The outlook for Peru's insurance industry is stable, reflecting insurers' good prospects for growth, strong asset quality, and sound profitability levels, Moody's Investors Service affirmed.
“We expect Peru's insurance industry will continue to grow and premiums to rise as economic activity continues to support demand for P&C, life and annuities products over the next 18 months," Moody's expressed.
Still, intense competition could strain margins and profit. Nevertheless, internal capital generation will continue to support capital adequacy.
Furthermore, the Inca country's insurance market has grown significantly over the last five years, expanding at a nominal compound annual growth rate (CAGR) of 7.3%, while GDP grew at an average annual rate of 6.6%, indicating there is a strong relationship between economic growth and the evolution of premiums in Peru.
"Strong GDP growth has benefited the insurance industry
through increased household savings and disposable income, a trend we expect to continue given Peru's very low insurance penetration (1.6% of GDP) compared with other Latin American countries (3.1%)," it added.
Peruvian insurers' investment portfolios are generally well diversified and consist mostly of investment-grade securities, including sovereign bonds and some corporate and bank bonds.
Although the portfolio is reasonably diversified across securities, concentration in assets domiciled in Latin America —and more specifically in the Inca nation— somewhat constrains insurers' overall asset quality.
However, the exposure to Peruvian sovereign bonds (A3 stable) and the broad positive trend of the country's credit strength will continue to support insurers' asset quality.
Despite a downward trend since 2017 return on capital (ROC) has averaged a strong 16% over the past five years.
"While rising competition continues to put downward pressure on prices, straining earnings growth and narrowing underwriting margins, Peruvian insurers will remain profitable, sustained by strong investment income and a focus on improving underwriting results and strengthening policies and controls," the credit rating agency said.
Nevertheless, substantial underwriting exposures to natural catastrophes will likely increase earnings volatility.
Although local solvency requirements still fall short of global best practices for risk-based capital regulatory framework, local accounting standards are converging to global best practices, which is positive for the insurance industry because it promotes improvement in financial transparency and disclosure.