Is Brazil the next insurance giant?

Is Brazil the next insurance giant?

Is Brazil the next insurance giant? 520 265 Marcio Ribeiro

Continued from Brazil – Insurance in the land of uncertainty

Opportunities for international insurers and reinsurers in Brazil are currently mixed at best, although the market’s potential is enormous. At present, most insurance purchased is in commercial lines, since personal lines are way behind the game. Local people have little trust in insurance, so they don’t buy it very often. According to Swiss Re, non-life insurance penetration in Brazil was just 1.80% of GDP in 2015, compared to the global figure of 2.77% (and 4.22% in North America). Changing this will be a long process, but if consumer lines can be awakened, vast opportunities will emerge among Brazil’s population of more than 200 million.

Meanwhile the climate of political and economic uncertainty is having a noticeable impact on various important classes of business. Infrastructure and construction projects have been a relatively large source of premium for the international reinsurance market, but we have seen no new large projects since 2015. Last year the government announced 34 infrastructure concessions and privatisation programmes in an effort to attract private investment to improve the nation’s public facilities. Such investment is much needed; the World Economic Forum ranks the quality of Brazil’s infrastructure 120th out of 144 countries assessed. However, the climate of political and economic uncertainty has discouraged concrete progress.

Brazil’s struggling economy

The parlous state of the national economy has had repercussions for the surety business in Brazil. With the country’s main contractors facing financial problems, Judicial Bond business has become the mainstay. Similarly, airlines are struggling and no fleet growth is expected, which has been bad news for aviation underwriters. In general aviation, private jets and helicopters are being returned to lease owners, which has in some cases led to premium returns by insurers.

Marine business has declined as economic circumstances have led to a slump in exports and imports. Premium for inland and international transit has suffered similarly. One area of theoretical stability is commercial property insurance, since industries are required by law to acquire cover. However, as elsewhere in the world, local competition between direct insurers and new entrants may be driving rates down.

Where are the opportunities in the Brazilian age of uncertainty? 

Energy is an area to watch. About 10 years ago Brazil discovered pre-salt formations offshore and that oil isn’t going anywhere. With the low current price of oil, efficiency is key and Brazil’s oil has been promoted for it’s efficiency with a break-even cost at around $40 per barrel. In addition, and along with the theme of Brazil opening up it’s economy, a piece of legislation was passed in late 2016 which relieves Petrobras’ obligations to own 30% of any joint venture in the country. The government has also relieved requirements on the use of local goods and services to further promote foreign investment.

Total reinsurance premiums have almost tripled since the opening of the market in 2007. Notably, as liberalisation continues, the reinsurance market share permitted to foreign carriers increased to 70% in January 2017, and is expected to increase again soon. According to the regulator’s timetable, the threshold will be increased in stages to 85% by 1 January, 2020.

Under this plan, certain lines of reinsurance business are expected to grow, including motor reinsurance, life reinsurance, aviation, specialty risks, and transportation.

Brazil is indeed the land of uncertainty, but opportunities can be found, and the vast nation’s potential is enormous. If you would like to learn more, please do contact Marco.

Co-authored by Kirsty Howitt