AM Best stays negative on Brazil reinsurance amid volatile profitability and tax reforms

By Keira Wingate

Aug 15 - (The Insurer) - AM Best's outlook on Brazil's reinsurance market remains negative due to new tax reform measures, political uncertainty, regulatory restrictions and weather-related events.

"Brazil's reinsurance market continues to recover, but a favorable trend needs to be sustained," AM Best said in a new report. "The outlook will be considered stable when the volatility of the industry's technical and bottom-line results narrows, coupled with positive technical income, amid the new tax reforms taking place in the country."

Even so, GDP growth was strong in 2024, with a growth rate of 3.39%. Strong private consumption has driven an increase in demand, while growth in services and agriculture contributed to development on the supply side.

The country also reduced its primary fiscal deficit to 0.3% of GDP for 2024, from 2.3% in 2023, primarily due to strong revenue growth and a decrease in expenditures.

However, "sustaining the improvement remains one of the main challenges for 2025", the report said. GDP growth is supposed to reach 2.2% in 2025.

The most significant drivers of growth in the Brazilian reinsurance industry in 2024 were property, special risks, aeronautics and financial risk.

DOMESTIC MARKET AND REGULATORY ISSUES

Domestic reinsurers have a competitive advantage when doing business in the country, as they are somewhat insulated from currency fluctuations.

However, "easing regulatory barriers to allow more significant holdings in foreign currency to prevent a currency mismatch between investments and reserves would aid these domestic reinsurers in obtaining a stronger global business profile," the report said.

Other regulatory issues include recent tax changes affecting Brazilian insurers and reinsurers, which will likely pressure profitability in 2025. The changes increase the tax applied to foreign exchange transactions, leading offshore reinsurers to pay triple the taxes they had in previous years.

Furthermore, international companies that send dividends or cede premiums abroad, or consolidate with operations outside Brazil, will be exposed to foreign exchange fluctuations when paying claims in Brazilian reais.

RATES AND REINSURANCE

The country's reinsurance market has been experiencing a gradual slowdown since 2022, despite achieving positive bottom-line results in 2024, showing improvement in risk selection from local reinsurers, but "also reflects the increase of premium ceded by local insurers to reinsurers offshore".

Brazil's interest rate remains in the double digits, according to AM Best. As of the end of 2024, the interest rate (SELIC in Portuguese) stood at 12.3%, which is higher than the 11.8% at the beginning of the year. Reinsurance in the country has benefited from the higher interest rates paid on its invested reserves.

Investment income is a primary factor in the profitability of Brazil's reinsurance industry, contributing to positive bottom-line results for 2023 and 2024.

In addition to rates, certain weather events have also impacted the insurance industry, such as the floods in Rio Grande do Sul.

ILS-LIKE STRUCTURES

To help improve the reinsurance market conditions, Brazil is introducing insurance-linked securities-like structures such as the "Letra de Risco de Seguro", which cedes risks to a special purpose vehicle.

It is expected to lower insurance costs, and in May 2025, the country's largest local reinsurer, IRB (Re), issued the first ILS structure.

Other factors that could help improve or stabilize the reinsurance market include continuing meaningful economic reforms, "which could facilitate long-term growth and boost confidence domestically and abroad", the report stated.

Underwriting profitability is another. AM Best said the global reinsurance market is showing signs of strong profitability, helped by "favorable pricing, despite signs of localized softening, driving the ability to negotiate rates in the domestic market".