Fitch Ratings has recently revealed that it expects premium rate increases, rising investment yields and strong demand for reinsurance protection globally, will continue to support Latin American (LatAm) reinsurers’ earnings in the second half of 2023 and into 2024.
According to the ratings agency, headwinds related to high inflation and interest rates should begin to ease, while climate change effects on natural catastrophe claims are expected to be adequately priced.
At the same time, the sector is heavily influenced by global pricing conditions, due to its small size relative to the global market, and is prone to benefit from the current hard market conditions, with better pricing and more favorable terms.
Fitch states that this is driven by price increases above claims inflation in many global reinsurance business lines, as well as more favorable terms and conditions, which have ultimately helped to lower the natural catastrophe weight underwritten by reinsurers as cedents have had to increase the retention of these risks themselves.
“The LatAm reinsurance sector’s performance was very strong in 2022, favored by lower pandemic-related losses and better global reinsurance pricing,” commented Miguel Martinez, Fitch Ratings.
The ratings agency states that it expects LatAm reinsurers to benefit from global reinsurance conditions by prioritizing pricing, natural catastrophe risk management and organic premium growth.
The agency warns, however, that they may also be challenged by claims inflation, sovereign-related constraints, as well as economic slowdowns from developing countries.
In addition, the headwinds linked to high inflation and rising interest rates are expected to ease, while the the negative effect of climate change on natural catastrophe claims should be priced more adequately in 2023 and 2024, according to Fitch.
The agency also estimates that the sector’s near-term return on capital will exceed 8%–10% of its cost of capital.
Moreover, the majority of LatAm reinsurers’ ratings are likely to remain unchanged through the rating horizon because of the improving outlook on the global reinsurance sector.
Fitch added that this assumes a base case scenario for the next 12–18 months in which most LatAm reinsurers maintain adequate capitalization and financial performance, despite known macroeconomic risks and heightened catastrophe losses fueled by climate change.
It is important to highlight that across 2022 in LatAm, economic losses stemming from natural disasters reached around USD$18 billion. However, of those, approximately $4.8 billion were covered by insurance, which continues to highlight the importance of narrowing the protection gap across the region.
Also in 2022, ceded premiums to reinsurance in LatAm totaled $19.2 billion, a solid increase of 9.9% compared with $17.4 billion from 2021.
All of the countries in the region also experienced an increase in ceded premiums at the end of 2022, compared with 2021. The three countries that saw the highest increases in ceded premiums were Brazil, which witnessed a 27.5% increase; Nicaragua, with a 12.5% increase; and Costa Rica, with an 11.4% increase.
Fitch concludes by stating that it expects ceded premiums will continue to gain momentum during the next 12–18 months, considering the organic growth of LatAm insurance markets, the higher frequency of natural catastrophe events and increasing awareness from insurance consumers that supports reinsurance demand.