According to a new Best’s Special Report from ICMIF Supporting Member AM Best titled, Latin America: Economic and Political Risks May Subside in 2020, the rating agency expects Latin America’s economies to rebound somewhat in 2020, which would help the insurance markets in these countries better realise their growth potential.
In the new report, AM Best notes that countries in Latin America are coming off of two years of low growth and headwinds due to a number of factors. These factors included the end of the commodity price super-cycle, political instability and the resulting policy uncertainty, lower global and regional growth and volatile investment flows. Despite these challenges, the insurance markets remained resilient. Gross domestic product growth in 2020 is forecast to be 1.8% in 2020, following 0.2% in the previous year and 1.0% in 2017.
AM Best says that the economies of the countries in Latin America are diverse and dynamic, with great potential owing to abundant natural resources. However, the reliance on commodities makes the region vulnerable to external conditions and shocks. These countries are largely heterogeneous and differences can be attributed to individual reactions and exposures to domestic and external shocks. AM Best evaluates and incorporates country risk into all of its Credit Ratings, which entails identifying the various risks in a country that could directly or indirectly affect an insurance company. The risks are divided into three main categories: economic, political and financial system risks. Financial system risk is divided further into insurance and non-insurance risks.
Insurance penetration rates in the region average 2.3%, and given the low penetration rate, the region has significant potential for growth. However, premium growth, which peaked at USD 165 billion in 2013, has been below trend in recent years. Four of the top five markets—Brazil, Mexico, Colombia and Venezuela—have not reached the level of 2013 premiums in recent years. Brazil, the largest market by premium, recorded USD 75 billion in 2013 and was approximately down by half in 2016, before rebounding slightly in 2017. Mexico, the region’s second largest market, has largely stagnated over the last few years. Venezuela’s market has collapsed completely and is unlikely to recover for some time.
Nevertheless, for the two largest insurance markets in Latin America, and for most of the region, AM Best says it expects that an improvement in the economic environment, externally and domestically, as well as a decline in political policy uncertainty, will boost the region’s insurance environment.
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