Economic Outlook For LatAm Insurers In 2024

LatAm insurers are facing a challenging economic outlook, given our forecast of a slowdown in global economic growth. We expect the U.S.--a key trading partner for the region, particularly for Mexico, as it's the destination for more than 80% of Mexico's exports--to slip into a period of below-trend growth. Meanwhile, the eurozone is bordering on recession, and we expect China's economic activity to suffer from the property sector's deepening woes and high corporate and local government debt. The economic performance of the U.S. influences that of LatAm countries because of strong economic ties--through trade, investment, and remittances. Our baseline scenario is for a "soft landing" in the U.S. economy. The risk is that even under such a scenario, the U.S. economy would suffer a significant deceleration, which will have repercussions for LatAm, including its insurance sector.

We expect inflation to keep moderating this year throughout LatAm, providing the room for moderate cuts in policy rates. However, we expect interest rates to remain high (significantly above pre-pandemic levels), limiting investment prospects and softening domestic demand. In this sense, we expect most LatAm countries to grow below trend in 2024: about 1.2%, down from 1.7% in 2023. This is largely due to a slowdown in the two largest economies in the region, Brazil and Mexico. We expect growth to pick up in 2025, but at a still low 2.2% pace. We'll be monitoring closely the trajectory of the ongoing conflict between Russia and Ukraine and the war in the Middle East. So far, the spillover from these conflicts has been milder than we expected, but we can't rule out escalations that would represent a major risk to our growth outlook for LatAm due to the possible hike in food and energy prices.

Chart 1

Insurers Are Prepared For Tough Conditions This Year

In our opinion, LatAm's sluggish economy in 2024 could weigh on insurers' growth prospects. However, opportunities could cushion the impact and allow insurers to keep achieving profitable growth. We believe that LatAm's insurance sector will continue to lag behind its peers in other regions in terms of the level of access to insurance products (measured by GPW to GDP). This is because of the following structural weaknesses:

• Poor infrastructure;
• A large informal labor market;
• The lack of private- and public-sector investments;
• Insecurity; and
• Political uncertainty that could curtail the visibility of the predictability of economic policies.

Moreover, insurers' customers--companies, governments, and households--are already feeling the effects of elevated interest rates, which have depressed their income capacity and individuals' purchasing power. The latter, along with an expected deterioration in labor market conditions and the fading post-pandemic awareness of the need for insurance coverage will curtail growth in GPW, while lapse rates and withdrawals from savings and unit link-products could increase.

However, there are several factors offering opportunities that could mitigate the global economic headwinds and the sector's currently low penetration. For instance, companies around the world are viewing Mexico as a strategic location due to its strong trading and investment links with the U.S. The potential benefits of nearshoring could flow to other countries of the region as well. We could see increasing demand for insurance products among large corporations and small and medium enterprises (SMEs), which may act as suppliers to multinational companies. Other countries in the region could also benefit in the next few years from higher energy production, which could bolster demand for insurance products in LatAm.

The severe extreme weather events--such as a drought in Brazil in 2022, the 2023 Hurricane Otis in Mexico, and the floods caused by El Niño shrinking harvests in South America could increase the awareness of the need for insurance protection. Moreover, insurers' digitalization and cost-efficiency strategies could expand their offerings to the underserved low-income slice of population without jeopardizing profitability. Some companies are developing analytical tools to exploit and take advantage of their databases to better understand their customers' needs.

Given these conflicting trends, we expect LatAm insurers' GPW growth (including life and non-life lines of business) will remain moderate at 5%-7% in real terms this year, with the pace in Mexico at the top of the range while that in Brazil and Colombia at the bottom. In Argentina, GPWs will contract in real terms this year. We expect life premiums will keep benefiting from high interest rates that boost growth of unit-link and savings products. Property and casualty (P/C) business lines could take advantage from increasing foreign direct investment in the region and from nearshoring, while auto insurance premiums could rise from rising auto sales--boosted by credit--and price adjustments that will continue this year. Accident and health (A&H), as part of the non-life business segment, could expand from the post-pandemic awareness of insurance coverage and pricing adjustments to offset medical inflation. In our view, the key challenge for insurers this year is to raise their GPWs by accessing new customers, and not just expanding through hard market conditions. Nevertheless, we expect the access to insurance products in LatAm--measured by GPW to GDP--will remain lower than in other emerging markets.

Chart 2

Weakening Economies, High Inflation, And Climate Events Will Pressure Operating Performance

Elevated inflation is a key risk for insurers, as it has increased significantly the cost of claims and operating expenses in the past two years. We expect inflation to decline throughout LatAm, but the uncertain global economic backdrop makes it difficult to predict at what pace, and we wouldn't rule out further inflationary pressures if geopolitical tensions escalate or climate conditions lift food and energy prices. Moreover, insurers could see the claims' rising frequency and costs from higher unemployment and households' weakening purchasing power, which are exacerbating inequality in the region that could trigger social unrest, which usually leads to physical damage claims. Insecurity and the increasing incidence of fraud, along with larger, more frequent, and costlier natural disasters in the region (mainly earthquakes, hurricanes, floods, and droughts), will pose additional risks to the operating performance in the next 12-18 months.

Nevertheless, we believe technical results will benefit from the prevalence of conservative underwriting policies. The increase in risk-adjusted prices and stringent selection of risks have enabled insurers to absorb costlier claims and inflation-fueled operating expenses. As a result, insurers maintain combined ratios at manageable levels, allowing the underwriting businesses to contribute to bottom-line results. In 2024, we expect insurers to keep increasing prices across certain business lines, such as A&H and auto insurance. Therefore, we expect steady levels of combined ratios in the region this year.

As LatAm insurers increasingly adopt innovation and maximize their data analytics capabilities in their underwriting processes, we expect timely pricing adjustments and cost efficiencies. This will strengthen their technical results. In our view, the maintenance of prudent risk management (capital and reserve adequacy) and underwriting policies could allow for relatively smooth renewal negotiations with reinsurers during hard market conditions.

Chart 3

Investment Income Will Keep Supporting Profits Amid High Interest Rates

The investment portfolios of LatAm insurers mainly consist of debt instruments issued by the governments. This is because investment regimes across the region's countries consider these instruments as risk free. However, interest rates that LatAm governments pay on their debt are generally higher than those for governments in other regions, bolstering insurers' investment results. If we look at LatAm countries' one-year real ex ante interest rates--which take into account expectations of interest rates and inflation a year ahead--in most cases, they are the highest they have been in at least a decade (see chart 4). In this sense, although central banks in the region are likely to cut policy rates this year, as inflation moderates, we expect real interest rates will remain high. Therefore, insurers' investment income will remain solid, offsetting potential pressure on underwriting results, and boosting bottom-line results this year.

However, high interest rates could be unsustainable for speculative-grade government and corporate issuers in the region, which could lead to downgrades, defaults, or distressed exchanges. In LatAm, four countries in the speculative-grade category--Colombia ('BB+/B'), Ecuador ('B-/B'), Bolivia ('CCC+/C'), and Argentina ('CCC-/C')--have negative outlooks, while we expect the regional corporate speculative-grade default rate to stay below 1% this year. In this regard, a risk we identify for insurers in the next 12-24 months is related to governments and companies' debt refinancing, as debt maturities are piling up. Therefore, the credit quality of insurers' investment portfolios could weaken, especially of those that hold a large share of corporate bonds with weak credit quality. Consequently, this could dent the rated insurers' risk-based capitalization and liquidity.

Chart 4

Rating Trends In 2024

The rating trajectory across the sector is currently stable. As of Jan. 31, 2024, about 80% of the rated entities have a stable outlook, and the remainder is negative. We expect the rated insurers will maintain conservative risk management and underwriting policies, along with sound capitalization and sufficient liquidity. However, we don't rule out an increasing negative outlook bias in 2024 if our base-case economic assumptions--for a particular country--deviate from our current estimates, potentially eroding sovereigns and insurers' credit quality. Weather-related events could also weaken the credit quality of several industry players.

Currently, the credit quality of about 85% of the insurance companies we rate in LatAm, is the same as--or even stronger than--the respective sovereign ratings. We consider that the sovereign risk for the rated insurers is relevant. This is because we believe that in a sovereign stress scenario, regulatory and supervisory powers may restrict these entities' financial flexibility. Moreover, we consider that insurers' operations and creditworthiness would take a hit from many of the same economic factors that cause sovereign stress. Therefore, we don't rate insurers above the sovereign ratings, unless they pass our sovereign stress test, demonstrating their potential resilience to a hypothetical sovereign default. In this sense, a negative rating action on the sovereign would likely result in a similar action on domestic insurers. We note that, as of this report's date, about 87% of the insurance companies we rate operate in countries with a stable outlook, contributing to a mostly stable insurance portfolio.

Chart 5

Country-Specific Expectations For 2024

Brazilian insurers' profits to return to a historical average, but should remain sound

After a jump in profits in Brazil's P/C sector in 2023, we expect them to normalize in 2024. Solid results for P/C companies stemmed from lower claims for auto insurers and from high interest rates that supported profits. We project the sector's return on equity (ROE) in 2024 to be close to its past five-year average. This expectation incorporates our view that the sector's combined ratio will return to historical figures, after bottoming out in 2023, and that the investment yield will continue contributing to profitability, despite declining interest rates in Brazil. The policy interest rate is currently at 11.75%, and we expect it to drop to 9.0% by year-end. We also forecast that P/C GPW will continue to outpace slightly Brazil's inflation. We also expect solid bottom-line results for the life insurance segment in 2024, as the sector continues to gradually expand in real terms and to generate healthy loss ratios and reasonable returns from investments.

Mexican insurers' decelerating GPW growth, but profitability to remain resilient

For 2024, we forecast GPW growth will slip to 6%-7% in real terms from about 10% in 2023. This will be mainly due to slower economic activity and the rise in unemployment that could depress saving and purchase capacity, whereas the post-pandemic risk awareness may fade away along with demand for medical and life insurance. Also, we believe the rise in new vehicle sales, could partly compensate for the pause in the tightening of auto insurance rates. The GPW to GDP ratio will remain low at 2.5%, with plenty of room for insurers to redesign their products and costumer experience and take advantage of potential nearshoring business.

On the other hand, we expect premium adjustments will reduce non-life loss ratios towards historic averages of 67% in 2024 from 69%, with a minor impact from Hurricane Otis. New prices now incorporate inflation in hospital services and auto claims due to spare parts shortages and longer repair times. The sector estimates claims resulting from Hurricane Otis close to $2.2 billion, of which about 23% have already been paid, supporting economic activity in the affected area. However, most of these losses will be ceded to global reinsurers, which will relieve pressure on Mexican insurers. Additionally, we think the mortality rate will remain stable. But we could observe a slight increase in surrenders and withdrawals from savings and unit-link products that, along with economic pressures, could curtail the life insurance segment's profitability.

Finally, the industry will maintain solid investment returns in 2024 amid still high interest rates. We anticipate investment portfolios will remain concentrated in government securities, given the benefit these instruments offer through the yield significantly above inflation. These returns, coupled with better pricing, will allow the industry to reverse operating losses in the life insurance segment and support profitability in the non-life segment. The industry's ROE and return on revenue (ROR) will increase slightly to 8.2% from 7.9% and to 23.0% from 20.2%, respectively.

Colombian insurers' healthy profits

We project GPW growth of about 5% in real terms in 2024 despite the slower economic and lending momentum. Although inflation will partially recede this year following the effects of an aggressive contractive monetary policy adopted in 2022-2023, we think insurers will continue increasing prices to absorb higher claims and operational costs. Stable car sales will help keep auto insurance volumes growing, while public healthcare shortages will continue generating growth opportunities for the health insurance sector. In addition, government-sponsored agricultural insurance offers growth prospects.

We expect the industry's profitability to remain healthy this year owing to sound underwriting, stable claim rates, and steady investment gains thanks to their conservative investment strategies. The life sector's ROE will return to pre-pandemic levels of about 16% this year as inflation returns to the central bank's target range. However, we expect the P/C sector's underwriting results to remain weak, given high competition across the intermediary and policyholder markets. In addition, auto insurers will have to continue managing the rising costs of auto spare parts. The severe deficiencies in the underwriting model of the mandatory third-party liability and health insurance for car accidents (also known as SOAT) will keep the combined ratio above 103%. High interest rates during part of 2024 will continue supporting sound investment yields this year, offsetting pressure on the combined ratio. Thus, we forecast the P/C sector's ROE to reach about 10% this year.

Argentine insurers' profitability and growth prospects to continue shrinking

Insurers continue operating in a very challenging business environment, given economic woes, tightening controls on the foreign exchange market, and very high inflation and unemployment. Macroeconomic and policy factors have exacerbated distortions in the insurance sector. The volatility and unpredictable policies have led to swings in exchange-rate regimes, approaches to monetary policy, the state's huge role in the economy, and its deleterious influence on investment and growth, all of which contribute to structurally low growth prospects. Raising the pace of GDP growth in the medium term would require addressing macroeconomic imbalances and easing microeconomic obstacles, including a complex tax burden and rigid labor laws. We expect real GDP to contract 1% in 2024.

As of the end of June 2023 (fiscal year-end), very high inflation continues to undercut the industry's profitability. The sector posted real ROE of negative 6% and the combined ratio of 94%, narrowing from a negative 11% and almost 97%, respectively, in June 2022. On the other hand, GPW jumped 114% year on year in nominal terms, in line with the accumulated inflation as of the same date (116%). The industry faces considerable product risk from high inflation, a volatile exchange-rate policy, and foreign-exchange controls. These factors cause uncertainties in both pricing and reserve adequacy. For the next 12-24 months, we expect real ROE of negative 10% to negative 8%, with a combined ratio of 95%-100%, significantly affected by inflation adjustment. Also, we estimate premiums will contract in real terms by 5%-8%, expanding below inflation rate as insurers focus on retaining customers and collecting premiums.

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Related Research

• Insurance Industry And Country Risk Assessment Update: January 2024, Jan. 31, 2024
• Credit Conditions Emerging Markets Q1 2024: Not Getting Easier, Nov. 28, 2023
• Economic Outlook Emerging Markets Q1 2024: Challenging Global Conditions Will Constrain Growth, Nov. 27, 2023
• Hurricane Otis Unlikely To Affect Mexican Ratings, Oct. 26, 2023
• Latin America Sector Roundup Q4 2023: Uneven Trends Amid Rising Crosscurrents, Oct. 24, 2023