Insurance-linked securities (ILS), such as catastrophic bonds and other forms of alternative capital, will play an increasing role in Latin American reinsurance markets, Fitch Ratings predicts, provided the limitations surrounding the data can be overcome. and risk models.
In a recent report, Fitch highlighted why underwriting reinsurance in Latin America could be attractive, given diversification opportunities, the relatively untapped market, growing economies there and improving fundamentals.
But even so, ILS markets remain very small players in Latin American reinsurance programs in general, with a small amount of collateralized participation in some layers of the program.
Meanwhile, the catastrophe bond market has been restricted to sovereign catastrophe bond issues, facilitated by the World Bank, focused on the maximum catastrophic risks of Mexico and several other countries, to date.
Aside from that, a handful of private ILS deals have been made, such as the groundbreaking AlphaTerra Validus deals, which provide retrocessional reinsurance protection to Terra Brasis Re and are backed by AIG’s specialized ILS unit, AlphaCat Managers.
But ILS markets are not making the gains that might be expected in this region, despite high levels of exposure to natural disasters there.
One of the main reasons for this is competition from the traditional reinsurance market, since in Latin America the main world reinsurers have a dominant market share in many countries.
In addition, insurance penetration is still very low, in some countries below Asia Pacific and in LatAm there is no country like Japan, which has been much faster in adopting the protection of cat bonds and ILS than the rest of Asia due to its higher number of policyholders. values and coverage penetration.
Which means that Latin America is a great area of potential opportunity for the ILS market and one that could benefit the local insurance sector by providing efficient capital market financing to the region’s catastrophe risks.
But Fitch highlights the main problem that still hampers the expansion of the ILS market in Latin America, the quality of the data and the lack of solid models for some dangers and countries.
Fitch explained that, “This is in part because accurate insurance data capture is critical to ensuring adequate protection against catastrophes. This limitation poses partial restrictions on the use of alternative capital. Therefore, modeling capabilities need to be improved and more comprehensive statistics still need to be compiled so that alternative sources of capital are used more widely.
“Alternative capital will have an increasingly important role to play in the evolution of the insurance and reinsurance markets in Latin America, as some of the current constraints improve over time.”
One area of ILS market expansion could occur more rapidly in Latin America is Brazil, which, as we explained above, now has its own set of formalized ILS rules and regulations.
“With this new regulation, Brazil is now able to issue national ILS from its re / insurance market, as a possible new alternative to foster its growing re / insurance industry,” Fitch said.
However, this initiative has not yet seen its first broadcasts.
Fitch said: “However, there are currently no new ILS transactions in the Brazilian market. While ILS instruments are further developed and allow reinsurers to access lower-cost capital, both local and foreign, to support their reinsurance needs, in the end the goal is that the cost-saving benefits can reach the whole industry and cascade to the end. insurance consumer “