Peru insurers upbeat on 2024 as economic outlook shines brighter

Peru's economy suffered a contraction in 2023 but is expected to bounce back this year, which is good news for insurers in a country where the growth of the insurance sector is closely linked to economic performance.

To find out more about the improved outlook for insurers in the Andean nation, BNamericas conducted an email interview with Renato Bedoya, who is risk manager at local insurance association Apeseg.

He also discusses political risk, agriculture insurance, regulatory requirements and the implementation of the Solvency II framework.

BNamericas: By how much did the local insurance sector grow in 2023?

Bedoya: The Peruvian insurance sector wrote premiums of around 20.3bn soles [US$5.3bn], representing an increase of 8.1% compared to the previous year. If we don’t take into account inflation and foreign exchange impacts, the growth rate in 2023 was 1.8%. This represents a penetration ratio slightly over 2% [of GDP].

BNamericas: Which market segments saw the strongest expansion?

Bedoya: Last year’s expansion was strongly driven by the life business, which represented almost two thirds of total growth in the sector. Compared to 2022 figures, life insurance grew 15.7%, property and casualty [P&C] 10%, accident and health 3%, while insurance products related to the private pension system (SPP) decreased 6%. 

Within the life segment, the product lines that grew the most were credit life, fixed-term annuities and long-term individual life. The latter has generated particular interest among the public given the savings options that some products have, in addition to investment alternatives. 

In the P&C segment, there were various factors behind the expansion. On one hand, large national investment projects were launched in 2023 that required property and specialty lines insurance, including irrigation projects and projects related to the reconstruction of damaged public infrastructure, managed by the country’s reconstruction authority (ARCC). On the other hand, as is known, reinsurance costs increased for both political risk and fire and earthquake coverage that led to higher insurance prices and higher premiums than in 2022.

Recent regulatory changes for catastrophic reserves may also have redirected a greater proportion of premiums allocated to earthquake coverage in 2023.

BNamericas: What level of premium growth does Apeseg expect for this year and which segments will drive the expansion?

Bedoya: Last year, Peru experienced an economic contraction of 0.6% and high inflation of 6%, which undoubtedly had a negative impact on the finances of families and businesses. Nonetheless, we saw growth in written premiums. Unlike developed countries, the growth of the local insurance market is always closely linked to the performance of the economy. For 2024, the economic projections for Peru are foreseeing an expansion of around 3%, which could potentially help the sector to reach double-digit growth, in nominal terms.

The sector’s expansion could also be driven by new mandatory insurance policies, which could be tendered after the publication of the national guidelines to insure public assets. This is something that we have been promoting from the association in discussions with the government, and which the finance ministry is working on. Growth could also be spurred by the promulgation of bills that are being debated in congress to promote new insurance products, or by some new parametric insurance solutions tailored for the public sector, which are currently in the pipeline.

In addition, greater economic dynamism this year should trigger more private investment in various projects. At the same time, it will generate higher purchasing capacity that could increase demand for personal insurance lines. Falling interest rates will also make debt cheaper and financial products linked to insurance policies could benefit as well.

On the contrary, political risk could negatively impact the growth potential if we end up with another presidential impeachment, or populist legislative initiatives against the financial and insurance sectors.

BNamericas: What was the impact on political risk insurance coverage from the political crisis and the violence seen in Peru last year?

Bedoya: The country’s political crisis worsened in early 2023 and this marked another landmark in terms of pricing of political risk in Latin America, as it followed similar events that took place in Chile and Colombia. Reinsurers have been reflecting the increased price for political risk coverage in their contract renewals with cedents. For example, property risk policies in Peru used to be sold together with fire and earthquake as a package. However, given the peculiarity of the political and social issues, it’s not unusual today to have political risk coverage negotiated individually with insured parties.

BNamericas: What have been the latest and most important developments in terms of agriculture insurance?

Bedoya: There has been significant progress in the country’s catastrophic agricultural insurance (SAC) and agricultural insurance (SAGRO) programs. A new product for alpacas has also been launched.

SAC is a parametric insurance program indexed to agricultural yields that is 100% subsidized by the government. It’s focused on covering subsistence farmers and now has a nationwide reach of 24 regions, compared to the initial eight regions. It covers 16 risks, including climate, biological and natural disaster risks. Two more risks related to animal birth failures and earth clogging have recently been added. 

The subsidy fund for the current SAC crop season has been increased by 20%, reaching 96mn soles, which has allowed the number of insured hectares nationwide to increase from 1.6mn to 1.8mn. A complementary indemnity coverage has also been added to the program to cover those lots that suffered a catastrophic loss but without the parametric trigger being activated. This coverage was included, as of the last crop season, to reduce the basic risk of the program. The problem with this approach is that it could increase overall loss adjustment costs, but it was incorporated with an insured sum limit as a mechanism for the program to be sustainable, from a political perspective.

For the SAGRO program, the subsidy funds were renewed for two crop seasons, with a government subsidy of 80% of the premium to cover production costs or the value of an agricultural loan. This program is targeted to cover small commercial producers through financial institutions for up to 10 hectares or 15 UITs [inflation-linked units, around US$20,300]. The subsidy fund amounts to 10mn soles, and an increase is being evaluated since almost all of the available fund has already been used. Demand from producers and small financial institutions is increasing for this program. Boosting the size of the fund would help to promote greater participation by more insurance companies.

Let me also share the news that a new product has been launched recently. This is a new parametric insurance program to protect alpaca farmers in the Puno region, close to the border with Bolivia. It covers climate risks such as drought, cold and snow, which can impact the availability of food for alpacas. 

The idea of this program is that economic assistance via insurance payouts can be provided to the producers to buy alternative food for their animals when food has been impacted by the aforementioned risks. As a starting point, a subsidy fund of 4mn soles has been approved, with a 100% premium subsidy. The agriculture ministry (Midagri) has announced a plan to budget for an increase of the fund.

BNamericas: Does the Peruvian market continue to attract the interest of foreign insurers? And what are the capital and processing time requirements for an insurance company looking to enter the local market?

Bedoya: From time to time, we receive visits to the association from international insurers who want to learn about the Peruvian insurance market’s evolution, its players, product and price trends, regulation, and other factors of interest. One of the questions is always about regulatory requirements and processing times for operating approvals.

There are different minimum capital requirements for companies in the insurance sector:

• Insurance companies that operate in a single segment (P&C or life): 6.1mn soles
• Insurers that operate in both segments: 8.3mn soles
• Companies offering both insurance and reinsurance: 21.3mn soles
• Reinsurers: 12.9mn soles

This information is public and updated quarterly on the website of the banking, insurance and private pension regulator (SBS).

As for the processing time, it can be up to around two years. That’s not a short period and can end up being a barrier to entry.

BNamericas: How is the implementation of Solvency II advancing in Peru?

Bedoya: Peru has been working on a local regulatory initiative called the risk-based capital (RBC) model, which is a tropicalized version of Solvency II but adapted to the local reality. Several of the risks included in the model have been taken directly from the European Insurance and Occupational Pensions Authority (EIOPA), while others were calibrated 100% by our regulator. And some are a combination of EIOPA and SBS.

The industry's preparation has been carried out via technical working groups within Apeseg, with the involvement of various committees, such as enterprise risk management, actuarial, accounting, operational risk, and the investments and finance committee. 

As of today, two quantitative impact studies have been completed that have shown adequate sector solvency levels, based on a report from the regulator. The risks with the greatest impact in the model have been market and life risks.

Local insurance companies have been working on a risk and solvency self-assessment process (ARYS), which is the ORSA [Own Risk and Solvency Assessment] in Solvency II, whose objective is to preserve an adequate relationship between the insurers’ risk profile, growth appetite and their solvency. The insurers were expected to present the ARYS report by the end of April.  

The aim is for the RBC initiative to go into force locally around 2028. This is positive, as it will give the market and the regulator time to work on adjusting the proposed model and evaluate what the impact has been in other latitudes where Solvency II has been implemented, and what we can learn from that.

Other regions, for example, have been reporting excessive capital requirements for investment assets and artificial volatility in the case of the long-term business, as well as significant impact in terms of the operational burden and costs. This could ultimately have a negative effect on the final insurance price for consumers and even slow the potential increase in insurance penetration in some markets.