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Moody's report: catastrophe and reinsurance costs rise for Latin America
Monday, September 9, 2024 - 16:30
crédito foto Reuters desastre natural Brasil

Brazil and Mexico have seen less growth in 2024, which will impact insurance after a period of strong premium growth. While in Chile, Colombia and Peru, the insurance market will grow more than in other countries, but will still be below long-term averages.

Compared to more developed regions, Latin America has low insurance penetration, especially due to the low use of life insurance.

Economic activity is constrained by past monetary tightening, low investment flows and slowing global demand, while central banks are cutting interest rates.

In an industry overview by Moody's Ratings, it is highlighted that Brazil and Mexico have grown less in 2024, which will affect insurance after a period of strong premium growth. While in Chile, Colombia and Peru, the insurance market will grow more than in other countries, but will still be below long-term averages.

Thus, the expansion of the insurance industry in Latin America is closely related to regional economic indicators, such as GDP growth, inflation and interest rates.

“We expect moderate gross domestic product (GDP) growth to continue to support insurers' business prospects in Latin America, although investment returns will decline from the peaks of 2022 and 2023, resulting in lower investment returns,” said Marcelo De Gruttola, Vice President - Senior Analyst at Moody's Ratings.

In its analysis, Moody's projects that the region will have moderate average growth of 2.4% in 2024 and 2.5% in 2025 —except for Argentina, which will be in recession during 2024 and is expected to recover in 2025— which represents an improvement compared to 1.1% in 2023.

Digging deeper, Brazil and Mexico – the fastest-growing economies in 2023 – could experience a slowdown in growth compared to last year, which would impact insurance operations, although they are projected to perform better than before the COVID-19 pandemic.

Growth in Chile, Colombia and Peru could pick up, but will fall short of long-term averages, potentially leading to moderate premium growth in light of broader challenges such as monetary policy.
stricter restrictions and a slowdown in global demand.

Despite Colombia's economic slowdown, with GDP growth of 0.6% in 2023 and a weak 1.7% projected for 2024, its insurance sector grew in 2023, driven by rising insurance rates and life insurance penetration.

However, growth is likely to be more modest going forward due to weakening economic activity, pressured by low investment volumes and historically high levels of inflation and interest rates.

The Chilean life insurance market, which is mainly linked to retirement pensions, has seen a strong recovery after 2021, but its sustained growth will depend on the outcome of the debates on pension reform.

On the other hand, long-term life coverage is a key growth area, especially in Peru and Mexico, where insurance penetration is low.

INFLATION AND WEATHER EVENTS

The study highlights that the high level of informality and income inequality in Latin America partly explains the scope of the insurance market in the region. The lack of sufficient and stable income for individuals has been one of the main barriers to the growth of the insurance industry.

In addition, the quality of each country's social safety net and the implementation of public policies that encourage the use of insurance play an important role.

For example, the life insurance business is more developed in Chile and Brazil, driven by the broader private pension systems in both countries and the tax benefits for long-term insurance, especially in Brazil. In contrast, insurance penetration in Mexico is much lower, with only 17 million people—out of the 61.4 million economically active population—owning any type of life insurance.
type of private insurance.

Inflation and monetary tightening have also had far-reaching implications for insurers.

Macroeconomic factors have pushed up reinsurance costs, which have been worsened by rising catastrophe losses. "This has led to a combination of higher reinsurance rates and lower capacity of local insurers as companies retain a greater share of their risks. Larger insurers are more likely to lose out on reinsurance costs.
"They maintain adequate protection thanks to extensive catastrophe reinsurance coverage," the report states.

On the other hand, higher interest rates have improved the profitability of investments, which benefits insurers' results.

While weather events and catastrophes represent a key challenge, the El Niño weather phenomenon in 2024, although milder than expected, has increased claims to P&C insurers, especially in Peru, Colombia, Brazil and Central America, although it has been favourable for agriculture in Argentina and Uruguay following the severe drought in 2023.

The rise in catastrophe losses followed historic flooding in Brazil, wildfires in Chile and hurricanes in Mexico. Low insurance penetration limited the impact of these events on local insurers, while reinsurers have shouldered the majority of the losses.

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