AM Best has placed a negative market segment outlook on Brazils reinsurance market, citing persistent macroeconomic and political uncertainty; a declining interest rate environment, which has led to lower investment income; foreign exchange fluctuations; and evolving reinsurance market conditions.
A new Bests Market Segment Report, titled, Market Segment Outlook: Brazil Reinsurance, states that despite the negative outlook, AM Best believes that there is a strong likelihood that the worst has passed and that conditions in Brazil are trending in the right the direction, albeit somewhat slowly.
Brazil remains the worlds ninth-largest economy even though it ranks in the lower quartile in terms of ease of doing business. The countrys reinsurance market is no exception and has substantial barriers to entry, in addition to significant volatility. When compared with most economies of similar size, Brazil has relatively low insurance penetration, which comes with a correspondingly low level of reinsurance penetration and significant growth potential. However, according to the report, growth potential does not always translate into prudent risk selection or underwriting profitability. Investment income has been a major driver in the profitability of Brazils reinsurance industry in recent years. Interest rates are now in the 6%-7% range, with inflation in the 4%-5% range, so going forward, AM Best believes profitability no longer can depend on strong financial incomeunderwriting will need to make up the difference.
Although AM Bests outlook for the Brazilian reinsurance industry is negative, AM Best believes there are several triggers that could stabilize the reinsurance market. Most notable would be the implementation of meaningful economic reforms such as pension and fiscal reforms, which could help facilitate long-term growth and boost confidence domestically and abroad. The other important factor is underwriting-driven profitability. The ability to generate strong overall earnings driven by underwriting would go a long way toward creating a sustainable and prosperous reinsurance segment in Brazil.
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To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=281063.
AM Best recently revised its market segment outlook on the overall global reinsurance industry to stable from negative. To read the market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=280739.
AM Best is a global rating agency and information provider with a unique focus on the insurance industry. Visit www.ambest.com for more information.
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