Opportunity but volatility in LatAm’s insurance sector: Fitch

A relatively low insurance penetration in Latin America compared to more developed markets suggests significant potential for expansion in the sector. 

However, the continent’s insurance markets can be more volatile than those in developed countries due to their smaller size, concentration, and strong pricing competition.

That is the succinct summary offered by Eduardo Recinos, senior director and head of Latin America – Insurance Ratings, at Fitch Ratings, when asked to characterise the Latin America re/insurance market compared to other major regions.

He notes that high premium growth is common due to under penetration, but performance is also heavily influenced by GDP/inflation trends, and large account changes. “Despite these challenges, favorable underwriting performance is often achieved through low administrative expenses, ceding commissions, and significant investment income from high interest rates of local currency instruments and risky assets,” he told Miami Reinsurance Week Today.

He also highlighted the importance of reinsurance to Latin American insurers. Most are heavily exposed to catastrophe risk. Most non-life insurers have substantial and varied reinsurance coverage is in place as a result. 

“Given that in Latin American insurance markets, funding may be limited primarily or exclusively to its common equity from a parent company, these reinsurance arrangements serve not only to limit loss exposures or replenish losses but also to support growth, facilitate strategic repositioning, and even act as strategies to transfer risk or "cede" excess reserves from life insurance lines for regulatory capital relief,” he said.

“Unlike insurers in other major regions, Latin American insurers do not significantly rely on other risk mitigation strategies such as industry loss warranties (ILWs), capital markets products, or securitiszations like catastrophe bonds.”

He also discussed the rapidly evolving landscape in Latin America. He noted that natural disasters in the region have increased in recent years, partly attributed to climate change. Climate risks have manifested through earthquakes, hurricanes, floods, droughts, and wildfires across the region, leading to significant economic and insurance losses.

This has meant premium increases in many cases, to offset the higher claims driven by high inflation and catastrophic events. “This will necessitate robust risk management strategies from insurance companies in the region, in a context of a challenging international reinsurance market,” he noted.

He also flagged the fact that some countries in the region are undergoing legislative reforms, particularly in pension, health, labour, and judicial laws. 

Several countries in Latin America, mainly Mexico, Chile, Brazil, Colombia, Costa Rica, and Peru, have continued advancing their regulatory frameworks by implementing IFRS 17 and making progress towards the adoption of full risk-based solvency regulations. 

“These changes are encouraging insurers to update their risk management practices and systems. Additionally, the adoption of digital technologies has been increasing in the past two years, with insurers investing in online platforms, mobile apps, and AI to improve customer experience and streamline operations. 

“AI is being used for risk assessment, fraud detection, claims processing, and more, enhancing efficiency and customer experiences while optimizing pricing and predicting trends.”

But he also flagged the many challenges faced by insurance companies in Latin America. “Economic instability and currency fluctuations can affect their financial stability and consumer purchasing power. While digital transformation is under way, adopting new technologies and reaching underinsured populations can be challenging,” he said.

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