Latin America
In this chapter of our Annual Insurance Review 2024, we look at the main developments in 2023 and expected issues in 2024 for Latin America.
Key developments in 2023
The year 2023 has seen a significant rise in production costs and inflation. This increase has directly impacted insurance claims as the costs of repairing, reconstructing, or replacing insured risks have not been adequately covered. Additionally, inflation has impacted the valuations of insured properties, resulting in a situation where policy limits are insufficient to cover costs. This has led to a significant problem of underinsured properties.
Moreover, this year has seen an increase in catastrophic events in the region. For example, there have been devastating hurricanes in Mexico, droughts in Uruguay caused by the lack of rainfall and rising temperatures, landslides, and earthquakes in Ecuador, and the "El Niño y la Niña" phenomenon affecting Peru and Brazil. Additionally, forest fires in Chile have occurred as a result of high temperatures and strong winds, and there have been significant floods in Paraguay and Argentina.
Extreme weather events have become increasingly common in recent years, which may be seen as the result of climate change. As a result, insurance companies are becoming more aware of the potential losses that may arise from these catastrophic events. To reduce these risks, insurance premiums have increased considerably, and we expect to see new insurance products to be developed in the region.
Furthermore, the ongoing invasion of Ukraine by Russia has had a significant impact on the energy sector in Latin America, resulting in disruptions in the supply chain and putting additional pressure on an already tight global energy market.
The conflict has led to increased inflation rates, not only due to the rise in energy prices but also in the prices of agricultural products and the cost of living. However, some Latin American oil exporters, such as Brazil, Ecuador, and Colombia, have benefited from the situation, as it has led to an increase in their oil production. It remains unclear how this may impact the insurance industry, but we have seen an increase in losses in the energy sector as a result of the increase in production. This scenario could lead to a rise in premiums.
Several Latin American countries have experienced an increase in social conflicts and political violence-related losses during 2023. These losses are related to the change in presidential administrations in countries such as Brazil, Colombia, Costa Rica, and Paraguay, which occurred at the beginning of 2023 and the previous year. The new administrations have implemented social, economic, and security policies, leading to an increase in social inequality and political violence-related losses.
What to look out for in 2024
Latin America has emerged as one of the most rapid growth markets in the world. This regional insurance market is evolving rapidly both in terms of premiums and product sophistication.
Several developments are expected to be the focus of attention for the region in the coming year. These include the growing awareness of climate change and the need to comply with ESG standards, the increasing use of technology in the sector, particularly Artificial Intelligence, the economic instability in some countries that may be affected by the upcoming presidential administrations, and the possible impact of international conflicts on the energy sector.
It is evident that climate change, ESG standards, and the energy transition will be crucial subjects as numerous investors are moving into Latin America to invest in renewable projects.
The demand for sustainable solutions is increasing in the insurance market worldwide, and Latin America is no exception. We have observed a rise in awareness among (re)insurers as they strive to align their business activities with international ESG standards and mitigate risks associated with natural catastrophe events.
Parametric insurance, also known as index-based insurance, is increasingly popular in the region as a way to help minimise financial losses from frequent natural catastrophes. This type of insurance covers the insured person based on the probability and intensity of a covered natural event rather than providing compensation for actual losses incurred. If the pre-agreed parameter is reached, the insurance policy will pay out a predetermined amount to the insured person.
Also, it is likely that losses from Nat Cat events will continue in 2024. Thus, it is important to determine whether the insured values are up to date. Often, the insured values can be inaccurate due to the costly nature of updating them. This can result in the premium paid by the insured not reflecting the true value of the property insured and, therefore, being impacted by underinsurance.
Inflation will continue to have an impact during 2024 in industries like property, construction, and energy due to increased material and labour costs. This will result in a significant increase in insurance rates and repair costs.
In addition, the use of technology in the insurance industry has been increasing, and this trend is also visible in the region. It is expected that rules and regulations related to the use of artificial intelligence will impact the insurance sector, especially on how premiums are calculated based on risk analysis. This is likely to be an issue in many jurisdictions as it could affect how (re)insurers carry out their business in the region.
Finally, the economic instability in certain countries, as well as the lack of response from governments during natural catastrophes, may result in protests and political violence. Additionally, the election of new presidential administrations in countries like Argentina and Guatemala and the upcoming elections in El Salvador, Panama, Mexico, the Dominican Republic, Uruguay, and Venezuela could also lead to similar events.
As the region has undergone widespread political changes, we anticipate an increase in losses related to political violence in 2024.
Written by
Alex Almaguer | Latin America Insurance Practice Lead, Partner
Chris Burt | Senior Associate
Martín Jiménez | Associate