Mixed outlook for Latin American insurance markets says Fitch

Despite the stable outlook for most territories, the picture is variable throughout Latin America. For example, the Mexican insurance sector experienced recovery in its combined ratio to 101% in September 2012 (an average of 105% in last three years), due to solid annual premium growth (11% in real terms), and a net loss ratio reduction to 69.5% in September 2012 from 72% in September 2011, said Fitch. The net loss ratio reduction was due to tariff increase actions, stabilisation of total cost of claims, and the improvement in the claims environment, while catastrophic related losses were mitigated by adequate catastrophic reinsurance and reserves. A new insurance law in Mexico, which was intended to introduce a risk-based capital approach into the sector and has been under review for many years was recently approved by the senate and is now being submitted to the chamber of deputies to be tentatively implemented in 2014. Fitch said it expects the new regulatory regime to lead to greater capital resources and risk management, and also improve the industry's transparency and supervision. However, a return to aggressive pricing policies would have a negative effect on the sector's profitability and could prompt a revision of the outlook to negative.hideThe 'southern cone' insurance industry has demonstrated uneven results, said Fitch. "While Chile exhibits a mature and solid underwriting profile, including premiums diversification as well as a stable regulatory framework, other countries, such as Bolivia and Argentina face regulatory uncertainty, or greater inflation, such as in Argentina and Uruguay." The rating agency added: "Inflation rates in Argentina and Uruguay tend to be more elevated than those reported in the rest of the region, and has resulted in high nominal growth in premiums. Uruguay faces a high but controlled inflation scenario, whereas Argentina's insurers have demonstrated flexibility to anticipate tariff adjustments." Uruguay is experiencing the slow but progressive decentralization of Banco de Seguros del Estado's dominant position in the country, said Fitch, adding: "However, the intense competition by business line has resulted in significant pressures on tariffs, which has led to substantially diverse results in underwriting margins, a situation that is expected to continue in 2013." The insurance industry in the Andean region has a stable outlook for 2013, with adequate profitability despite pressure from a highly competitive environment, soft market conditions, and regulatory changes. Strong economies in Colombia and Peru will spur growth, while an economic downturn expected for Venezuela will pose challenges to the industry's growth and profitability, said Fitch. "Property & casualty insurance profitability is threatened. The region's P&C insurance companies continue to be highly dependent on the performance of their investment portfolios, and record combined ratios near or over 100%. The companies' technical profitability will be pressured in 2013 by a competitive environment and low prices, especially in automotive and property insurance. Liability, surety bonds, property, and health insurance will be the main drivers of growth in non-life insurance. It is anticipated that the downward trend in financial results will continue." Colombian and Peruvian regulations are more advanced and are moving toward international standards, while Venezuelan regulations are still lagging behind, said the rating agency. "In recent years, improvements in the regulatory framework in all three countries have begun to bridge the gap that exists with international practices, but there is still a long way to go and aspects to fine-tune, especially in terms of capital requirements, reserves, and asset and liability matching," Fitch noted. It added that profitability among Andean non-life insurance companies overall will stay under pressure and could decline, resulting in combined ratios of over 100%. As for Central America, Fitch said it considers that premiums in the region should grow by a modest 7% at the end of 2012, and 6.4% at the end of 2013, led by the Costa Rican insurance market, the second-largest in the region. Fitch estimates that Costa Rica will maintain a strong dynamism, as it is still in an expansion phase since opening to private competition in 2008. Fitch said it believes that the Central American markets will maintain an adequate operating performance in 2013, led by Honduras and El Salvador, which in recent years had registered the lowest loss ratios of the region, and a higher operational efficiency in the case of El Salvador. Fitch expects that Honduras and El Salvador will continue to influence the good performance of the region in 2013. This is mainly due to their conservative reinsurance protections, which is unlike other countries in the region where there is greater prominence of retained business lines of high claims frequency. Fitch said it thinks that the region reflects a good capital position in average, which also results in a relatively low operating leverage ratio (average of 1.0x). Fitch expects to see a strengthening in the region's capital level in 2013, in light of the regulatory adjustments recently implemented in Nicaragua and Guatemala, historically two of the region's less capitalised insurance markets.

Mixed outlook for Latin American insurance markets says Fitch

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