BUENOS AIRES, Argentina, Dec 21, 2011 (BUSINESS WIRE) — The sector has been faced with new insurance regulations, with greater government intervention adding uncertainty to this market. Fitch believes that there is a chance for more regulatory changes going forward and will, therefore, closely monitor the impact that these could have on the sector’s performance. Fitch understands that the purpose of these amendments is not to improve the sector’s creditworthiness or the functioning of the insurance market, but rather to address macroeconomic issues arising from exchange rate distortions.
After strong economic growth in 2011 (Fitch expects a full-year rate of 7.5%), Fitch is forecasting a more subdued expansion of 4% for 2012-2013. Risk factors for the medium term include: 1) an acceleration in the inflation rate, 2) a slowdown in the global economy, and 3) a deterioration in fiscal balances.
Fitch believes that premiums written will continue to show a positive trend, albeit at a more modest pace, in line with the overall economy. Given the more moderate growth projected for the industry as a whole, competition is likely to increase in an attempt to compensate lower overall growth with an increase in market share, which in turn may lead to less stringent underwriting standards.
The Argentine insurance market continues to be the least concentrated in Latin America, with the 30 largest insurers (there are 179 companies in total) comprising nearly 72% of total premiums.
Over the past few years, profitability in the insurance sector has been driven by the companies’ investment income, which has compensated for operating losses recorded during that time. Profitability in this industry will continue to be subject to volatility in the companies’ investment income, although low-risk investments (term deposits) are becoming more attractive due to the current high interest rates in the local market.
Reserves are currently adequate – but with an estimated increase in inflation and risk appetite- as companies are faced with higher competition. A significant decline in the reserves/earned retained premiums ratio would increase the companies’ risks stemming from inadequate reserve coverage.
Source: Fitch Ratings – marketwatch.com