Brazil reinsurance market placed on negative outlook by AM Best

AM Best has placed a negative market segment outlook on Brazil’s reinsurance market, citing persistent macroeconomic and political uncertainty; a declining interest rate environment, which has led to lower investment income; foreign exchange fluctuations; and evolving reinsurance market conditions.

Brazil remains the world’s ninth-largest economy even though it ranks in the lower quartile in terms of ease of doing business. The country’s reinsurance market is no exception and has substantial barriers to entry, in addition to significant volatility, according to the latest Best’s Market Segment Report, titled “Market Segment Outlook: Brazil Reinsurance”.

When compared with most economies of similar size, Brazil has relatively low insurance penetration, which comes with a correspondingly low level of reinsurance penetration and significant growth potential. However, according to the report, growth potential does not always translate into prudent risk selection or underwriting profitability. Investment income has been a major driver in the profitability of Brazil’s reinsurance industry in recent years. Interest rates are now in the 6%-7% range, with inflation in the 4%-5% range, so going forward, AM Best believes profitability no longer can depend on strong financial income—underwriting will need to make up the difference.

Although AM Best’s outlook for the Brazilian reinsurance industry is negative, AM Best believes there are several triggers that could stabilize the reinsurance market. Most notable would be the implementation of meaningful economic reforms such as pension and fiscal reforms, which could help facilitate long-term growth and boost confidence domestically and abroad. The other important factor is underwriting-driven profitability. The ability to generate strong overall earnings driven by underwriting would go a long way toward creating a sustainable and prosperous reinsurance segment in Brazil.

Despite the negative outlook, AM Best believes that there is a strong likelihood that the worst has passed and that conditions in Brazil are trending in the right the direction, albeit somewhat slowly.

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