Rating agency AM Best has announced that its outlook for Argentina’s insurance industry remains Negative, due to the country’s persistent economic challenges.
According to the International Monetary Fund, Argentina’s GDP expanded by 10.4% in 2021, recovering from a three-year recession, with GDP forecast to grow by 4.0% in 2022.
Best highlighted that growth is being driven by government spending, rising consumer demand, and a pickup in industrial activity, as well as improvements in the fiscal deficit (down from 8.6% of GDP in 2020 to 4.3% in 2021) owing partially to higher taxes on export rights, driven by a rise in commodity prices, taxes on family fortunes, and consistent money printing.
But, Best warns that the economy is expected to slow in 2023 due to a slowdown in both domestic and global economic activity.
Inflation also remains a significant challenge and worrying situation that is continuing to grow, especially after hitting a high of 83% in September, negatively impacting consumer purchasing power.
Best noted that Argentina’s insurance industry growth generally has been below the inflation rate. In 2021, the industry grew 3.6% in real terms, led by auto coverage, mainly through pricing adjustments owing to increasingly expensive automobiles as a result of inflation and supply chain disruptions, as well as the government´s mandatory basic car insurance.
The industry is still being driven by the non-life segment. According to Argentina´s insurance regulator – the Superintendencia de Seguros de la Nación (SSN), the industry consists of 191 insurers and 16 local reinsurers, with premium volume at 3.02% of GDP in 2021.
Non-life market accounts for 89% of GPW, led by automobile at 38% and workers’ compensation at 23%. The two segments accounted for almost two thirds of premium volume in 2021.
Furthermore, Best notes that investment income support of overall profitability has been undermined by the industry’s large exposures to government-backed obligations, which remain pressured by negative real interest rates, foreign exchange volatility, and non-investment grade credit quality.
“The country’s developing capital markets and the few financial instruments approved by the local regulator that can adequately match insurance liabilities and regulatory requirements continue to limit market participants’ financial flexibility to withstand the difficult economic environment, which is being impacted by soaring inflation, ultimately exacerbating solvency and liquidity issues,” explained Salvador Smith, senior financial analyst, AM Best.
Best concludes that given the large number of persistent challenges the country and the industry face, they will continue to monitor companies’ decisions seeking inorganic growth through M&A.