Latin American reinsurers’ ratings are expected to remain “unchanged” despite experiencing catastrophic losses of approximately US$18.6 billion in 2020, according to Fitch Ratings.
This prediction is based on the rating agency’s base case scenario over the next 12-18 months, whereby the majority of Latin American reinsurers sustain adequate capitalisation and financial performance.
Of the calculated catastrophic losses (identified as “significantly below” the record losses of 2017, which reached almost $150 billion) the three largest catastrophe events, Hurricanes Eta and Iota in Central America, drought and wildfires in South America and the Puerto Rican earthquake, constituted more than $2 billion in insured losses.
Fitch says this demonstrates the importance of continuing to narrow the protection gap in Latin America, as the region’s reinsurance sector is heavily guided by international pricing conditions.
Furthermore, competition from global reinsurers, specifically the significant reinsurance capital in Europe, enables Latin American reinsurers to focus their attention on regional insurance sectors.
Fitch describes Latin American reinsurers as “the most resilient” to the changing reinsurance landscape owing to their comprehensive understanding of regional markets.
Therefore, the ratings agency expects demand for reinsurance in the region to increase during the second half of 2021, attributable to increased uncertainty arising from the COVID-19 pandemic, and severe and frequent high-impact weather events.
However, Fitch notes that this growth may be partially offset by slower insurance industry growth as a result of the pandemic’s detrimental economic impact in Latin America.
Fitch’s market update concludes by identifying continued “limited” activity in the region’s insurance-linked securities (ILS) market.
Accurate insurance data is important when providing catastrophe protection, while modelling capabilities and statistics are required in order for alternative capital sources to be more widely implemented in the region.
Fitch predicts that alternative capital “will have a growing role” in the development of the Latin American insurance and reinsurance industries, providing the current limitations of data capture and modelling capabilities improve.
