Reinsurance grows, but penetration remains limited in Latin America: Fitch

“We expect demand for reinsurance in Latin America to remain strong during the second half of 2021 due to heightened uncertainties linked to the pandemic and catastrophe weather events and primary insurance companies’ stronger ability to purchase reinsurance given increases in their own pricing,” explained  Fitch Ratings’ regional head of Latin American insurance and reinsurance rating, Eduardo Recinos.

“However, the increase in demand might be offset by lower insurance industry growth given the COVID-19 pandemic’s adverse economic effects in the region.”

Introducing the rating agency’s market update, Recinos noted that the insurance market was heavily influenced by the global market and international pricing conditions.

“We expect global insurance price increases to benefit Latin American reinsurers’ top-line growth,” he said. “Underwriting margins should improve this year and in 2022 as price increases flow down to net earnings in the medium term.”

The industry will also benefit from the tightening insurance terms that have accompanied price increases, he added.

“The desire to protect earnings from pandemic-related claims and lower investment income has led to more disciplined underwriting and policy limit management across the global market. Provisional and alternative reinsurance capacity providers remain disciplined.”

Exclusion of pandemic cover in new and renewal contracts should progressively reduce the potential for future reinsurance claims stemming from the pandemic, he added.

Major reinsurers in the market remain strong, according to director of Latin America insurance ratings, Miguel Martinez.

“From our rated reinsurance companies, we view the largest reinsurers as the most resilient to the changing reinsurance landscape,” he said. “The group’s largest and best positioned competitors have strong franchises and deep knowledge of their regional markets.”

“Most Latin American reinsurers maintain adequate capitalisation and financial performance despite the global pandemic and natural catastrophes that occurred in the region. We do not expect a significant deterioration of their main credit factors in the short term,” Martinez added.

Poor penetration inadequate for risks

According to Martinez, recent losses in the region are likely to boost demand for reinsurance.

“Record natural catastrophe losses from the past years, mainly from 2017, and the recent weather events in the region have motivated further coverage acquisition for property and casualty business—mainly in the countries which were more heavily affected.”

Market penetration, however, remained extremely low in the region despite recent catastrophes causing significant economic losses: hurricanes Eta and Iota in 2020, which cost more than $8 billion; the January earthquakes in Puerto Rico the same year, with $1 billion of losses; and the South American wildfires across the agricultural region of southern Brazil, Paraguay, Bolivia and Argentina—the worst in decades. Hardly any of the losses were insured.

“The three largest catastrophe events in 2020—Eta and Iota, wildfires in South America and the earthquake in Puerto Rico—accounted for insured losses of only a little more than $2 billion,” said Martinez.

Overall in 2020, Latin America experienced economic losses from natural disasters of around $18.6 billion, he reported, but only $2.1 billion of insured losses. Of the $8 billion economic costs of the two hurricanes, only around $140 million was covered.

“It highlights the importance of narrowing the insurance protection gap in the region,” he said.

How much reinsurers could do to address that was unclear.

“Since reinsurance companies are in the second line of defence against catastrophe risks, the role of reinsurers in the face of this disparity is limited to promoting risk protection through adequate insurance coverage and creating more awareness of risk management,” he said.