Latam Briefing: Peru's insurance market outlook
Political and economic uncertainties have marred the performance of Peru’s insurance industry, despite efforts to increase levels of protection that lag behind those of other Latin American markets.
The persistence of political instability both at home and abroad, as well as inflation and high interest rates, makes it hard for insurers to project a more favourable environment this year, although there are hopes that the situation will improve in 2024.
“Not only the insurance market, but the Peruvian economy as a whole, has moved from a very fast growth cycle to a slowdown period in recent years,” says Eduardo Moron, the president of Asociación Peruana de Empresas de Seguros (Apeseg), an association of insurance companies. “One hears about the separation between the political and economic worlds, but it is clear now that this separation does not exist.”
Peru has been shaken by a wave of political protests since early December, when president Pedro Castillo was deposed after trying to dissolve Congress in what was described by critics as an attempted coup d’état.
In the following weeks, millions of Peruvians took the streets to protest against Castillo’s removal, closing roads and disrupting the operation of companies in segments such as mining and energy. Repression by the security forces headed by new president Dina Boluarte resulted in at least 48 deaths.
The crisis is nothing new. Ms Boluarte is the sixth Peruvian president since 2016, and several of her predecessors left the job amidst social turmoil and conflicts with Congress.
The instability has affected the performance of the Peruvian economy, which is expected to post very modest, if any, GDP growth in the first quarter. According to Conmex Perú, an association of export companies, the economy was already slowing down before the protests and closed 2022 with a 2.7% GDP growth rate. The rate is roughly half the average posted in the ten years before the Covid-19 pandemic.
The insurance sector has not been spared by the troubles. According to Apeseg, the volume of premiums in the Peruvian market decreased 1.2% in 2022 in real terms, after discounting the impact of inflation. Insurance penetration, which was growing steadily since the mid-2010s, barely bulged in the past couple of years and remains a very modest 2.05% of GDP. Premiums per capita stood at $145, a small decrease over the past two years.
Moron does not believe that the market will have a much better performance in the short term, as it is clear that insurers cannot detach their fates from the economic slowdown.
“Our expectation is that 2023 will be very similar to 2022, with very low premium growth because of the political and economic uncertainties,” he says.
Credit rating agency AM Best assigned a negative outlook to Peru’s insurance sector in July 2022, and it looks unlikely to make significant changes to the outlook in the near future, says analyst Eli Sánchez.
“Affecting the recovery is the political uncertainty that has impacted Peru since 2020. That is something that really concerns the market,” he explains.
Sánchez notes that insurers were trending positively in early 2022, with post-pandemic claims receding in segments like motor insurance. Covid claims were also on the wane, while demand was rising for collective insurance covers demanded by companies.
However, pension plans, which constitute an important part of the market, were struggling to deal with plans by the government to allow savers to take money out of their retirement plans. The measures raised doubts about the sustainability of the private the pension system in the long run.
On the motor insurance side, rampant inflation in Peru and abroad increased the cost of spare parts, turning the payment of claims more expensive as a result. On the other hand, investment income in the sector was helped by higher interest rates.
Sánchez points out, however, that the protests that popped up across the country in the final stretch of 2022 disrupted vital sectors of the economy such as mining, raising the prospect of claims and worrying underwriters about risks such as social unrest, terrorism and business interruption.
“We should see higher rates in insurance and maybe less risk appetite from international underwriters,” Sánchez says.
Companies may therefore struggle to find capacity in some insurance segments in future renewals. A similar pattern has taken place in other Latin American markets that have gone through social unrest in recent years, such as Chile and Colombia.
Moron, however, believes that the Peruvian case bears significant differences with its Andean neighbours, at least when it comes to the exposure of insurers to claims linked to social unrest.
“Any foreigner that sees the manifestations in Peru will immediately compare them to those that took place in Chile and Colombia. But the fact that, here, they are less concentrated in urban areas,” he says. “They have happened in smaller towns, and as a result they do not generate the same risk perception, nor they create demand for protection against vandalism risks.”
The uncertainty is also affecting sectors like construction, which has a broad impact not only on insurance, as demand for covers projects has come down, but also on employment and the purchase power of families. Interest for health insurance policies, which shot up with the pandemic, has started to recede as well as families has less discretionary income at their disposal.
“Because of that, there are no drivers of demand for a number of insurance products,” Moron points out.
However, the Apeseg president estimates that the situation should settle down somewhat in forthcoming months. In his view, the economy should post in 2024 rates of growth closer to 4%, which is a level more in line with the recent past. The insurance market should benefit as a result, he says.
Boosting those dismal insurance penetration ratios, however, may take a while and an extra dose of effort from the sector. Ana Morales, a partner at the Boston Consulting Group, BCG, in Lima, believes that Peruvian insurers still need to find the right channels and develop affordable products to bring more customers into the market.
“Insurers are moving in the right direction, but they have not achieved it yet,” she says.
The universe of unserved potential customers includes young consumers, independent workers and small and medium companies. The first two can be targeted by an ongoing process of digitalization that received a new impulse since the Covid-19 pandemic. The latter requires closer attention by the market to their specific needs.
“Even though they are a very important sector for the economy, SMEs still don’t have a clear offer of products from the insurance market. For instance, there are no multi-risks covers of the kind that are common in other markets,” Morales says.
In addition to digitalization, Peruvian insurers may look at partnerships with players such as banks and other companies that have a wide presence across the country and can help then to reduce distribution costs and give them access to a wealth of data about potential clients.
“Differently from their European peers, Peruvian banks still work with high margins on their credit businesses, and they do not see as a necessity to enter the insurance market. But there are some incipient efforts in that direction,” Morales says.
For all that to happen, however, insurers will need to be confident enough about the direction of the country to allocate capital to new business areas.
“Everywhere in Latin America, investors’ capital tends to be very shy. It just wants to go to insurance businesses that have worked for many years and really don’t have large significant initiatives to increase insurance penetration,” Sánchez concludes.