Challenges remain despite business-friendly governments
Many countries began the year with fiscally conservative and business-friendly administrations, following regional elections, but domestic challenges remain, Mathias Jungen, head of reinsurance Brazil and the Southern Cone at Swiss Re, has told FIDES Today.
“These governments have the opportunity to propose meaningful reforms that promote fiscal sustainability, increase competitiveness and foster sustained levels of economic growth,” says Jungen.
And some external headwinds have now dissipated—the Chinese economy has not slowed as much as feared and US monetary policy has not excessively tightened, he adds. Despite this, Jungen warns that domestic challenges remain.
“For example, Brazil requires a pension reform as a key contributor to fiscal sustainability, and its delay is currently limiting business confidence. Argentina’s outlook remains uncertain, with difficult external economic conditions and October elections that threaten the return of distortive economic policies,” he explains.
The recent governmental changes have also led to a renewed focus on infrastructure projects that are necessary to improve local economies or meet the needs of the local population.
Swiss Re sees opportunities for the re/insurance industry to support these projects by providing coverage in areas such as engineering, surety and life and health.
Leapfrog technologies and catch-up growth
The reinsurer expects real gross domestic product above 3 percent in Chile, Colombia and Peru in 2019, due to the absence of major imbalances and favourable cyclical conditions.
“We expect insurance demand to improve in 2019 and 2020 as the gradual economic recovery picks up pace by the end of next year,” he adds.
In recent years, premium growth has not met expectations, particularly in countries such as Argentina or Brazil.
“The economic soft patch that began in 2014 following the downturn in commodity prices continues to linger,” says Jungen, adding that the region's economic growth has also been affected by concerns about investment in emerging markets and a gradual transition in the US towards tighter credit conditions.
He says: “This has a corresponding effect on the demand for insurance. Some of these externalities are dissipating, but domestic developments are now front and centre.”
The prolonged period of soft market conditions has affected the business model of traditional reinsurance and two consecutive seasons with significant natural catastrophe losses reduced the amount of capital that was flooding the market. However, says Jungen, the industry is so well capitalised that rates did not adjust as expected.
“We believe that the growing segment of strategic reinsurance (involving tailor-made transactions) will provide more opportunities for insurers and reinsurers to transact in a more strategic manner,” he notes.
Life insurance penetration also remains below expectations in Mexico, Colombia and Peru, which Jungen believes highlights room for catch-up growth.
“Cycle-sensitive property and casualty lines such as motor, credit and surety, marine, and engineering are likely to be more responsive to an upturn in the economy, greater purchasing power due to lower inflation, and favourable credit conditions. Mexico and Argentina are exceptions to this expectation,” he adds.
Latin America isn’t immune to the innovation and change spreading worldwide.
According to Jungen, while the use of technology in insurance was initially centred on digitisation and automation to improve efficiency and productivity, now, the use of data analytics has become more prominent with artificial intelligence and robotics being integrated into the value chain.
He concludes: “Emerging markets are well suited for the adoption of new technology, as they are generally more agile. They do not have the burden of legacy systems compared to insurers in advanced markets, creating opportunities for leapfrog technologies with new and innovative solutions that can be the basis for a more robust outlook for Latin America.”
