2023 Fitch`s Outlook for the Latin American insurance sector is neutral

The 2023 Outlook for the Latin American insurance sector is neutral in most markets based on stable industry profile and operating environments (IPOE).

According to Fitch Ratings, the sector outlook considers premium growth aligned with economic growth, normalization of life and health loss ratios to pre-pandemic levels, and pricing adjustments in non-life business lines that may benefit underwriting performance.

However, financial market volatility may affect profitability in some markets.

Fitch expects the insurance sectors in Colombia, El Salvador, Peru and Chilean Non-Life will deteriorate, considering that lower economic growth, currency depreciations and persisting high levels of inflation may continue to affect non-life business claims costs, especially the auto business line that may not be completely offset by pricing adjustments.

Sovereign ratings and their potential effects in IPOEs will influence some insurance sectors, given that investment portfolios remain exposed to government bonds, and operations are concentrated in domestic economies.

Insurance companies remain highly influenced by sovereigns, due to significant exposure to government bonds and the concentration of operations in the domestic economy.

Life and health segments will have better performance in 2022 due to a downward trend in loss ratios, mainly life and coronavirus-related health, rising renewal prices and higher interest rates, which will compensate for the increase in medical care, consultation and treatment costs.

Non-life sector profitability will be exposed to the negative effects of currency fluctuations, supply chain restrictions, higher inflation and rising reinsurance costs. A downward scenario would be influenced by social and political tensions due to elections in several countries and higher volatility in investment portfolios.

Persistent high inflation and rapidly rising interest rates affect various insurance markets within Latin America.

The report discusses how these factors affect Latin American insurance companies, with a focus on Brazil, Chile, Colombia, Mexico and Peru — the five largest insurance markets that Fitch covers in the region.

Fitch developed economic scenarios for the LatAm insurance industry to help judge insurers’ resilience and exposure to the impact of rising inflation and interest rates, as well as any possible related recessions.

An economic scenario where rapidly rising interest rates and high inflation persists into 2023 would likely trigger deteriorating insurance sector outlooks and negative rating actions on individual insurers in LatAm. Furthermore, negative rating actions would likely be driven by related sovereign ratings actions.

Pressures would be greatest in the non-life, health and reinsurance sectors. Insurer’s earnings are likely to be affected by the volatile claims performance on some inflation-sensitive business lines, but will also benefit from increased market rates as central banks tighten monetary policy.

Financial income from investment portfolios is an important component for the overall earnings of LatAm insurance companies. Income from investments across LatAm is highly correlated with interest rates and inflation as most investment portfolios are comprised of fixed-income securities attached to floating-rate interest rates and inflation. Investment portfolios of a large group of insurers in the region are comprised mainly of government or local private fixed-income securities.

Prolonged recessionary conditions can put pressure on sovereign ratings. Sovereign downgrades can directly affect the risk profile of insurers’ investment portfolios and deteriorate the credit quality.

Fitch’s market scoring of the industry profile and operating environment (IPOE), which is also linked to the scoring of individual insurers’ company profiles, can likely be affected by sovereign rating actions.

For a notable cross section of Rating Outlooks to turn Negative, beyond those related mainly to sovereign actions, and for systemic downgrades to start to occur in LatAm, we believe a stress environment would need to develop reflecting persistently high inflation and policy interest rates into 2024 and beyond, which could cause prolonged and deeper recessions in the noted countries.

by Yana Keller