Central America and Dominican Republic forecast as stable

The Central American and Dominican Republic insurance sector's outlook remains stable for 2016, according to Fitch Ratings in a new report.

Fitch said the stable outlook is based on favourable growth rates for insurance markets in the region, along with the projected positive economic growth in those countries. In addition, the outlook considers the strengths that the insurance markets continue to show in terms of capitalisation and liquidity.

However, the rating firm said that a higher frequency of catastrophic events, along with higher inflation rates and currency devaluation in some countries, still pose challenges for the region.

In Fitch's opinion, the Central American insurance industry maintained an adequate financial profile as of September 2015. This is based on the region's relatively low combined ratio, which remained less than 100 percent (95.6 percent). In addition, the region maintained a low operating leverage ratio of 1.1x, and a high liquidity coverage ratio (152 percent of reserves and 105 percent of liabilities).

Fitch estimates nominal growth (in US dollars) of 4.8 percent in premium underwriting for Central America and the Dominican Republic at the end of 2015, comparing unfavourably to the 8.2 percent registered in 2014.

This is due to an accounting adjustment in the financial statements of Costa Rica's largest insurer, which underwrites 82 percent of total premiums. This market is the second largest in the region with 25 percent of total premiums. For 2016, Fitch estimates growth of 3.5 percent, based on more aggressive competition and devaluation of currency in some of the markets.

Fitch also said believes that profitability in property and casualty insurance lines will be challenged by highly competitive rates promoted by favourable conditions in the international reinsurance market. In the medium term, this may affect sector performance, although growth and profitability in personal insurance lines could mitigate a possible deterioration in the profitability of these markets.

“We also believe that the region will be able to maintain adequate capitalisation and leverage ratios, based on more efficient generation and reinvestment of revenues in most companies, and on the extensive reinsurance capacity available in the markets,” said the firm.

“Fitch believes solvency levels could show further improvement as Solvency II type regulations are adopted in some markets within the region.”