A low number of large severity catastrophe events in Latin America in the past three years has benefited reinsurers operating in the region; however, according to a new AM Best report, pricing and claims costs are still pressured as a result of the global inflationary environment.
The Best’s Market Segment Report, “Limited Claims Activity Amid Inflationary Pressures for Latin America Reinsurers,” is part of AM Best’s month-long look at the global reinsurance industry marking Rendez-Vous de Septembre in Monte Carlo.
According to the report, the Latin American region’s insurance markets began hardening at the onset of the pandemic, but since that time, reinsurers have not seen major losses from catastrophes.
Still, reinsurers have adjusted their product offerings by raising deductibles, narrowing coverages and pressing for exclusions as they try to expand net profits by retaining more risks. At the same time, most of the region’s large insurers have been expanding their risk appetites given positive results and redundant reserves.
“Now that the market hardening is diminishing, some global reinsurers have followed the mandate of their parents to limit or exit their business in Latin America, pressured by a more conservative risk appetite that is less focused on cat-prone areas, or to target their capital in regions that justify price increases,” said Eli Sanchez, associate director, AM Best. “These conditions have opened opportunities for domestic reinsurers looking to fill the gaps left by global reinsurers, though a slowdown in hardening conditions should be viewed with some caution in markets that can incur catastrophe-related losses quickly.”
Although claims activity has been favorable for reinsurers’ income, inflation is impacting pricing and claims costs. Additionally, currency depreciation is constant across the continent. Although most contracts are in U.S. dollars, a decline in purchasing power owing to higher prices could continue to soften renewals for primary insurers. Rising interest rates could help improve net income if portfolio durations allow, depending on asset-liability management.
Inflation is particularly high in Brazil at approximately 12% and continues to fuel loss costs. Net premiums grew significantly, by 16%, with premium retention rising to 48%. For domestic Brazilian reinsurers, surplus growth and the retention of profitable business remain key.
“Pricing remains favorable, with the help of the hard global reinsurance market and inflation, and despite the Central Bank of Brazil’s hawkish interest rate hikes, these have not been enough to generate profitable results for the industry,” said Guilherme Monteiro Simoes, senior financial analyst, AM Best. “In a year of presidential elections aggravated by global instability, reinsurance groups in Brazil will likely find attracting capital from investors and increase capacity difficult.”
To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=324129. A short video interview about this report also can be viewed at http://www.ambest.com/v.asp?v=ambglobalrelatam922.
Additional reports, including AM Best’s annual ranking of the Top 50 global reinsurance groups and in-depth looks at the insurance-linked securities, Lloyd’s, life and regional reinsurance markets, are available. Please visit Best’s Research for additional reports.