Emerging economics face slowdown

The global slowdown in economic growth will eventually translate into growth in world insurance premiums, particularly in the non-life and life risk segments.

This is the finding of “Economic and Industry Outlook 2019: Third Quarter Perspectives”, a report from Mapfre Foundation, published earlier this year.

“The more accommodative monetary policy measures towards which virtually all monetary authorities appear to be heading may soften the impact on the economy and the performance of these lines of business, although they will negatively affect the development of the savings life and annuities insurance business, as they materialise,” said the report.

Major emerging economies are also facing a possible slowdown in the growth of their insurance business. This includes Argentina, where the economy remains in recession, and Brazil and Mexico, where weak levels of economic growth are expected.

Mexico

Following last quarter’s slowdown, Mapfre estimates real growth in the Mexican economy in 2019 to be around 1.3 percent (compared with 2 percent in 2018), which means “the country’s growth prospects are narrowing”, said the report.

It added: “The restrictive monetary policy, with the aim of curbing inflation and, collaterally, currency depreciation, has brought with it an economic slowdown that has been fed by the fall of public spending, investment and the deceleration of the external sector, to which must be added the increase in investment uncertainty.”

While the economic slowdown could end up spreading to the insurance market, Mapfre said that inflation is moderating and the currency seems to have stabilised, which is good news for the profitability performance of the non-life business lines (which were negatively affected by the upturn in previous months).

Brazil

Mapfre has lowered its initial expectations of real gross domestic product growth in 2019 to 1 percent (1.1 percent in 2018), as all indicators point to a slowdown in the activity levels of the Brazilian economy.

The report said: “Expectations of a global slowdown are materialising, combined with the persistence of the strong imbalance in public accounts and the difficulties faced by the government in undertaking the necessary structural reforms to balance them, especially in the pension system.”

This downward revision of economic growth forecasts worsens the growth prospects for the non-life and life risk businesses of the insurance industry. However, inflation seems to have been reined in and exchange rates are forecast to stay stable, which is positive for these lines of business.

Argentina

While the forecast for the Argentine economy in 2019 is a gross domestic product drop of around -1.5 percent (compared with -2.4 percent in 2018), growth is expected to return in 2020 (estimated at 2.6 percent).

The implementation of restrictive fiscal and monetary policy measures, which were agreed under the financial assistance programme with the International Monetary Fund, make it difficult “in the short term to exit the recessionary environment in which the economy finds itself, but they do signal an improvement in the medium-term outlook”.

This environment negatively affects the development of the insurance business, again in the non-life and life risk lines of business.

“Difficulties in curbing inflation, which shows no signs of easing (57.3 percent year-on-year in May), will have a negative impact on the claims costs of insurance companies that are unable to take full advantage of the high interest rates of monetary policy to shore up the financial profitability of these lines of business,” said the report.

This is because of the regulatory limits imposed on insurance companies for investments in short-term public debt instruments.

The interest rate environment could also be an opportunity to market annual savings life insurance products that are temporary and renewable with short maturity terms and renegotiation of the guaranteed rate for each maturity term, but regulatory limitations may also hinder the development of this kind of product, added the report.