Brazilian reinsurance market remains negative according to AM Best

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AM Best analysts commented on the impact of the COVID-19 pandemic on Brazil’s macroeconomic instability and how macroeconomic and political uncertainties have increased, making the country more vulnerable to global market volatility.

Analysts explained that while these issues were not enough to halt the growth of the country’s re/insurance market, past challenges have resurfaced, leading to further instability.

They also explained that loss cost inflation can minimize the benefits of higher prices for goods and services, resulting in higher reinsurance losses due to higher costs of repairing plant and equipment, replacement of assets and durable goods and related services, for example.

Analysts indicated that local reinsurance premiums benefit from the same positive dynamics as the global reinsurance sector, and that the overall effect in the medium and short term could be positive for the reinsurance sector in Brazil.

“However, segment growth is likely to face headwinds due to limitations in ability to underwrite risk, as the financial flexibility offered by local capital markets dries up, and risk aversion world, as international investors and players reconsider their national markets,” they said. .

They also added that the persistence of high public debt has the potential to crowd out private sector investment opportunities when interest rates rise.

AM Best predicts that the budget deficit, which is currently being amplified by the upcoming presidential elections, is likely to persist and bring volatility to the local currency.

Compared to most economies of similar size, insurance penetration in Brazil is relatively low, with a relatively low level of reinsurance penetration and significant growth potential, but this has not yet translated into underwriting profitability.

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