Economic conditions in Brazil are challenging local insurers and reinsurers, but no rating impact is expected, according to an A.M. Best briefing.
Brazil has found itself experiencing economic challenges, including poor economic growth prospects, above target inflation, declining commodity prices and a reduction in investor confidence.
The Brazilian government has taken steps to mitigate these challenges, according to A.M. Best, but the implementation of austerity policies and other initiatives are yet to take effect, causing an impact on Brazil’s current economic condition.
Brazil’s sovereign ratings are just above non-investment status. A.M. Best commented: “They must contemplate the effect a future sovereign downgrade would have on rated insurers and reinsurers’ balance sheets and risk-adjusted capitalisation.”
Brazil domiciled insurers and reinsurers hold the majority of their invested assets in Brazilian securities, sovereign debt being the most widely held, according to the briefing.
A.M. Best commented: “[We] must consider what potential impact these broader economic issues will have on the insurance sector and which lines of business may be negatively impacted.”
The rating agency tests the resiliency of rates insurers and reinsurers’ balance sheet strength by applying various stress tests, including sovereign downgrades and even default scenarios, using its capital model, Best’s Capital Adequacy Ratio (BCAR).
According to A.M. Best, the stress test methodology consists of haircuts to Brazilian sovereign securities, lowering the rating of Brazilian corporate bonds, as well as additional haircuts to equity and real estate holdings.
While it does not employ a sovereign ceiling on its financial strength ratings, it does assess how these external factors would affect a insurers and reinsurers’ future business prospects, operating performance and capitalisation.?
To date, insurers and reinsurers in Brazil that are rated by A.M. Best have not been materially adversely affected by the current economic environment, but the agency said it will continue to monitor the situation for any potential ratings impact.
