NEW YORK: AM Best continues to hold a negative outlook on Brazil’s reinsurance sector, due predominantly to macroeconomic instability and a declining interest rate environment that has led to lower investment income.
A new Best’s Market Segment Report, titled, “Market Segment Outlook: Brazil Reinsurance,” states that investment income has been a major contributor to the profitability of the country’s reinsurance industry in recent years. However, interest rates are now in the 5% range, and inflation in the 2-3% range, which will lead to lower investment income.
This means that underwriting performance will need to make up the difference. However, AM Best believes that the worst of Brazil’s economic issues has passed and that conditions are moving in the right the direction, with the economy showing signs of slow and steady growth.
This could lead to a thriving reinsurance market that may support the country’s future economic growth and facilitate prudent risk-taking.
Other supporting factors for the negative outlook include foreign exchange fluctuations, which impact global companies that send dividends or cede premiums abroad, or are consolidated with operations outside Brazil, when paying out claims in Brazilian reais. Reinsurers based in Brazil have a competitive advantage by being somewhat insulated from currency fluctuations.
Despite the negative outlook, AM Best believes that a couple of factors in particular could stabilize the reinsurance market. Most notable is the continuation of meaningful economic reforms, which could facilitate long-term growth and boost confidence domestically and abroad. The other important factor is underwriting-driven profitability.
The ability to generate strong overall earnings from underwriting would go a long way toward creating a sustainable and prosperous reinsurance segment in Brazil.