S&P Global Ratings has forecasted Latin America’s economic growth to stagnate this year, which will weigh on insurers’ business and operating conditions.
According to the credit rating agency, this prediction reflects analysts’ expectations of lower demand for the region’s manufactured products and commodities from key trading partners – particularly, the U.S. and China – as the world’ largest economies lose steam.
At the same time, agency analysts’ also expect slowing consumption amid fraying consumer confidence and employment levels to act as a drag on Latin America’s economy.
Central banks in the region might start lowering interest rates as inflation is expected to recede gradually this year having reached its peak during 2022.
However, S&P warned that the lag between rate hikes and their full effects means that prices could stay elevated – dwindling consumer purchasing power – curtailing economic activity.
Finally, analysts believe that the governments’ fiscal response to slower growth is likely to “generate jitters among investors” about the risk of fiscal slippage.
“This scenario will pose complications for the regional insurers,” S&P stated. “For instance, as the global economic slump spills over to Latin America, we expect demand for insurance products to sag. This is because economic woes could hit corporate profits and households’ purchasing power. Moreover, insurers’ technical results could take a hit from potentially higher claims (in frequency and severity).”
“This is because the lifting of pandemic-related restrictions could increase insurers’ claims, while high inflation and the potential deterioration of employment could increase incidents of fraud, social unrest, and crime levels across the regions.”
The rating agency added: “We should also consider physical risks from climate change that are increasing in the region. Finally, if high inflation persists and Latin American currencies undergo episodes of high volatility, insurers’ claims could jump. This could lift costs of insurance premiums and, consequently, lapse rates within policies in-force, shrinking insurers’ customer and premium base.”
However, analysts believe that healthy balance sheets, sound capitalization, and sufficient liquidity will cushion the blow for insurers in the region.
S&P said: “We expect the companies to maintain conservative underwriting and investment policies this year, enabling them to preserve profitability amid potentially high financial-market volatility.
“Moreover, we believe the experience that insurers gained from operating during previous times of economic stress – with significant fluctuations in market conditions and foreign-exchange rates – will help the industry players to navigate the upcoming obstacles.”
