Insurance penetration and density in Colombia set to rise with regional income levels

Latin America has a population of more than 600m people and a combined GDP of over $5trn, and both have grown significantly since the turn of the century. Nonetheless, the region has been hit hard by the ebbing of the commodity super cycle in recent years, as well as still relatively sluggish global growth in the wake of the 2008-09 financial crisis.

The region has been in outright recession for two straight years, contracting by 0.1% in 2015 and by an expected 0.7% in 2016. According to the IMF this is the first time since the Latin American debt crisis of 1982-83 that the economy of the region as a whole has contracted for two years running.

This dynamic has been driven by contraction in three of the continent’s largest economies, Brazil, Argentina and Venezuela. The regional economy is expected to return to modest growth in 2017, and to accelerate gradually in subsequent years.

Premium Growth

The sharp economic slowdown has been mirrored in the region’s insurance sector, where inflation-adjusted premium growth slowed from 5.2% in 2014 to 4.6% in 2015, and remains well below both pre-financial crisis rates and those seen since 2009. When measured in US dollars, premiums for the Latin America and Caribbean region actually fell from $178bn to $158bn, but this should be seen as a consequence of the strength of the dollar.

The region accounts for 3.47% of global premiums. With a 1.52% share of the global total, Brazil is by far the largest insurance market in the region, followed by Mexico (0.55%), Argentina (0.43%), Chile (0.25%), Colombia (0.17%) and Venezuela (0.16%). All other countries in the region have an individual share of global premiums of less than 0.1%. Together, Brazil and Mexico therefore dominate the region’s insurance sector, with a combined 60% of total premiums.

In Swiss Re’s review of 2016, and outlook for 2017 and 2018, non-life premiums are estimated to have stagnated in 2016 in real terms across Latin America. Declines in property values and auto sales are cited as having had a negative impact on both property and motor insurance in Brazil, while the marine and engineering segments have been particularly weak in Peru. By contrast, growth in non-life premiums picked up in Mexico in 2016, and stayed in positive territory in both Colombia and Chile.

In the life and health insurance segment, Swiss Re estimates that premium growth moderated somewhat, from 8.3% in 2015 to 6.9% in 2016, on the back of a slowdown in Brazil, from 8% to 2.4%, stagnation in Argentina, and a sharp drop of 15% in Venezuela in the face of its economic crisis. Life and health premium growth in the 7-13% range in Chile, Colombia and Peru was not enough to offset weakness in the region’s larger economies.

Penetration & Density

For the Latin America and Caribbean region as a whole, insurance penetration stood at 3.09% in 2015, while premiums per capita (density) stood at $251.

The development of the insurance sector varies greatly across the region, however. Penetration rates range from a low of 1.21% of GDP in the Dominican Republic to a high of 4.74% in Chile. Venezuela (3.95%), Brazil (3.9%) and Argentina (3.26%) all have rates higher than the regional average, while those of Colombia (2.64%) and Mexico (2.21%) fall below it.

Meanwhile, insurance density ranges from a low of $47.40 in Guatemala to a high of $630.30 in Chile. Among the larger markets, Argentina ($446.50) and Brazil ($332.10) are above the regional average, while Venezuela ($241.10), Mexico ($198.30) and Colombia ($162.60) all fall below it.

Expansion

In its 2015 “Global Insurance Outlook”, EY points out that many global brokers have continued to expand their presence in Latin America. In 2014, for example, Jardine Lloyd Thompson Group acquired a 75% stake in Brazil-based insurance broker SCK, while Aon Risk Solutions acquired Peru’s Graña y Asociados. Howden Broking Group also expanded into Colombia by acquiring local insurance brokers Proseguros and Wacolda.

As well as global players becoming increasingly active in Latin America, some regional insurers are expanding their operations in the country. Colombian businesses have been well represented among these, with Grupo Sura acquiring the Latin American assets of Royal Sun Alliance for $614m in 2015, for example. As well as Royal Sun Alliance’s Colombian operations, this deal included its insurance assets in Chile, Argentina, Brazil, Mexico and Uruguay.

Meanwhile, in 2016 Brazilian reinsurer Austral Re expanded into Colombia and Ecuador, and signalled its intent to begin operations in Mexico, Argentina and Paraguay once it gains regulatory approval. New entrants – whether domestic, from across the region or from farther afield – are changing the competitive dynamic in Latin America’s insurance sector. According to EY, this is putting a lid on insurance rate increases and even pushing them lower in some markets, particularly in non-catastrophe property.

New Trends

In its 2016 “Global Insurance Outlook”, EY notes that “Latin American consumers, many of whom are young, cosmopolitan and tech-savvy, will continue to push for new insurance channels and services that fit with their lifestyle. To respond, insurers will need to simplify and adapt products for millennials, and sharpen their focus on mobile and social media interactions.”

In addition, EY noted in the report that “the emergence of end-to-end digital capabilities is transforming the Latin American insurance market. This digital market disruption will force insurers to make rapid revisions to existing business models to stay competitive and build market share.”

Regulatory Cooperation

Reflecting global trends, regulation of Latin America’s insurance sector is becoming increasingly robust and sophisticated. However, to a large extent individual regulatory agencies are following their own track, rather than moving in tandem with the Pacific Alliance and seeking greater levels of integration.

In the “Latin America Report 2016”, Emanuel Baltis, CEO of global corporate for Brazil at Zurich Insurance, noted that, essentially, Latin American insurance markets operate as regulatory islands.

“Insurance regulation is particularly localised, with local laws and little consideration for cross-border insurance,” wrote Baltis. “Countries are mainly acting isolated in the insurance regulatory fields. There is certainly no meaningful collaboration in the field of non-admitted insurance. There is a global trend for regulators to benchmark each other, to look at what others are doing in terms of best practice. However, in Latin America, countries tend to be internally focused and concentrate on making sure that taxes are paid in the right way and that insurers operating in the country are licensed.”

For example, Mexico has moved quickly to implement Solvency II requirements, experiencing some teething problems as the country’s insurers grappled with the new regime in 2016. Brazil has already developed a risk-based capital adequacy framework along similar lines to Solvency II.

As a result of these developments the EU has adopted provisional third-country equivalence for both countries. Chile and, at an even slower pace, Colombia are moving in a similar direction, developing risk-based capital models. These four countries have been at the regulatory vanguard, but others in the region lag further behind.

Regional Outlook

According to Swiss Re, the outlook is for a slow but steady recovery in the Latin American insurance sector in 2017-18.

A strong performance in Brazil’s commercial insurance segment and a new Federal Income Law in Mexico that provides fiscal incentives for taking out health insurance are cited as bright spots in the region’s two largest insurance markets.

Likewise, the 4G road-building programme is expected to drive speciality premium growth in Colombia. It is predicted that challenging economic circumstances will continue to weigh on the performance of the sector in Venezuela.

Over the longer term, the relatively low insurance penetration and density rates seen at present in Latin America hold out the prospect of significant growth in the sector as income levels converge towards those in the most advanced countries, particularly if premium growth continues to outpace GDP growth in emerging markets.

At the same time, consumers across the region are becoming more and more demanding, while new channels are opening up to develop and sell insurance products that respond to the needs and desires of the emerging middle class.

Investing in new technology platforms is therefore becoming an increasingly important factor for insurers looking to gain a competitive advantage.