Economic reform key for burgeoning Brazilian reinsurance market

Brazil’s developing economy features a similarly developing reinsurance market. The nation’s market is a competitive one, according to ratings agency AmBest, but it has significant barriers to entry, with the underlying regulatory framework of the market still under development.

The volatile nature of Brazil’s currency market and its macro-instability has deterred investors from the region according to AmBest, who recently gave the nation a negative outlook. For global companies paying out claims in Brazilian reais, currency fluctuations can have a substantial impact on business, according to Scott Mangan, associate director at AmBest. “Currency fluctuation makes the market less attractive to global reinsurance players, but domicile companies are more insulated from these fluctuations,” he said.

Local reinsurer IRB still occupies the majority of the Brazillian market with a 33 percent market share. In 2007, the Brazilian government ordered the end of IRB’s reinsurance monopoly, opening up the market to local and international firms. Then, in July 2019, the government exited its role in the reinsurance market by selling its shares in the company.

AmBest pointed to the declining interest rate environment as a key factor to its negative outlook on the Brazilian reinsurance industry.  Investment income has been a major contributor to the profitability of the country’s reinsurance industry in recent years, according to the ratings agency.  But, although nominal interest rates on Brazilian sovereign bonds were as high as 14 percent a few years ago, interest rates are now in the five percent range. And with inflation around two to three percent, underwriters may need to account for the lower investment income.

While the ratings agency has given the country a negative outlook, Mangan claimed that the nation is close to stable short to medium term growth, with the potential to see a more sustainable form of growth in the future. “In order to achieve this there needs to be economic reform, facilitating growth and boosting confidence both domestically and abroad,” he added.

The re/insurance markets of other countries in the South American region have benefitted from alternative capital markets in the form of insurance linked securities (ILS). The World Bank issued a $1.36 million Latin and South American earthquake cat bond in February 2018. But, when asked if ILS could provide Brazil with alternative sources of capital, Guilherme Simoes, senior financial analyst at AmBest, told Intelligent Insurer that the country lacks the right modelling to entice investors. And, while flooding has been prominent in some regions, the country doesn’t experience a large number of natural catastrophe events. Simoes added that while Brazil has the world's ninth-largest economy, when it is compared to economies of similar size the country’s insurance penetration is relatively low, with a correspondingly low level of reinsurance penetration.