Brazil’s reinsurance market: challenges loom amid growth

The Brazilian reinsurance market is a study in contrasts – opportunity tempered by challenge, with AM Best's Market Segment Outlook report, published in August 2024, highlighting a market navigating headwinds while hinting at promising pathways for growth.

AM Best has maintained a negative outlook for the sector, citing several systemic hurdles. 

The industry’s insularity – largely reliant on the domestic market – limits its ability to diversify risks and revenue streams internationally. 

Regulatory constraints, such as restrictions on foreign assets, further exacerbate these challenges. 

Combined with Brazil’s fiscal deficit and a recent slowdown in reinsurance growth, the sector’s recovery appears tentative.

However, 2023 offered a glimmer of hope. Positive bottom-line results, driven by historically high interest rates and robust investment income, hint at the sector's resilience. 

For a stable outlook, the market must reach a point where it consistently delivers technical profitability.

Brazil’s economic landscape continues to influence the reinsurance sector. GDP growth in 2023 outperformed expectations, fuelled by agricultural output and fiscal incentives. Yet, this growth plateaued by year-end. 

The country’s historically high SELIC rate (the interest rate for the Brazilian economy) – though easing from 13.8 per cent in 2022 to 11.8 per cent – has supported profitability through higher returns on invested reserves.

Currency fluctuations remain a double-edged sword. A strengthening Brazilian real has expanded the market’s profile, attracting international reinsurers, but it also exposes foreign players to exchange risks. 

Innovation is paving new avenues for the market. Insurance-linked securities initiatives such as the Letra de Risco de Seguro aim to reduce insurance costs by tapping institutional investors for reinsurance capital. 

Though the initiative is still developing, expectations are high once approval is given from the regulators.

High underwriting prices present another bright spot, though strategic risk selection will be critical; lessons from the 2022 drought in southern Brazil led reinsurers to adopt a more cautious approach, particularly in agribusiness, where more than 50 per cent of risks are now ceded to reinsurers.

For Brazil’s reinsurance market to transition to a stable outlook, a combination of factors must align – regulatory reforms, sustained economic initiatives and the easing of fiscal uncertainties.

For more news from Miami Reinsurance Week Today, click here.

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.