Cautious optimism: S&P mulls LatAm mixed prospects for insurers

The Latin American economic picture may stagnate overall in 2024, leading to a cautious outlook for insurers seeking growth. But there are also some good reasons for optimism, S&P Global Ratings reveals in a new report.

Sluggish economic growth in Latin America in 2024 could weigh on insurers’ growth prospects. But the size of wider opportunities in the region could cushion the impact and allow insurers to keep achieving profitable growth.

That is according to a report by S&P Global Ratings published on February 20 titled “Latin American Insurance Sector View 2024: A Balance Between Risks And Opportunities”. 

“We believe that LatAm’s insurance sector will continue to lag behind its peers in other regions in terms of the level of access to insurance products (measured by gross premium written [GPW] to gross domestic product [GDP]),” S&P says, blaming a number of structural weaknesses.

Covering the region’s economic outlook first, the rating agency suggests LatAm insurers are facing a challenging economic outlook, given its forecast of a slowdown in global economic growth. It says it expects the US, a key trading partner for the region, particularly for Mexico, to slip into a period of below-trend growth.

The economic performance of the US influences that of LatAm countries because of strong economic ties, through trade, investment, and remittances. “Our baseline scenario is for a ‘soft landing’ in the US economy. The risk is that even under such a scenario, the US economy would suffer a significant deceleration, which will have repercussions for LatAm, including its insurance sector,” S&P says.

Meanwhile, S&P notes, the eurozone is bordering on recession. “And we expect China’s economic activity to suffer from the property sector’s deepening woes and high corporate and local government debt,” it says.

All this means it expects inflation to keep moderating this year throughout LatAm, providing the room for moderate cuts in policy rates. “However, we expect interest rates to remain high (significantly above pre-COVID-19 pandemic levels), limiting investment prospects and softening domestic demand.” It expects most LatAm countries to grow below trend in 2024: about 1.2 percent, down from 1.7 percent in 2023.

This dynamic is largely due to a slowdown in the two largest economies in the region, Brazil and Mexico. It expects growth to pick up in 2025, but at a still low 2.2 percent pace. 

“We’ll be monitoring closely the trajectory of the ongoing wars in Ukraine and the Middle East. So far, the spillover from these conflicts has been milder than we expected, but we can’t rule out escalations that would represent a major risk to our growth outlook for LatAm due to the possible hike in food and energy prices.”

Going back to its comment on the region’s structural weaknesses, S&P lists poor infrastructure, a large informal labour market, the lack of private and public-sector investments, insecurity, and political uncertainty as being the main ones of concern.

It adds that, partly driven by some of these factors, insurers’ customers (companies, governments, and households) are feeling the effects of elevated interest rates, which have depressed their income capacity and individuals’ purchasing power. 

“The latter, along with an expected deterioration in labour market conditions and the fading post-pandemic awareness of the need for insurance coverage will curtail growth in GPW, while lapse rates and withdrawals from savings and unit-linked products could increase,” the report says.

Some good news

There are some reasons for optimism, however. S&P identifies factors offering opportunities that could mitigate the global economic headwinds and the sector’s currently low penetration. For instance, it notes, companies around the world are viewing Mexico as a strategic location due to its strong trading and investment links with the US.

“The potential benefits of nearshoring could flow to other countries of the region as well. We could see increasing demand for insurance products among large corporations and small and medium enterprises, which may act as suppliers to multinational companies. 

“Other countries in the region could benefit in the next few years from higher energy production, which could bolster demand for insurance products in LatAm,” says the report.

Another positive could be a growing awareness of the need for certain insurance products in the aftermath of severe weather events including a drought in Brazil in 2022, the 2023 Hurricane Otis in Mexico, and floods caused by El Niño. These could increase the awareness of the need for insurance protection. 

“Moreover, insurers’ digitisation and cost-efficiency strategies could expand their offerings to the underserved low-income slice of population without jeopardising profitability. Some companies are developing analytical tools to exploit and take advantage of their databases to better understand their customers’ needs,” the report states.

Given these conflicting trends, the rating agency expects LatAm insurers’ GPW growth (including life and non-life lines of business) to remain moderate at 5 to 7 percent in real terms this year, with the pace in Mexico at the top of the range while that in Brazil and Colombia at the bottom. In Argentina, it suggests, GPW will contract in real terms this year.

“We expect life premiums to keep benefiting from high interest rates that boost growth of unit-linked and savings products. Property and casualty business lines could take advantage of increasing foreign direct investment in the region and from nearshoring, while auto insurance premiums could rise from rising auto sales—boosted by credit—and price adjustments that will continue this year. 

“Accident and health (A&H), as part of the non-life business segment, could expand from the post-pandemic awareness of insurance coverage and pricing adjustments to offset medical inflation. In our view, the key challenge for insurers this year is to raise their GPW by accessing new customers, and not just expanding through hard market conditions. 

“Nevertheless, we expect the access to insurance products in LatAm—measured by GPW to GDP—will remain lower than in other emerging markets.”

The report notes that elevated inflation is a key risk for insurers, as it has significantly increased the cost of claims and operating expenses in the past two years. “We expect inflation to decline throughout LatAm, but the uncertain global economic backdrop makes it difficult to predict at what pace, and we wouldn’t rule out further inflationary pressures if geopolitical tensions escalate or climate conditions lift food and energy prices.”

In addition insurers could see a rising frequency of claims and their costs from higher unemployment and households’ weakening purchasing power, which are exacerbating inequality in the region and could trigger social unrest, which can lead to physical damage claims.

Nevertheless, S&P is broadly bullish on potentially profitability. “We believe technical results will benefit from the prevalence of conservative underwriting policies. The increase in risk-adjusted prices and stringent selection of risks have enabled insurers to absorb costlier claims and inflation-fuelled operating expenses. 

“As a result, insurers maintain combined ratios at manageable levels, allowing the underwriting businesses to contribute to bottom-line results. In 2024, we expect insurers to keep increasing prices across certain business lines, such as A&H and auto insurance. Therefore, we expect steady levels of combined ratios in the region this year,” the report concludes.

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