Growing penetration and infrastructure projects will drive LatAm growth

Growth opportunities for the reinsurance market in Latin America (LatAm) are ample, given the relatively low insurance penetration rate in Latin America (2.5 percent on average), compared with the US and Europe (above 7 percent).

And various infrastructure projects planned in the region in the coming years will be a key driver of growth.

Those are the conclusions of a report by Fitch Ratings called Latin American Reinsurance: Fertile Ground in a Complicated Environment.

The rating agency also considers as positive the evolution of the regulatory environment toward risk-based capital models in the most important economies and insurance markets in the region (Mexico, Brazil and Chile).

Others, such as Colombia, Peru and Costa Rica, are introducing incremental changes to their existing solvency frameworks. Fitch believes that these regulatory initiatives will increase reinsurance penetration, as they will promote confidence in the region's insurance industry and its use as a risk-transfer tool.

On the other hand, the region's vulnerability to natural disasters promotes continued demand for reinsurance. This, along with soft global reinsurance rates and a recent decline in the frequency and severity of natural catastrophes in the region, has resulted in several companies taking this advantage to expand their reinsurance coverage at a lower cost, the report said.

In Fitch's opinion, LatAm reinsurers are considered to be small relative to most global reinsurance competitors, mainly as a consequence of limited capital resources. Additionally, LatAm reinsurers are characterised by a limited client base and geographic spread of business.

Both factors play a key role in the rating level assigned to reinsurers. Nevertheless, multi-line reinsurers domiciled in the largest LatAm economies have important market positions in the region, where they are considered 'medium scale'.

The reinsurance property and casualty (P&C) and catastrophe branches are the largest within the region's reinsurance companies. However, revenue and earnings from surety bonds and life lines of business have been growing rapidly, leading to a more balanced split between non-life and life branches in their books.

On the other hand, given the orientation of regional reinsurers' business toward large catastrophe and P&C segments, the premiums portfolios of regional reinsurers tend to be concentrated.

The region's reinsurance business is derived largely (approximately 60 percent) through direct cooperation with primary independent insurers and several reinsurers. Reinsurers also have strong partnerships with leading reinsurance brokerage firms, although this channel represents around 40 percent of regional reinsurers' revenues.

According to Fitch, LatAm reinsurers continue to face the problem of limited data availability with which to more accurately model and manage catastrophe risks. This limitation partially poses constraints on the use of alternative capital.

Thus, modelling capabilities and compilation of more comprehensive statistics need to improve for alternative uses of capital to become more prevalent in the region.