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NEW YORK-International insurers must establish full-fledged underwriting operations in Latin America rather than branches with little autonomy if they want to take advantage of growing demand for capacity in the region, a Chilean broker says.

While setting up a well-managed local office or subsidiary can take years, the prospects for growth in Latin American insurance markets should make it a worthwhile investment, the broker says.

As in other areas of the world, overcapacity and the absence of significant catastrophe losses over the past several years is putting pressure on reinsurers to lower rates, said a reinsurer, adding there is no sign of any change in 1997.

They were speaking at the Roundtable on Insurance Conditions in Latin America sponsored by the International Insurance Council late last month in New York.

International insurers looking to enter the Latin American insurance markets should learn from the lessons of other insurers that have found success, said Jaime Searle, senior vp at Claro, Marsh & McLennan S.A., a unit of Marsh & McLennan Cos. Inc. in Santiago, Chile.

"The only way to be successful is by finding more flexible ways to operate and allowing local underwriters to function in the local environment," he said.

Historically, most international insurers have set up local offices in Latin America but largely left the underwriting decisions in their head offices, Mr. Searle said.

The head offices had little knowledge of the local market and were conservative in granting capacity to the local risks, he said.

"The subsidiaries then became brokers dealing with their own home office," Mr. Searle said.

Policyholders in Latin America confronted with this system found that an easier route to accessing significant international capacity was to use a Lloyd's of London broker to access the London market directly, he said.

Some international insurers have since changed their strategy and are sending underwriters to Latin America to learn more about the markets, Mr. Searle said. "The expats come in and only after three, four or five years do they have a good idea of what's going on."

However, once the underwriters know the market, they can write significant programs directly from the Latin American office, he said.

Already, this approach is benefiting some international insurers and their policyholders in Chile, Mr. Searle said.

"I've been able to put together some very large programs using only international companies in Chile," Mr. Searle said.

The international insurers that commit operations to Latin America will be able to take full advantage of the liberalized insurance markets in the region and the economic liberalization, including privatization of state-controlled industries, which is leading to an increased demand for insurance, he said.

The increased demand for insurance capacity is doing little to stem reinsurance competition in the region, said Keith Shroyer, vp-Latin American operations at American Reinsurance Co. in Princeton, N.J.

In the near term, international reinsurers with an eye on Latin America are seeing rates in the region plummet, Mr. Shroyer said.

As one reinsurer reduces its rate for a risk, another reinsurer cuts its rates even further, he said.

"It's like watching a limbo contest on a cruise liner," Mr. Shroyer said.

For example, at year-end renewals, catastrophe excess-of-loss rates were down by 50% for many Central American risks, he said.

The sharp reduction in reinsurance rates for Central America is due partly to a lack of rate reductions there over the past two years, while rates were falling throughout the rest of Latin America, Mr. Shroyer said.

Excess-of-loss catastrophe rates still fell between 10% and 25% in the Caribbean and an average of 20% in the rest of Latin America at year-end renewals, he added.

About the lowest catastrophe rates in the region are in Chile, where the rate on line, calculated by dividing reinsurance limits by the premium, is 0.66%, Mr. Shroyer said. "It's really incredible."

The low excess-of-loss rates helped push down primary insurance rates, which in turn helped drive down the premiums for proportional treaties, he said.

"We did not see a single proportional property reinsurance treaty in 1996 that met its estimated premium income," Mr. Shroyer said.

And there is no sign of the fall in rates being halted in 1997, he said.

Reinsurers have plentiful capacity and are aggressively seeking premium income, Mr. Shroyer said.