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Insurance Industry And Country Risk Assessment: Brazil P/C

Insurance Industry And Country Risk Assessment: Brazil P/C


S&P Global Ratings assesses the industry and country risk of Brazil's (BB-/Stable/B) property and casualty (P/C) insurance sector as moderately high, the same assessment as South Africa, Colombia, and Portugal's P/C sectors.

Country Risk: Moderately High

Brazil's country risk reflects the challenging political and economic scenario in the country, in light of its sluggish economic prospects and the longstanding challenges of advancing difficult structural fiscal measures.

Although the market reacted positively after the election of Jair Bolsonaro last year, the first semester of 2019 has highlighted how the new administration has struggled to pass controversial pieces of legislation in a fragmented Congress in order to correct structural fiscal slippage and an increasing debt burden, as well as to bolster economic growth. The recent approval of the basic text of pension reform has been the first step in Brazil regaining business optimism and reverting the current weakening expectation of economic growth.

In terms of business conditions, all Brazil's insurance industries have suffered to various degrees from the recession that has hit the country in the past few years. The P/C sector has been very sensitive to economic cycles, and reported weaker profitability metrics during the economic contraction in Brazil in 2015 and 2016, although profitability has been recovering since then. In this context, we continue expecting that Brazil's uncertain political and economic situation may pose a challenge to the P/C segment's performance.

Table 1

Brazil Sovereign Risk Indicators -- Economic Data
(%) 2015 2016 2017 2018 2019F 2020F
GDP (3.6) (3.3) 1.1 1.0 1.0 2.2
CPI 9.0 8.7 3.4 3.7 4.0 4.0
Unemployment 8.5 11.5 12.7 12.3 11.5 10.3
Policy rate 14.3 14.0 7.6 6.5 6.0 6.0

Industry Risk: Moderately Low

Our view of the P/C insurance sector considers the segment's satisfactory profitability despite the difficult economic conditions. This profitability is supported by the sector's characteristics that sustain the current competitive dynamic and the lack of excessive risk in the overall P/C product mix. We forecast profitability metrics to remain stable over the next few years, with return on equity (ROE) averaging 19% and a combined ratio of 94% in the next three years.

Factors supporting profitability
  • We believe the P/C sector in Brazil benefits from high operational barriers for new entries, which support the current industry's competitive dynamic. In our view, the market is dominated by large banks that have very effective and difficult to match distribution channels. These banks also benefit from low-cost structures and established brands and reputations. Although we believe it's possible for new players to enter into smaller and niche lines--especially if they're part of a larger international group--new entrants wouldn't change the industry's competitive dynamic or its overall profitability.
  • Premiums growth started to recover last year after a contraction in real terms in 2015 to 2017. In our view, the growth in premiums should follow the trend in GDP growth, slightly improving in the next two years.
  • Although growth and profitability metrics improved last year, we still believe the P/C sector's sensitivity to Brazil's currently unstable economy could have a larger impact on the sector than we anticipated.
  • Overall, we don't think the industry faces significant product risks. Brazil doesn't have substantial catastrophic risks, and the country's most common natural hazards, such as droughts and floods, are underinsured. We also believe that claim settlements are somewhat predictable and that insurance companies can adjust premium prices to reflect higher risk if necessary.
  • In our view, Brazil's regulator--Private Insurance Superintendent (SUSEP for its Portuguese acronym)--monitors the insurance industry frequently. SUSEP was established in 1988, and has successfully reduced risks in the insurance market by requiring better governance standards for the insurance companies while seeking to implement international standards of solvency in the domestic market. In our view, SUSEP currently has an adequate level of sophistication and has established rules for investments, capital adequacy, solvency, corporate governance, money laundering controls, and fraud prevention. We see no deficiency in corporate governance and transparency among Brazilian P/C insurers, and wide information about the industry is available on a monthly basis.

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Related Criteria

  • Insurers Rating Methodology, July 1, 2019
  • Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

Related Research

  • Insurance Industry And Country Risk Assessments Under Our Revised Criteria, July 5, 2019

This report does not constitute a rating action.

Primary Credit Analyst:Mariana Gomes, CFA, Sao Paulo (55)-11-3039-9728;
Secondary Contact:Pedro Breviglieri, Sao Paulo +55 (11) 3039-9725;

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