Analysts at AM Best have commented on the impact the COVID-19 pandemic has had on Brazil’s macroeconomic instability, and how macroeconomic and political uncertainties have grown, making the country more vulnerable to volatility in the global markets.
The analysts explained that although these issues were not enough to stop the country’s re/insurance market growth, past challenges have re-emerged, which has led to a heightening instability.
They also explained that loss cost inflation may minimise the benefit the higher prices for goods and services, leading to larger re/insurance losses due to higher costs for the repair of facilities and equipment, replacement of assets and durable goods, and related services, for example.
The analysts reported that the local reinsurance premiums are benefitting from the same positive momentum as the global reinsurance industry, and the overall medium- to short-term effect may be positive for Brazil’s reinsurance industry.
“However, the segment’s growth is likely to face headwinds due to capacity limitations to underwrite risks, as the financial flexibility provided by the local capital markets dries up, and global risk aversion, as international investors and players reconsider their domestic markets,” they said.
They also added that persistently high government debt has the potential to crowd out investment opportunities in the private sector when interest rates go up.
AM Best predicts that fiscal deficit, which is currently being magnified by the upcoming presidential elections, is likely to persist and bring volatility to the local currency.
Compared with most economies of similar size, Brazil’s insurance penetration is relatively low, with a correspondingly low level of reinsurance penetration and significant growth potential, however this has not yet been translated into underwriting profitability.
