Despite contending with economic headwinds and the related challenges, Latin America’s insurance market remains sound with premium levels nearing those last seen in 2019, credit rating agency AM Best stated in a new report.
The Best’s Special Report, “Tighter Financial Conditions, Political Polarization, and Stubborn Inflation Cloud Latin America’s Economic Outlook,” found that the region’s gross domestic product grew 4.0% in 2022, which followed on the heels of 7.0% growth the year prior.
Latin America has managed to successfully navigate major external shocks since 2020 stemming from COVID-19, the Russia-Ukraine conflict and, most recently, the tightening of global financial conditions, the report highlighted.
The main issues driving the economic conditions for Latin America’s insurers according to the report include a damped domestic demand due to declining real wages and weakening consumer balance sheets; also higher operating expenses, sluggish sales, and narrower profit margins have negatively affected businesses.
Additionally, rising government debt loads owing to pandemic crisis spending have diminished fiscal space and the ability of governments to spend in the future.
According to the International Monetary Fund (IMF), the economic activity in Latin America is expected to slow to 1.6%. This percentage is lower than the 2.8% estimate for the global economic growth.
Divided into three main categories: economic, political, and financial system, the report also highlighted how country risk is evaluated and factored into all AM Best ratings.
As part of evaluating country risk, the rating agency identifies the various factors within a country that may directly or indirectly affect an insurance company.
As part of the highlights the report also found that the region’s insurance premium growth reached a peak of $203bn in 2016 and has fallen every year since.
2021 was the exception, when insurance premiums rebounded to $116bn from $103bn in 2020, as the market benefitted from the economic recovery following the slowdown due to the pandemic.
Also, from 2019 to 2020, insurance premiums dropped by almost $15bn. Most countries in the region saw a decline, but five saw contractions in the double digits: Chile (22.6%), Brazil (20.5%), Suriname (14.9%), Mexico (10.5%), and Colombia (10.2%).
Finally, the report revealed that one of the most glaring deficiencies in the regional economy would be the lack of real GDP per capita growth, which has fallen for many of the region’s countries over the last decade.
