AM Best
Latin American reinsurers navigate lingering pandemic stress
Like other areas around the globe, Latin America has been severely affected by COVID-19. Eli Sánchez and Guilherme Monteiro Simões of AM Best look at the challenges and opportunities for growth in the region.
“Latin America remains attractive to reinsurers and other market participants such as data providers and risk modeling agencies, as insurers seek to optimise coverage.”
Eli Sánchez, AM Best
“Brazil differs from most Latin American markets, due to its more robust reinsurance industry, which has grown more than the country’s GDP.”
Guilherme Monteiro Simões, AM Best
COVID-19 remains a top concern throughout Latin America. In AM Best’s view, reinsurance growth opportunities will be in those countries whose economies are already recovering. These conditions could revert if vaccination efforts slow down or if there is social or political unrest.
The reinsurance market in Latin America has cautiously deployed capacity, making few adjustments in treaty terms, while facultative programmes have been adjusted case by case. There are growing opportunities due to low insurance penetration, risk awareness, and alternative risk transfer solutions.
Growth opportunities for primary insurance segment
The International Monetary Fund (IMF) is projecting 4.6 percent growth in Latin America’s gross domestic product (GDP) during 2021, reflecting the mixed results of local efforts to tackle the economic crisis caused by the COVID-19 pandemic. Demand in the region’s primary insurance markets was adversely affected by the lockdowns and other restrictions implemented to stem the spread of the SARS-CoV-2 virus. In addition, constant political turmoil and social unrest challenge the region.
Insurance use declined, as public expenditures were rerouted to battle the pandemic. AM Best estimates that in 2020, Latin America’s insurance market contracted by 1.5 percent on average in real terms and in local currency. In US dollars, the region contracted around 11.4 percent, due mostly to a drop in the life segment, while demand for health insurance surged, mainly because of major medical expense. Slow—albeit ongoing—vaccination programmes continue to limit the development of underlying industries that rely on insurance.
AM Best expects primary companies to maintain profitable risk selection, although pandemic-related claims continue to evolve. Insured losses have been low in recent years, but market participants remain aware of the region’s susceptibility to earthquakes, tropical weather volatility and social unrest.
Mixed 2020 reinsurance market results
AM Best estimates ceded premium in the Latin American reinsurance market at $22.8 billion, down 3 percent from 2019 (Table 1). The region accounts for roughly 5 percent of global reinsurance premiums. The largest Latin American reinsurance markets are in countries most prone to natural catastrophes or countries with a high GDP.
Table 1: Latin America—ceded premiums*
Results for the reinsurance-dependent property and casualty (P&C) lines in 2020 were mixed, with some markets facing the economic crisis by absorbing risks, while others weathered the financial strains through governmental economic incentives. Despite a record-setting Atlantic hurricane season in 2020, catastrophe activity in Latin America was limited. Hurricanes Eta and Iota were significant events in Central America, but due to low insurance penetration, only 1.8 percent of the $8.1 billion in economic losses was covered by insurance. In comparison, a similar US event, Hurricane Sally, generated economic losses of $7 billion, with about half that amount covered by the insurance industry.
The low penetration rate for insurance products in Latin America tends to insulate the technical results of the region’s reinsurers and, therefore, any major justification for a hardening reinsurance market. In the first half of 2021, the region experienced flooding due to La Niña, as well as minor drought, earthquakes, and severe weather events. The 2021 hurricane season is still in progress, so its impact remains to be seen.
Reinsurance landscape still competitive
Latin America accounts for a relatively small part of the global risk portfolio, but leading global reinsurers and brokers maintain their interest and presence in the region. Global reinsurers retained their 5 to 7 percent share of the region’s business book in 2020. Lloyd’s presence in Latin America over the last five years accounted for approximately 7 percent of that market.
Most reinsurance companies in Latin America are privately owned. The national players are few, other than in Argentina and Brazil, where they have right of first refusal and fiscal advantages over foreign participants. In the rest of Latin America, the reinsurance market tends to be dominated by foreign reinsurers. Brazil differs from most Latin American markets, due to its more robust reinsurance industry, which has grown more than the country’s GDP.
In the first quarter of 2021, Brazil’s insurance industry grew 29.8 percent compared to the first quarter of 2020. For the full year 2020, reinsurance premiums increased by 21.6 percent over 2019—quite remarkable given that local reinsurance industry growth was significantly higher than the primary insurance industry and the overall economy (during the pandemic).
Other small and medium-sized, privately owned reinsurers in Latin America domiciled outside the region (mostly in the Caribbean) also have domestic capital and ties. These carriers tend to be more active in lower layers of programmes led by global players, and in the past few years have diversified into Europe, the Middle East, North Africa, and Asia through vehicles such as Lloyd’s syndicates or by setting up their own operations.
However, the experience has been mixed, as implementation costs and loss experience have not met participants’ projections.
Potential for growth
AM Best expects a substantial part of this year’s reinsurance demand to come from large risks as infrastructure projects and local demand are gradually reactivated. Reinsurance premium volumes for industries heavily affected by the current negative economic cycle, especially tourism, are expected to remain limited—even as travel restrictions loosen, and a gradual recovery takes place on the back of vaccination efforts. Speciality risks such as cyber and energy will remain dependent on the risk appetite of the global markets.
In 2021, primary insurers became interested in reinsurance for personal lines, which tends to be less reinsurance-intensive. Claims exposure has not yet met levels to justify the cost of excess of loss, particularly for the life segment. The greatest challenge comes from collective policies, whose performance was affected by the pandemic, which negatively impacted results on proportional contracts. Reinsurance renewals could be problematic given the regulatory requirements on coverage and price adjustments for primary insurers. Ultimately, this may limit reinsurers’ capacity to provide comprehensive, cost-efficient coverage to match those limitations faced by cedants.
The global reinsurance market has hardened somewhat due to business interruptions, event cancellations, and major re/insurance penetration in catastrophe-prone regions. In Latin America, low insurance penetration and lower economic and market development have insulated insurers’ balance sheets and limited reinsurers’ exposures. These conditions have dampened the capacity of the region’s reinsurers to adjust their offerings. Major adjustments have focused on facultative programmes, while captive insurance usage has surged as owners of profitable risks aim for a more efficient cost solution than traditional re/insurance.
Given Brazil’s low penetration (1.7 percent), the country’s re/insurance industry has plenty of room for growth. Local re/insurers’ balance sheets denominated in Brazilian real (BRL), however, are susceptible to devaluation against the US dollar, limiting their ability to match the capacity of their “admitted” and “occasional” global peers or even when operating regionally in Latin America (see box) (Figure 1).
This is the case for policies denominated in US dollars, which require that the equivalent capacity be denominated in the same currency.
Figure 1: Brazil—premiums ceded to reinsurers by type of reinsurer
Challenges turn into opportunities
Despite the current challenges that Latin American reinsurers face, there may be cause for optimism. During 2020 and 2021, many global reinsurers were pressed by limited performance and prospects in other regions. This resulted in global players cautiously deploying their capacity in Latin America and, in some cases, exiting businesses, replaced by local capital as regional players adopted a more active role.
Regular reinsurance conditions will continue for markets prone to natural catastrophes, as 2020 did not include natural disasters of significant magnitude—even as frequency increased. Latin America remains attractive to reinsurers and other market participants such as data providers and risk modelling agencies, as insurers seek to optimise coverage.
There is a greater understanding of exposures, particularly in catastrophe-prone areas with low insurance penetration. Cat coverage demand will continue, given the need to safeguard productive assets in the region, providing opportunities for parametric alternatives (in which a triggering event occurs, or a specified threshold is reached), as a cost-efficient strategy for insurers.
Latin American insurers are aware of the need to cover contingencies (especially business interruption), liabilities, and rising risks (such as cyber), due to new working environment dynamics (both remote and on site). Regulatory changes may lead to opportunities in Ecuador, where the regulator has allowed primary insurers to cede a wider array of personal lines coverages.
In Brazil, regulatory changes at the end of 2019 allowed for an increase in cession limits to “admitted” and “occasional” reinsurers, intensifying competition with local reinsurers as well as contributing to the distribution of risks over a larger number of market participants and to the overall development of the reinsurance market.
Global reinsurers have been active in their due diligence throughout Latin America and may constitute an additional resource to support the growth and expansion of Latin American companies worldwide. Historically, reinsurers provided an alternative for better returns than other asset classes during bear markets. Nevertheless, industry results in previous years have made investors wary of the risks, limiting additional capacity.
Alternative risk capital in the region is still low, with very limited insurance-linked securities (ILS) and cat bonds used mostly by sovereigns. One exception is Brazil, where the first-ever cat bond sponsored by a local Brazilian reinsurer covering Latin American reinsurance was issued a few years ago. The strengthening of solvency regulations and minimum ratings for foreign reinsurers will continue to provide local insurers with solid reinsurance providers to protect their balance sheets.
AM Best expects stability in the reinsurance market in Latin America but is maintaining its negative outlooks for many of the region’s individual markets. Most of those outlooks are tied to lines less focused on reinsurance. Our negative outlooks for the insurance markets in Chile and Peru are driven by the life side, owing to regulatory changes, although their P&C reinsurance markets continue to perform well.
Our negative outlook for Mexico’s insurance industry takes into account the lack of economic growth incentives and the impact on revenue, although demand for reinsurance is tied to catastrophic exposures.
Our negative outlook for Brazil’s reinsurance segment is based on the industry’s unfavorable profitability and its dependence on investment income for capitalisation growth, although we recognise the sophistication and strength of the country’s reinsurance system. Our only stable outlook in the region is for Guatemala, due to the country’s macrostability.
Brazil: types of reinsurers
- Local: Fully compliant with local re/insurance rules; partial right of first refusal in local primary business; a minimum mandatory percentage of business is ceded to them
- Admitted: Domiciled abroad; files local financial statements; representative office
- Occasional: Domiciled abroad (except for tax havens); recent regulatory change practically equates it to Admitted
This article is an excerpt from an AM Best special report titled “Global Reinsurance Outlook Remains Stable in a More Uncertain World”, published August 31, 2021.
Eli Sánchez is an associate director at AM Best. He can be contacted at: eli.sanchez@ambest.com Guilherme Monteiro Simões is a senior financial analyst at AM Best. He can be contacted at: guy.simoes@ambest.com
