Fitch: Costa Rica premium growth to slow in 2019
Costa Rica's fiscal woes will put a drag on insurance sector growth in 2019, with Fitch Ratings projecting 7-8% premium growth this year following the estimated 9-10% in 2018.
"Fitch anticipates a slight slowdown in the sector's dynamism during 2019 (7%-8% growth) given the sluggish economic environment as a result of a continuous rising budget deficit, as well as persistent institutional gridlock preventing progress on reforms to correct the fiscal imbalance," said Fitch in its 2019 regional outlook report.
Costa Rica passed a fiscal tax reform in early December after years of gridlock. Despite its passage Moody's subsequently downgraded the country's sovereign credit ratings, noting "Costa Rica's ongoing fiscal consolidation efforts will be insufficient to quickly and materially reduce its high fiscal deficits."
Moody's expects GDP growth to slow to about 2.5% in 2019 and 2022, with the fiscal deficit reaching 7.5% in 2019 with a debt ratio at nearly 59% in 2019, peaking at around 65% by 2022 before current efforts begin to turn back the tide.
In its report, Fitch sees GDP growth at 2.4% in 2019 with inflation rising to 2.9% from 2.4% in 2018.
The following table provides major economic and insurance sector data and forecasts for Costa Rica generated by Fitch Ratings, which also drew upon sector regulator (Sugese) data.
Looking at insurance, the agency noted that insurance growth has already begun to slow, reporting that it saw premiums grow 7% from year-end 2017 in the first three quarters of 2018. The report added that this growth rate was the slowest in the last five years in similar comparisons, where the average for those five years was 10% growth through September of each year.
The agency noted the deceleration in 2018 was "due to the low dynamism in the largest insurance company, the state-owned Instituto Nacional de Seguros (INS) of 3% versus 18% growth in private companies."
"Nonetheless, growth will continue to be underpinned by the high acquisition power of the market and the still-low penetration rate of the insurance sector in the country's GDP (current Costa Rica penetration: 2.3% versus 3.1% average for Latin American countries)," added Fitch.
Performance to hold up against challenging environment
Fitch said it continues to see adequate profitability for Costa Rica's insurance sector in 2019, with the sector-wide combined ration holding below 100%.
"This stems from an adequate operating efficiency ratio given that the industry itself has reached its shakeout stage, where written premiums will continue to show a steady growth and operating expenses will reach a normalization stage," said Fitch. "Net loss ratio should remain adequate, given the stringent regulatory framework focused on a risk-based capital, which mitigates the risk of a potential price war in a highly competitive market."
Capitalization and liquidity stable
The sector is on track to maintain adequate capitalization and low leverage levels in 2019, in Fitch's opinion due to INS' solid capital position and support on tap from the international groups controlling the majority of INS' competitors.
"Additionally, the agency expectation remains consistent with the strict requirements in the solvency margin," added Fitch. "However, adequate investment requirements placed by local regulation, along with a low diversity of instruments available for investing, will contribute to the trend of ample liquidity levels."
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