The demand for reinsurance in Latin America (LatAm) is expected to increase during the second half of this year due to heightened uncertainty linked to COVID-19, according to a report by Fitch Ratings.
The expected increase is also due to numerous high-impact weather events and primary insurers’ stronger ability to purchase reinsurance given increases in their own pricing.
However, this might be offset by lower insurance industry growth given the pandemic’s adverse economic effects in the region.
Fitch views major LatAm reinsurers as the most resilient to the changing reinsurance landscape. This group’s largest and best-positioned competitors possess strong franchises and deep knowledge of regional markets.
Furthermore, insurance-linked securities (ILS) activity in LatAm remains limited. Accurate capture of insurance data is fundamental in ensuring adequate catastrophe protection; modelling capabilities need to improve and more comprehensive statistics still need to be compiled for alternative capital sources to become more widely used.
Alternative capital will have a growing role in the evolution of the LatAm reinsurance and insurance markets as some of the current limitations improve over time.
In LatAm, Brazil’s insurance regulator SUSEP took the lead in creating regulation for the issuance of ILS and special-purpose reinsurance vehicles, with its legislation that came into effect on January 2021.
With this new regulation, Brazil is now capable of issuing domestic ILS from its re/insurance market, as a possible new alternative to foster its growing re/insurance industry.
The LatAm region experienced catastrophic losses of around $18.6 billion in 2020, which was still significantly below 2017’s record losses of nearly $150 billion.
The report noted that Hurricanes Eta and Iota in Central America, the drought and wildfires in South America and an earthquake in Puerto Rico accounted for insured losses of more than $2 billion, which highlights the importance of continuing to narrow the protection gap.
The competition from global reinsurers, particularly European reinsurers and their larger reinsurance capital, allows LatAm reinsurers to focus most of their efforts on regional insurance sectors that are marked by low levels of insurance penetration between 2% and 4%.