Brazilian Insurance Companies Prepare to Face Market Challenges

The Brazilian insurance market continues to be the largest in Latin America followed by Mexico, Argentina and Colombia. Despite its low participation in GDP, a time of regulatory transition and deterioration in the macroeconomic environment in the short term, it still presents significant potential for greater development once a consistent recovery in economic growth is observed, according to the Fitch Ratings report published.

The 'bancassurance' process has predominated in the market, as well as the strong presence of large national financial conglomerates, with a relevant participation of the main foreign insurance and reinsurance groups active in Brazil. The growth of the Brazilian market has been favored by greater economic stability and the increase in corporate and personal incomes, which has altered the consumption and savings habits of the population.

Fitch analysts observed that advances in the regulatory framework have been cautious. In their opinion, the effective breakup of the IRB-Brasil Resseguros (IRB) monopoly in the reinsurance market in 2008 is expected to bring progressive benefits and modernization to the industry over the medium and long term. Fitch believes that sector performance will continue to be affected by the slower resumption of local economic growth, due to deterioration of the investment environment and the economy, and the impact of the global financial crisis. In addition, the effects of smaller financial gains due to the return of the declining interest rate cycle are expected to negatively affect the earnings generated by insurers, even though they have maintained high ROA and ROE, around 3% and 20% at the end of 2008, respectively.

To mitigate these effects, the main Brazilian insurers have accelerated their search for greater operational efficiency, reorganizing their main processes and supplier cost controls, as well as streamlining their underwriting models. This has led to better and lower combined and operating margins, with the average of the 10 largest insurance companies having reached 96% and 84% in 2008.

Fitch also expects competition to intensify in some segments going forward, including those that are more relevant, such as pension funds, further pressuring the insurers' generation of earnings.