The outlook for Brazil’s insurance sector is to remain stable as interest rates, which are helping to strengthen net investment income, offset price competition in the region.
This is the latest finding of rating agency Moody’s which expects the market’s current fundamental credit conditions to hold fast over the next 12 to 18 months.
"We expect that, despite slower growth in recent years, the long-term expansion of the country's middle class should continue to support increasing demand for insurance products," said Diego Kashiwakura, a Moody's vice president, senior analyst and author of the report.
According to the rating agency, Brazil’s expanding middle class has contributed to the insurance market which has grown steadily and significantly in recent years.
“Brazil has the largest Latin American economy and insurance market. The sector's penetration rate relative to GDP, however, remains low at around 4 percent, which indicates that it still has significant room to grow.
“Asset quality is adequate but improving; although firms will still have to contend with concentration risk related to their large holdings of Brazilian government bonds (Baa2 stable). Nevertheless, capital adequacy and profitability are solid for both property and casualty and life insurance companies,” said Moody’s.
It added that bank-affiliated life and retirement insurers benefit from their control of product distribution, and from group-wide franchise strength.
In the meantime, price competition between general insurers will continue to pressure profitability, but interest rates in Brazil of 11 percent will help strengthen net investment income and, as a result, the profitability of both local insurance and capitalizacão companies.
"Brazil's regulator has expanded its surveillance and incorporated more risk-based capital requirements for insurers, which has helped strengthen capital requirements and improve solvency,” said ," Kashiwakura.
“However, some smaller insurers, especially those with less capital, could find raising the additional capital needed to maintain solvency margins above the regulatory requirements difficult,” the rating agency said.
Brazil, insurance, Moody's, Diego Kashiwakura