As per a new Fitch Ratings report, the regulation of Letras de Risco de Seguro (LRS), which are similar to insurance linked-securities (ILS), could benefit Brazil’s re/insurance market.
According to Fitch, LRS may provide new access to portfolio diversification and capital management, which would support re/insurer credit ratings.
If successful in attracting alternative sources of risk capital, the rating agency noted that LRS should help stabilise reinsurance costs through improved competition and mitigation of reinsurer counterparty risk.
“Sharing risk between insurers, the SSPEs and investors could reduce insurers’ financing costs. The approach would provide an alternative to the traditional reinsurance market, which can be more expensive or restricted at times,” Fitch’s report observed.
It continued, “These instruments will allow re/insurers to optimize capital and risk management, enhance liquidity, and mitigate risk transfer expenses, including reinsurance premiums.
“LRS could also be an option for investors aiming to diversify their portfolios with investments that have low correlation to traditional asset classes.”
Brazil’s Securities and Exchange Commission will reportedly issue and distribute LRS, as per the regulation, while the Private Insurance Superintendence (Susep) and the National Private Insurance Council (CNSP) will regulate the activities of SSPEs.
Fitch’s report concluded that demand and growth for these alternative reinsurance capital markets in Brazil will depend on (re)insurers’ search for alternative capacity, further capping or increasing reinsurance rates, and potential returns for investors.
In related news, as revealed by our sister publication Artemis earlier this month, catastrophe bond and related ILS market activity levels accelerated in Q2 of 2024, with a record $8.4 billion of new risk capital issued that propelled the market to a record size of $48 billion.
Q2 of 2024 saw a record $8.2 billion of new issuance across full 144A property catastrophe bond transactions, cat bonds covering non-catastrophe risks, such as cyber risks, and privately placed cat bond deals.
34 new cat bond transactions were issued during Q2, comprised of 52 tranches of notes, as positive momentum was not only sustained but accelerated in the period, taking H1 2024 issuance to $12.6 billion, another record for the sector.
