Credit Insurance in Latin America

Regional focus: Credit insurance in Latin America

By Paulo Rogério Gonçalves De Morais, Vice President of Panamerican Surety Association (PASA)

Almost 15 years have passed since the crisis of the socalled subprime mortgages (2007) and the subsequent global financial crisis (2008), while today we are within the ongoing pandemic crisis. It has been a troubled period during which the world economy has had to overcome a great recession, various regional economic crises with some rescues in between, and now Covid-19. Obviously, a period with many challenges for the credit insurance sector too! In these 15 years, credit insurance production in the Latin American region has exceeded the USD 400million barrier. From USD 152million at the end of 2007, it grew to approximately USD 415million at the end of Q3 2021 (latest data provided by Latino Insurance*).

For some this will seem spectacular growth and for others not so much - it always depends on one’s perspective. Some will say that a 173% growth is very significant and others that, in that period, it should have grown much more. Both may be correct to some extent.

It is clear that premium growth has been very important, since it has largely exceeded the region’s GDP growth in the same period. According to the Economic Commission for Latin America and the Caribbean (ECLAC) database, between 2007 and 2020 the GDP growth at current prices was 15%. This growth is also seen when we analyze the contribution of credit insurance premiums to the region’s GDP. In 2007 it was 0.004% and in Q3 2021 it reached 0.009%*. This means that, little by little, the sector is imposing itself in the region and is growing at rates much higher than those of the real economy.

For some this will seem spectacular growth and for others not so much - it always depends on one’s perspective. Some will say that a 173% growth is very significant and others that, in that period, it should have grown much more. Both may be correct to some extent. This growth is also seen when we analyze the contribution of credit insurance premiums to the region’s GDP. In 2007 it was 0.004% and in Q3 2021 it reached 0.009%*. This means that, little by little, the sector is imposing itself in the region and is growing at rates much higher than those of the real economy.

It is clear that premium growth has been very important, since it has largely exceeded the region’s GDP growth in the same period. According to the Economic Commission for Latin America and the Caribbean (ECLAC) database, between 2007 and 2020 the GDP growth at current prices was 15%.

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But whether we like it or not, the truth is that credit insurance premiums in the region do not represent much more than 3.5% of total premiums written worldwide. Very little, if we compare them with other realities.

Of course, when we compare the figures with the European market, specifically with the EU, we see that there is still a lot to do to reach minimally similar degrees of penetration. But let us be aware that Europe is the market with the greatest penetration of this product and the oldest, and also that the European Union is the largest exporter of goods and services in the world. Historically too, it has played a very important role, if not decisive, in the penetration of credit insurance. Let us bear in mind that these states have always seen credit insurance as a fundamental instrument for the promotion of exports and international trade, and the socioeconomic development of their different countries.

At the Panamerican Surety Association (PASA) we think that the decisive role that credit insurance has played in the development of international trade between Europe and the other regions is yet to reach the Latin American region.

Actually, in the vast majority of Latin American markets surety bonds continue to be used as the main guarantee against nonpayment. Maybe the great exception in the region is Chile, where credit insurance has always been very relevant. It is the only country in which credit insurance has a high degree of penetration and is much more important than surety bonds, and also the only one in which the contribution of the sector to the GDP far exceeds the average for the region, 0.033% against 0.009%.

Let us not forget that the region encompasses a very heterogeneous reality, with very different scenarios in terms of its economic and social development. Brazil accounts for almost 33% of the region’s GDP and 32% of the population, and is obviously the largest issuer of credit insurance premiums in the region, with 32%, followed by Chile with 24% and Mexico with 19% (Q3 2021 data). But the region comprises 19 countries, with very different economic environments and social contexts.

Despite the aforementioned heterogeneity, we think that the economic development potential of the region is enormous and could be greater still if the intraregional trade in goods and services is intensified. Basically, if the bet taken in the last decades of primacy of exports was more strongly promoted. There has of course been much discussion about the political context of the region, but it is clear that stability is a crucial factor.

If that were the bet, credit insurance could become the best ally to explore new markets and boost traditional ones; and it would work as a great driver of foreign trade. Our product can play a major role in offering the different local governments a political incentive for economic and social growth, providing wealth generation and social welfare for the region’s economies.

Likewise, credit insurance will have to be “democratized” and adapted to the region. The product will have to reach more SMEs, which represent more than 99% of the companies in the region. These companies generally have more drawbacks to export and in turn, less access to bank credit.

This last point is another of the basic factors that must be developed. How can we make credit insurance work as an essential tool for the financial sector—specifically for the region’s banks—in order to mitigate its exposure to credit risk? This would enhance support for trade financing, and in particular, for export transactions.

It is not an easy path, but PASA is strongly committed to the development and promotion of credit insurance in Latin America. In recent years, it has been developing a whole set of support, dissemination and training activities in the area, including the promotion of new local operators, which are gradually becoming successful.

It is a long and very, very difficult way. But we are excited about it!