Best’s Market Segment Report: Argentina Insurance Industry Outlook Negative, Reflecting Country's Economic Issues

Business Wire

MEXICO CITY--(BUSINESS WIRE)-- Insurance companies operating in Argentina’s insurance market are facing the potential for a contraction in growth resulting from capital controls, along with volatile interest rates and the government’s restructuring of public debt, among some drivers. These factors are driving AM Best’s negative market segment outlook on the industry.

The new Best’s Market Segment Report, titled, “Market Segment Outlook: Argentina Insurance,” states that Argentina’s insurance segment grew more than 33% in 2018 in terms of gross premiums, in the midst of a recession characterized by a 2.5% contraction in GDP; however, below inflation rates. In addition, the decision by Argentina’s central bank to restructure short-term public debt restructuring to deploy international reserves to contain currency volatility, coupled with the new administration’s decision to aggressively cut interest rates to spur the expansion of credit facilities, has compounded uncertainty and is taking a toll on the insurance industry. Nonlife companies, which account for the bulk of premiums, have to contend with declining bond market values, leading to asset-liability mismatches owing to debt tenor extensions and negative yields. As a result, solvency and liquidity issues have started emerging.

The industry’s combined ratio deteriorated to 130.0 at year-end 2018 from 112.0 in the previous year. Rising inflation has nullified carriers’ cost-efficiency initiatives to improve technical results and has created negative distortions in the industry’s expense structure. Additionally, the implementation of capital controls in 2019, including a requirement to limit foreign currency (USD) transactions to foreign holding companies, may further restrain performance owing to higher management expenses. Insurers’ ability to withstand the country’s difficult economic environment is compounded by the segment’s weak overall risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR).

Domestic insurers with a robust capital base and diversified business profiles and distribution capabilities will be better able to maintain stable solvency levels and adequate financial flexibility. Solvency issues may be partly offset by leveraging well-diversified investment strategies with material exposure to global investment-grade fixed-income securities. However, the insurance industry is limited from adopting an overall global investment strategy, given the country’s developing capital markets and the few financial instruments approved by the local regulator that can adequately match, in terms of tenors and rates, insurance liabilities. Although the non-life insurers face difficult prospects, their life counterparts may be able to leverage recent tax changes.

To access a copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=294500.

AM Best will host a market briefing on the state of Latin America’s insurance industries on Thursday, March 12, 2020, at the JW Marriott Miami Turnberry Resort and Spa in Miami, FL, featuring leading Latin America-based insurance industry executives and AM Best analysts. To register for the event, or for more information, please visit www.ambest.com/events/imblatam2020 (or www.ambest.com/events/Cumbre2020 in Spanish). For a related Best’s Special Report, titled, “Latin America: Economic and Political Risks May Subside in 2020,” please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=293607. A video interview with that report’s author is also available.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.