Fitch: Chilean insurers drawn to Peru's premium growth potential

Peru's growth potential as a developing market is driving moves by Chilean insurers to establish footholds in the country's insurance sector, says Fitch Ratings. Last week's announcement that Peruvian insurer Protecta will be acquired by Grupo Security is the latest example of a Chilean insurer's entry into Peru's market.

Since 2013, five foreign insurers, four of which are Chilean, have established a presence in Peru. More foreign ownership of Peru's insurers increases the local industry's product diversification and competitive dynamics - factors that should improve insurance penetration and disrupt the country's relatively oligopolistic structure. Peru's two largest insurers, Rimac and Pacifico, hold 55% of total gross premiums written (GPW) and 58% of the market's total net income. The top four insurance firms comprise 78% of GPW. Similar to its banking system, Peru's insurance market is among the most concentrated in Latin America.

Peru remains relatively underpenetrated in insurance because the country still contends with slow social mobility, informal labor conditions and low average incomes. The concentration of a few large insurers in Peru partially contributes to the country's low insured penetration rate, in our view. Recent growth of the Peruvian middle class may bode well for medium-term premium growth, especially considering the sustained growth in bank penetration, which Fitch considers a pre-condition to faster insurance penetration.

Chile's relatively advanced insurance market shares similarities with Peru's legal, regulatory and operational environment for the sector. As Peru's economic performance improves and average incomes rise, the middle class's demand for insurance is expected to come in line with developed emerging markets, although the large income gap between Peru and Chile suggest a steady but moderate growth.

A further attraction of Peru is regulatory-mandated bidding processes for placing disability and survival insurance to private pensioners, called Pensions Assets Managers (or AFPs). The beneficiaries of these policies are the pension plan participants, who are protecting their retirement incomes when they become unable to make contributions prior to retirement age due to death or disability. In September 2013, the first bidding process for Peru's pension funds was held, with business awarded to four insurers (Rimac two out of seven funds, Rigel one, Ohio National two and Vida Camara two). The annual bidding processes today continue to open competition to smaller players, who may offer more competitive prices. Peru's pension participants account for about 8% of the country's total GPWs. Such bulk insurance programs help insurers operating in Peru to reach profitability quicker.

Peru's insurance market is one of the least penetrated in Latin America, with GPWs at just 1.6% of the country's gross domestic product, versus a 2.6% average across Latin American countries. The number of insurers in the market has recently grown to 18, five of which entered in the last two years. Peru's number of insurance firms is still below typical levels for more developed Latin American markets. Most new entrants are focused on niche segments where they have competitive advantages.

Peru's insurance industry grew 11.6% during 2014, reaching a GPW of million (USD 3.4 billion) and exhibiting an annual average growth of 14.6% in the last 5 years. GPW's breakdown remains adequate and comparable with most mature insurance industries in Latin America, including annuities (19.1%), life insurance (29.4%) and non-life segments (51.5%).