Brazil\u2019s (re)insurance market has reached a turning point with the launch of its first insurance-linked securities (ILS) transaction earlier this year, a move that rating agencies say opens the door for Latin America\u2019s (re)insurers to tap the capital markets.<\/p>\n
A general view of the Rocinha slum the day before Brazil’s presidential election, in Rio de Janeiro, Brazil, October 1, 2022. REUTERS\/Pilar Olivares<\/p>\n
In a comment issued on Latin America\u2019s reinsurance market released on Friday September 5, Fitch Ratings said Latin America faces a wide protection gap, citing figures that only about 10% of the $21.8 billion in 2024 losses were insured, reflecting low penetration and high vulnerability.<\/p>\n
However, Fitch said that innovation in the region is advancing through catastrophe bonds, parametric covers, and other ILS.<\/p>\n
\u201cBrazil\u2019s first ILS in 2024 demonstrated the region\u2019s potential to use alternative risk transfer to narrow the gap,\u201d the rating agency said.<\/p>\n
However, Fitch warned that poor and delayed loss data further hampers risk assessment, underscoring the need for better regulatory transparency and reporting.<\/p>\n
The new commentary follows Fitch in an August 12 report describing the debut Brazil ILS issuance as \u201ca new chapter for the (re)insurance market,\u201d noting that the risk notes broadly resemble ILS structures seen in developed markets.<\/p>\n
AM Best stated in a separate report last month that the introduction of ILS-like structures, such as Brazil\u2019s “Letra de Risco de Seguro,” could help lower insurance costs and support stability in a market under pressure from tax reforms, political uncertainty and severe weather.<\/p>\n
The agency cautioned, however, that “easing regulatory barriers to allow more significant holdings in foreign currency to prevent a currency mismatch between investments and reserves would aid these domestic reinsurers in obtaining a stronger global business profile.\u201d<\/p>\n
Brazil\u2019s first ILS deal was completed in May. Andrina Sociedade Seguradora de Prop\u00f3sito Espec\u00edfico (Andrina SSPE), a wholly owned subsidiary of IRB Brasil Re, issued the 33.7 million Brazilian reais bond ($6.2 million) backed by surety insurance risks, structured jointly with Ita\u00fa.<\/p>\n
The deal followed Brazil\u2019s passage of Law 14,430 in 2022, which authorized the formation of the ILS market in Brazil.<\/p>\n
The issuance of insurance bonds enables the insurance market to absorb risks through the capital market, a move that IRB Re CEO Marcos Falc\u00e3o commented in May \u201cexpands the sources of capital for insurers and reinsurers in the country, allowing the increase in capacity of the entire sector.\u201d<\/p>\n
Fitch in August noted that Brazil\u2019s first deal was unusual compared to most of the global ILS market, which typically focuses on natural disaster risks, such as hurricanes or earthquakes.<\/p>\n
Instead, the Brazilian bond was tied to surety risk, which is a legal guarantee. Fitch said the new rules provide insurers and reinsurers with another means to raise capital. But the market will only grow if investors show interest, companies launch more deals and the product becomes better understood.<\/p>\n
Andrina was the first SSPE to receive authorization from Brazilian insurance regulator Susep to operate in Brazil in December of last year.<\/p>\n
Susep said the ILS framework will allow SSPEs to transfer to capital market investors the risks of insurance, supplementary pensions, supply health, reinsurance or writeback from one or more insurers or reinsurers, known as counterparties.<\/p>\n
\u201cWith this, the financial market now has new risk options available for the investment portfolio,\u201d Falc\u00e3o said in May\u2019s press release. \u201cThis is because these securities linked to insurance and reinsurance are not correlated with the traditional financial market. In other words, its profitability is not affected by economic cycles or price variations in the economy, such as interest and exchange rates.\u201d<\/p>\n
SOFTER MARKET IN LATAM PROPERTY CAT<\/p>\n
Commenting on Latin America\u2019s reinsurance market more broadly in its comment last week, Fitch said global players can now deploy more capacity in Latin America, especially in property catastrophe, to gain market share and diversify portfolios.<\/p>\n
\u201cHowever, this softer market could reverse if major catastrophic losses occur,\u201d it said.<\/p>\n
\u201cLatin American reinsurers are navigating the softer market with strong capital and effective retrocession contracts to manage volatility. Persistently high interest rates, though declining, help offset potential technical performance deterioration,\u201d Fitch said.<\/p>\n
The rating agency added that Latin America reinsurers are also influenced by sovereign risk, and negative changes in sovereign ratings could affect their ratings.<\/p>\n
Latin America\u2019s reinsurance market ranges from $18 billion to $22 billion, Fitch said.<\/p>\n
AM Best also released a report on Latin America\u2019s reinsurance market on Monday that said<\/a> demand for reinsurance capacity is strengthening across almost all Latin American territories.<\/p>\n