution or the insurance company; everything is reduced to a policy number. We want to recover the trust relationship that existed between insurance companies and borrowers. I remember my grandfather, in Belém, when I was five or six years old, and the relationship he had with his life insurance company. It wasn’t only protection for the family, but a family asset. This is what we want to encourage. We want to return to the roots of this lending/borrowing system in which lower classes are protected by an effective instrument. This is why we need to have an extremely efficient inspection scheme. It’s impossible to go wrong with such a model. The cost of a mistake is the loss of confidence by the population.
The degree of inclusion in life insurance in Brazil is very low if compared to other countries, says Renê Garcia. However, the degree of banking inclusion is much higher than that verified in many nations. “If we analyze the number of people from classes C, D, and E who have insurance in Brazil, we’ll see it’s insignificant. So let us analyze the number of Brazilians from classes C, D, and E who have some kind of banking relationship. It’s a very high percentage. In Argentina, for example, 60% of the population does not have bank accounts. In Brazil, about 65% of the population has some kind of bank account. Why is that? Because of inflation. What’s the explanation for our situation? Inflation. Insurance policies, for example, due to the fact that they are not monetarily adjusted, were not protected against the impact of inflation. Therefore people with low incomes have disregarded them as an option. However, financial investments, which are protected against inflation, have generated a high demand. Today, in Brazil, we are seeing a movement opposite to what has occurred in the rest of the world. Our population has more banking relationships than the world average, which is 22%, and has a much weaker insurance tradition. I believe this scenario can be changed, in the short term, with great effort. We just need to pay attention to simple aspects. For example: what’s the best type of relationship between an insurance company and an insurance customer? We need to rebuild that historical aspect of protecting a person’s life, which is a very important instrument for social peace of mind. Right now, the main obstacle is the amount of taxes charged on life insurance as a whole – it’s very high, totaling 38%. All over the world, there are tax benefits for the purchase of life insurance policies, such as the possibility of full Income Tax deduction or even benefits regarding the investment of reserves. We don’t have this in Brazil. It’s a deformity. Why is it so? Because the image we had in the past, was that the reserves for guaranteeing the assets should be taxed as a form of additional revenue for the Treasury. This isn’t a very consistent approach. We have been continuously asking the Internal Revenue Service and the Ministry of Finance to change this reality. Insurance for low income classes cannot be taxed.”
Another very positive point in the growth of the corporate base of life insurance and pension funds, according to Renê Garcia, is that it ends up bringing a positive contribution, as proven by historical evidence, for the strengthening of capital markets. First of all, this strengthening provides an improvement in the country’s income distribution; second, it allows an increase in productivity for companies with listed and distributed shares. This means that companies become more competitive. An additional advantage is that the scope of projects available to society may be expanded. Renê says:
“Projects that weren’t feasible, due to the lack of financing sources, will now be feasible. A cycle is closed. If we consider the American growth over the past few years, involving the 1994-2000 boom, we’ll clearly see that the role of institutional investors was essential for leveraging the credit system in the United States. Of course it’s hard to reproduce the American model in hostile environments, such as emerging countries because of institutional credibility issues, but we could build a similar model and seize the benefits of faster development. This is important because, as the capital market expands its base, there’s a very positive income redistribution effect. If we take, for instance, countries such as South Korea and other Asian nations, where the degree of inclusion of the population in terms of share acquisition is very high, we’ll see that the capital gains resulting from the increase in company value end up becoming an income surplus. This happened in the United States in the 1990’s. Dividends became important for the increase in the population’s income. There’s a virtuous circle aspect in this process. Local companies are required to have a behavior standard similar to that of international companies with regard to the environment, social responsibility, and corporate attitude. The country’s corporate environment is improved. Everything is closely related. If we look at the experience of countries with success stories regarding fast economic growth, we’ll see that the source of this phenomenon is in an accumulation process based on strong institutional investors.”
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