A land of opportunity—but a nuanced picture

Latin America offers opportunities for re/insurers willing to understand and accept the important subtleties of operating in the region, Marcelo De Gruttola, vice president–senior analyst at Moody’s Investors Service, tells Intelligent Insurer.

How would you characterise the Latin America re/insurance market compared to that in other major regions?

Latin America is characterised by a relatively low insurance penetration when compared to more developed countries, especially regarding life coverages. Although still below the global average, penetration is higher in Chile and Brazil, as these countries’ life insurance industry is more developed. Large levels of informality and income inequality in the region lead to lower utilisation of insurance products. 

Overall, P&C products comprise the largest share of premiums in the region, with automobile insurance being the largest contributor to premiums in most countries. The presence of large international insurance companies, especially from the US and Europe, is significant throughout the region.

How has this region changed for re/insurers over the past two or three years? 

The main changes on Latin American insurance industries are to some extent in line with other regions. The increase in inflation and the consequent monetary tightening, which started earlier in the region when compared to more developed markets, have had far-reaching implications for insurers. 

“Higher rates, at levels not seen in the region in decades, have led investment returns to support insurers’ bottom-line results.” Marcelo De Gruttola, Moody’s

First, it led to an increase in reinsurance costs, which was compounded by mounting catastrophe losses in the region and globally. This was evidenced by recent events such as Hurricane Otis in Mexico, the fires in Chile and the drought in Argentina and Uruguay and led to a combination of reinsurance rate increases and lower capacity by local insurers, with companies retaining a higher portion of their risks. 

The largest insurers in the region remain adequately protected by extensive catastrophe reinsurance coverage. In turn, higher rates, at levels not seen in the region in decades, have led investment returns to support insurers’ bottom-line results. In addition, high and in some cases unruly inflation has led to claims inflation, which has strained underwriting results, although companies have actively adjusted their rates to at least partially compensate for the pressure.

What are the key markets to watch in terms of opportunity and realistic growth? 

We expect insurance business growth to be closely tied to gross domestic product (GDP), inflation, and interest rate dynamics in the region. GDP growth will show little change in 2024 in relation to 2023, although growth will slow in some countries while accelerating in others. After being the fastest-growing economies within the largest countries in the region—which also resulted in strong premium growth—Brazil and Mexico will grow less in 2024, which will weigh on insurance activities. 

However, growth in these countries is above pre-COVID-19 pandemic levels, so premium growth will still be supportive of broadly stable financial fundamentals for insurers. On the other hand, even though growth will be higher in 2024 for Chile, Colombia and Peru, it will be below their long-term averages, leading to more subdued premium growth. 

Economic activity in the region is still affected by monetary tightening and slowing global demand, although most central banks in the region began cutting interest rates in 2023.

Insurance business grew substantially in Colombia during 2023 in spite of the economic deceleration, in part due to higher insurance rates and an increase of life insurance penetration, but we expect growth to be more subdued this year due to continued low economic growth and continuing high inflation and interest rates. 

Life insurance in Chile, mostly related to pension annuities, has recovered swiftly after being virtually stalled in 2021, although a sustainable recovery will be subject to the finalisation of the pension reform discussions currently taking place in Congress. 

In general, long-term life coverages are the ones that have the larger growth opportunities in the region, especially in Peru and Mexico where penetration remains low.

What challenges will re/insurers face in these same markets? 

“Maintaining or improving underwriting results will be a key challenge.”

Insurers’ bottom-line results throughout the region have been supported by strong investment income in 2023 as interest rates remained high. Most countries have begun the rate reduction cycle and therefore insurers will struggle to maintain their investment results, although rates will remain above the levels before the rate hikes and therefore investment returns will continue to be supportive of insurers’ profitability. Maintaining or improving underwriting results will be a key challenge for the companies’ profits, especially on automobile insurance that continues to be subject to significant price competition. 

Claim costs inflation—in motor parts and others—has made it more difficult for insurers to anticipate costs and adjust rates accordingly. In this scenario, P&C insurers will need to further increase prices to maintain adequate results. 

In light of the increase of reinsurance protection prices, weather events and overall catastrophe risks remain a challenge. The El Niño weather phenomenon, even though it is milder so far than expected, risks increasing claims for P&C insurers especially in Brazil, Central America, Colombia and Peru, while it will benefit agriculture in Argentina and Uruguay after the severe drought suffered in 2023, which led to severe losses for insurers in Uruguay.

What market or macroeconomic trends are you monitoring that could affect re/insurers and brokers?

Risks to the macroeconomic forecasts could lead to additional challenges to the insurance industries. We expect political pressures to remain relevant, but easing relative to 2023. However, in the event of renewed social unrest in the region, it could lead to weaker prospects as it would affect demand for insurance products. 

Weather events and overall catastrophe risk is still a challenge, as recently evidenced by the fires in Chile. As described above, the El Niño weather phenomenon will have an impact. The path of disinflation is also important: if inflation proves to be stickier than expected in some countries—which has been the case in Colombia in relation to its peers in the region—the rate reduction cycle by central banks could take longer, impacting economic and premium growth. 

Insurers in the region are already being affected by higher reinsurance costs, and further increases—albeit not expected—could drive lower capacity and also lead to insurers retaining even more risks.

What is your long-term outlook for this huge and diverse market as it continues to develop?

We expect the industry to grow moderately in 2024, with more growth expected for 2025 as most of the economies of the region will see higher economic activity. In the longer term, we expect benefits from increasing financial inclusion in the region also to help insurance penetration. 

COVID-19 improved the awareness of the benefits of insurance products, especially of life and health coverages, which should also support the industry growth. However, sustained long-term growth of the industry will be subject to reductions of the levels of informality and income inequality in the region, which compares unfavourably with other regions and constrains the demand for insurance products.

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