Latin America Insurers
AM Best Retains Negative Outlook on Peru’s Insurance Industry
Overall, economic conditions continue to recover from the pandemic due to the country’s macro-stability, according to Best’s Market Segment Report: Market Segment Outlook: Peru Insurance. However, many of the actions taken to enhance economic recovery have aroused political interest, creating challenges for the current and future performance of the insurance market.
- August 2022
FINANCIAL CENTER: A view of the San Isidro district in Lima, Peru. As of December 2021, Peru’s insurance market amounted to USD4.4 billion in premiums, with a penetration rate of 2% of GDP.
AM Best is maintaining its Negative outlook on Peru's insurance industry, based on the following factors:
- The extended negative impact of the early withdrawals in the private pension funds (PPFs) on revenues and results.
- The difficult underwriting conditions going into 2022, as companies aim to reflect claims experience in key life and health segments.
- The lower capital base in the system as a whole.
Partially mitigating these factors is the industry's solid capitalization despite a lower capital base, in conjunction with active and responsive regulation, which provides insurers financial flexibility.
Economy Recovering, Still Facing Challenges
As the impact of the pandemic on Peru's economy continues to subside and economic growth recovers, the country still faces domestic and global challenges. The disruptions in global supply chains and rising oil, gas, and grain prices have driven inflation to levels well above the central bank's target, while domestic political instability remains a challenge not only for the insurance industry but also for many insurance-related industries. The IMF expects GDP to grow around 3% in 2022 after substantial growth of 13.3% in 2021, following the 11% contraction in 2020 due to the pandemic. The implementation of public expenditure and sufficient fiscal and monetary policies are key for a sustainable recovery, particularly for domestic consumption and construction.
Claims experience continues to recover to pre-pandemic levels, further negatively impacted by early withdrawals of the insurance component from the Private Pension Funds (PPF). In AM Best's view, controlled distribution of benefits, as well as ongoing dialogue among Congress, the PPFs, and the central bank, is critical to avoid distress in Peru's financial markets and insurance industry. However, proposed changes to the PPF system aim to eliminate the mandatory pension savings scheme and make enrollment in the system voluntary. The proposed reform could adversely affect earnings and the distribution of benefits over the short term, while the insurance industry promotes alternative life and savings offerings, such as in the years following 2016 when the government approved early surrenders of individual accounts for pensioners over the age of 65. However, this time withdrawals are unlikely to migrate to the insurance system, as many eligible beneficiaries are facing economic distress instead of planning for retirement. AM Best will continue to monitor the financial markets for any disruptions that could negatively affect the insurance industry's solvency.
A Concentrated Market
As of December 2021, Peru's insurance market amounted to USD4.4 billion in premiums, with a penetration rate of 2% of GDP. The non-life segment accounted for 47.9%, and the life segment, 52%. As of May 2022, the market consisted of 18 companies, with six accounting for 80% of the market share. The country has a developed regulatory framework that encompasses microinsurance and alternative distribution channels, and although IFRS 17 is not mandatory yet, many companies are already working toward implementation.
Risk-Adjusted Capitalization Impacted by Market Developments
Risk-adjusted capitalization as of December 2021 remained at what would be considered the strongest levels if the industry is seen as an operating insurance company according to the AM Best's Capital Adequacy Ratio (BCAR) score. This measure points to the excess (expressed as percentage) of available capital over net required capital in a 1-in-250 year scenario. Net required capital accounts for assets as well as underwriting and business risks, in addition to net probable maximum losses for catastrophic events, adjusted for covariance.
Based on data from Superintendencia de Banca, Seguros y AFP (Peru's insurance regulator), AM Best calculated a BCAR score of 52%, depicting a larger growth rate in risk requirements than in available capital, versus the 2020 score of 63%. The industry's available capital side contracted by around 8.8%, due mainly to lower unrealized valuations on investments, lower net income and capital outflows from cumulative results. On the capital requirements side, growth was driven by investment risk (a sovereign downgrade during 2021) and to a lower extent by net premium risk.
The unrealized loss on investments comes from a heightened perception of risk because of political uncertainty and global conditions, in conjunction with rate hikes to counteract inflationary pressures, as Peru's central bank raised the reference rate by 225 basis points during the second half of 2021. The system's reported surplus has also diminished due to dividend payments by the dominant market participants, as the three largest insurance companies account for around 67% of the industry's equity.
Net Income and Risk-Adjusted Capitalization
Net income has been limited by the resurgence in claims and an increase in administrative expenses as businesses start returning to normalcy. Life-related claims specifically from the private pension funds have shown the greater relative increase, such as survivor annuities, fixed annuities and credit life. On the health side, COVID claims continued to push claims during the first half of 2021, while on the property/casualty side, the rebound in auto usage, along with inflationary pressures, the scarcity of spare parts, and recovering car sales, have pushed the cost of claims higher. We will continue to monitor the Peruvian sol's parity with the U.S. dollar and its effects on claims costs, investment income, and asset-liability management.
The net required capital component of the BCAR scores is still being influenced by higher capital requirements for Peruvian securities following the sovereign downgrade in 2021. In addition, required capital mandates capital for underwriting risks, recognizing the large growth in the life segment, including those coverages provided to private pension funds. The BCAR score takes into account the increase in prices in the life business owing to the pandemic, but its full effect on the health business will not be clear for some time. System reserves remain ample, and releases may be possible in 2022 if the life segment starts to perform better than expected, as severity diminishes.
Challenges Leading to Opportunities
In AM Best's view, the challenges Peru's insurers face could lead to significant opportunities. A higher unaffiliated population to the PPF system could help boost microinsurance offerings targeted for this segment under the current regulatory framework. In competitive lines such as life, health, and auto, the advantage will be to companies able to create efficient administrative structures and valuable insurance solutions (amid a recovering economy). The surety segment will continue to depend on public expenditures, infrastructure, and political decisions. Overall, economic conditions continue to recover from the pandemic, due to the country's macro-stability. However, many of the actions taken to enhance economic recovery have aroused political interest, creating challenges for the current and future performance of the insurance market. Despite insurers' experience navigating similar political and economic cycles in the past, further positive developments would be needed for a Stable outlook.
Largest Latin America Insurers – 2022 Edition
Ranked by 2020 gross premiums written.
||Bradesco Saúde S.A.
||Amil Assistencia Medica Internacional SA
||Grupo Nacional Provincial S.A.B.
||Sul América Companhia de Seguro Saúde
||MetLife México, S.A.
||BBVA Seguros México, S.A. de C.V.
||AXA Seguros, S.A. de C.V.
||Brasilseg Companhia de Seguros, S.A.
||IRB - Brasil Resseguros S.A.
||Porto Seguro Companhia de Seguros Gerais
||Notre Dame Intermédica Saúde S/A
||Quálitas Compañía de Seguros SA de CV
||Seguros Monterrey New York Life SA de CV
||Bradesco Vida e Previdência SA
||Citibanamex Seguros, S.A. de C.V.
||Seguros de Vida Suramericana S.A.
||MAPFRE Seguros Gerais S/A
||Seguros Banorte SA de CV Grupo Banorte
||Tokio Marine Seguradora S.A.
||Rímac Seguros y Reaseguros
||Hapvida Assistencia Medica Ltda
||Bradesco Auto/Re Cia de Seguros
||Pacifico Compañia Seguros y Reaseguros
||Caixa Seguradora S.A.
||Banco de Seguros del Estado
||Central Nacional Unimed - Coop Central
||Instituto Nacional de Seguros
||MetLife Chile Seguros de Vida S.A.
||Chubb Seguros Mexico S.A.
||Seguros Inbursa, S.A.
Source: and AM Best research; data as of June 30, 2022.