Increasing awareness boosts Mexico insurance

Although the pace of expansion has moderated in the last two years in line with a sluggish economy, Mexico’s insurance industry has been experiencing strong growth. The country remains under-insured, and thus the outlook for increasing the market penetration of insurance products is encouraging. According to the industry’s main regulatory body, the Insurance and Surety National Commission (Comisión Nacional de Seguros y Fianzas, CNSF), total premium income in 2014 was MXN363.53bn ($24.47bn), reaching 2.1% of GDP. Taking demographic trends into account, long-term prospects for the sector are very encouraging. In May 2015, while attending the annual conference of the Mexican Association of Insurance Companies ( Asociación Mexicana de Instituciones de Seguros, AMIS), its president and CEO of Grupo GNP, Mario Vela Berrondo, said that the 105 companies in the industry were solid and contributing to rising productivity and economic growth in the country. According to AMIS, premium income grew by 4.5% in 2014, or about 1% in real terms. A major issue in 2015 has been the introduction of the Solvency II capital reserve, governance and transparency standards, which place Mexico in the vanguard of insurance industry regulation (see analysis).

Industry Structure

BBVA’s Global Insurance Unit told OBG, “This is a growing and dynamic market. There is a lot of potential for various reasons. There is room for financial markets to develop, and there is a significant proportion of the population that does not yet buy insurance. Regulatory changes are in some ways placing us in the vanguard of insurance development in Latin America.” The number of companies active in the Mexican insurance sector has increased significantly, from around 40 in the 1990s to 70 in 2000 and to a total of 105 by the end of 2014.

Because of regulatory changes it is not easy to place these companies in simple, mutually exclusive categories. BBVA specialists explain that before 1992 a single company could write both life and non-life policies, and many set up before that date still do so. But companies created after 1992 had to choose either the life or the non-life side. In addition, companies offering pension-linked annuities commissioned by the social security system cannot conduct other lines of business (there are a total of nine of these firms, known as aseguradoras de giro único).

Market Concentration

According to CNSF, of the 105 companies active in Mexico at the end of 2014, 53 were writing life policies and 81 non-life. Among the single-product line companies there were nine focusing exclusively on state pension-linked annuities, 10 in the health sector, three in mortgage insurance, and one in financial guarantee insurance. In 2014 the top five insurance companies in Mexico controlled 46% of direct premium income, slightly down on the concentration ratio of 47.1% registered by the top five in 2013. The market leaders were MetLife Mexico (14.3% of total premium income), Grupo Nacional Provincial or GNP (11.3%), AXA (8.3%), Seguros Banamex (6.3%), and Seguros BBVA Bancomer (5.8%). Industry concentration ratios are higher in some specific categories: for example, the top five insurance companies in the life sector controlled 71.9% of premium income.

In the separate sureties sector 16 firms were active. The concentration index was higher than in insurance, with the top five companies responsible for 78% of total direct premium income in 2014. The five top companies in sureties were ACE Fianzas Monterrey (19.6%), Afianzadora Aserta (19.1%), Guardiana Inbursa (18.8%), Afianzadora Sofimex (14.5%) and Chubb (6%).

Premiums have been growing throughout Latin America over the last decade due to good economic growth and the expansion of the middle classes. In 2013 Mexico, with 17% of regional premium income, was in second place after Brazil (41%) and ahead of Argentina in third place (10%). Mexico’s largest insurance company, the local subsidiary of MetLife of the US, was ranked number six in Latin America by premium income ($5.74bn) in 2013. Brazil’s Bradesco was number one with $13.18bn, followed by Spain’s Mapfre with $11.8bn.

Limited Penetration

For a number of reasons, including a high level of financial exclusion, Mexico remains a relatively under-insured society. According to a financial inclusion survey carried out by the National Institute for Statistics and Geography (Instituto Nacional de Estadística y Geografía, INEGI), in 2012 only 22% of the population had bought some kind of insurance product. According to AMIS data, total insurance premiums as a proportion of GDP stood at 1.7% in 2002; they trended down in the immediately subsequent years, dipping below 1.5% in 2006, but then began a process of slow expansion, reaching 2.1% in 2014. Industry executives say this in part because of cultural factors, and in particular what they call the lack of a “culture of prevention”. “Financial and insurance education must be fostered in order for people to realize the benefits of insurance. There seems to be a strong sense of skepticism towards insurance companies. If this skepticism doesn’t turn into trust, it’ll be hard to increase penetration,” Vela Berrondo told OBG. According to the National Commission for the Protection and Defence of Users of Financial Services (Comisión Nacional para la Defensa de los Usuarios de Servicios Financieros, CONDUSEF), a regulatory body, there were 1346 formal complaints against insurance companies in the first four months of 2015, an increase of 4% compared to the same period in 2014. This made insurance companies the second-most complained about category of financial institution, after the commercial banks. Of the total, 44% of complaints related to “nonpayment of claims, policy terms and conditions, and delays in cancelling policies”.

Performance

In 2014 total premium income was MXN363.53bn ($24.47bn). According to CNSF, total premium revenue received in the first quarter of 2015 was MXN103.68bn ($6.98bn), of which 98.1% represented direct premiums with the remainder for reinsurance. The direct premiums total showed real terms growth of 7.7% on the comparable year-earlier quarter; the adjusted rate (based on a pro-rata calculation to smooth out a large once-every-two-years premium paid by state oil company Pemex) was 7.6%. By categories, life insurance dominated with 41.4% of total premium income, followed by property (37.8%) which in turn was composed of vehicle insurance (19.1%), and other property insurance (18.7%). Two other smaller categories included accidents and illness (15.5%) and pension/annuities (5.3%). In terms of growth rates by category, life insurance premiums grew most strongly in the first quarter (+11.3% year on year), followed by accidents and illness (+9.8%) and pension/annuities (+8.3%). The CNSF’s combined ratio for the insurance industry (a measure of profitability) stood at 92.9 percentage points of total earned premium income, composed of 71.2 points for claims payments, 15.9 for new business acquisition costs, and 5.8 for costs of operation. The surplus of 7.1 percentage points, said the CSNF, was evidence of “a healthy technical operation”.

Premium income in the sureties sector totalled MXN9.19bn ($618.6m) in 2014. In the first quarter of 2015 sureties premium income was MXN2.33bn ($157m). The direct premium portion (96.7%) showed a real-term year-on-year contraction of 2.8%.

“In the insurance sector the main issue [in 2015] is regulatory, and in particular the introduction of the Solvency II standards. The industry is adjusting reserves and parameters. The sector has been pretty stable in terms of growth and policies issued. Most Mexican insurance companies reinsure their risks, so they don’t take on too much risk themselves. Premiums will continue to grow, particularly with new demand from the infrastructure and energy sectors,” Pedro Latapí, chief operating officer at HR Ratings, told OBG.

Mario Senties Palacio, director-general of sureties broker Fianzas Senties & Chauvet, told OBG, “Business in the insurance sector has benefitted from the introduction of structural economic reforms, but lower oil prices have had a negative effect on government spending. In the sureties sector 80% of our business is linked to government contracts, and some of these are being reduced or postponed. We are expecting business [in 2015] to be similar to 2014, with initial hopes of a stronger recovery having to be postponed.”

Aiming Higher

Industry players say prospects for long-term insurance growth, to take the total value of insurance premiums above the current 2.1% of GDP, are good. BBVA’s Global Insurance Unit notes that in Chile premium income is 4% of GDP, about double the figure in Mexico. “The difference is due to the fact that in Mexico there are fewer cases of obligatory insurance and there also fewer cases where the state commissions the private sector to provide insurance services on its behalf. So penetration is lower,” they told OBG. Marcos Gunn, Latin America CEO for ACE Group, however, believes there is room for sustained growth. “In the next five years the insurance industry has the potential to maintain a sustained growth, especially in some areas, such as surety and construction, depending on the level of infrastructure investment,” he told OBG.

Auto Insurance

A case in point is automobile insurance. Along with Haiti, Mexico is the only country in Latin America that does not require by law that all drivers be insured. Introducing obligatory car insurance at the federal level has been discussed for over 20 years in Mexico, but politicians have to date been unwilling to push through what they perceive to be an unpopular measure. As a result, according to AMIS data, only 28% of vehicles in circulation are insured. There have been some partial advances. For example, obligatory insurance is now required for those driving on federal highways; however, insurance remains non-obligatory in the country’s major cities and across rural areas, and the industry would welcome more progress on this front. Statistically speaking, most road traffic accidents involve uninsured drivers, and society as a whole ( including the public health system) pays higher costs to cover them than would be expected.

Afores & Annuities

One reason for optimism on the future of the insurance industry is the growth of pension funds. In Chile pension funds, known as admini-tradoras de fondos de pensiones (AFPs), were introduced 30 years ago and now have assets equivalent to 60% of GDP. After an initial accumulation phase, many individual accounts are now paying out to retirees, meaning a flow of increased business for insurance firms that provide annuities and similar products. In Mexico insurance funds known as administradoras de fondos para el retiro, or Afores, were introduced much more recently, in the 1990s. In their first 18 years they have grown to represent 12% of GDP, and most are still in the accumulation phase. Gary Raymond Bennett, chairman and CEO of Seguros Monterrey New York Life, told OBG, “Most countries have recognised their social security benefits will be tested in the way they will support a growing population, so government requirements for encouraging individuals to create their own pools of savings will be key. For this reason, and due to Mexico’s demographics, there is a level of mandatory savings in the pension fund market place and individual long-term saving and life insurance is key to future welfare of Mexicans.” It is expected that the Afores will continue growing as pension coverage gradually increases; this should generate a surge in annuities business.

Cultural Factors

Life insurance in general is seen as a future growth sector, since many life products contain an element of both protection and saving, and Mexico’s middle class has been expanding and showing growing interest in saving. There are also good prospects for the growth of medical insurance. Yet some cultural obstacles exist here as well. Michael Carricarte, senior vice-president of Pan American Life Insurance Group, told El Economista that car insurance, which is low in Mexico, is still more popular than medical insurance. He cites data from insurance association AMIS that only 8% of the Mexican population has some form of medical insurance. “There is a low insurance culture in Mexico, and many are confident of their health, or simply believe that in case of illness God will provide. As a result the proportion of the population covered by medical insurance lags behind the rest of Latin America: it is 30% in Venezuela, 25% in Brazil, 18% in Chile, and 15% in Argentina,” Carricarte said.

During the 2015 annual meeting of AMIS, there were calls for the government to authorise public sector medical insurance schemes to commission some services to private insurance providers.

Rodrigo Sandoval, life insurance product and operations director at Seguros Sura, told OBG that a key step to expand the market penetration of insurance products is to achieve an across-the-board improvement in levels of financial education. “In life insurance, the average sum insured in Mexico is around MXN400,000 ($26,920). If we assume that an average middle class Mexican family needs MXN15,000 ($1010) a month to live, it turns out that on the death of the main salary-earner that family is covered for only two years. That is not enough. People prefer to insure their car than to insure their lives. It is as if, given the option to protect the chicken that lays golden eggs, or to protect the eggs, they choose to protect the eggs.” Sandoval says that there is a disconnect in people’s thinking: they don’t want to pay what they perceive to be high life insurance premiums, but when the question is framed in terms of protecting their loved ones, they are much more willing to invest. This has implications for the way the industry seeks to market insurance products.

At the lower end of the income distribution scale, and for the estimated half of the labour force that is in the informal sector (i.e., outside the tax and benefits system), the penetration of insurance products has been very low. However, the industry hopes this can change as a result of expansion by the micro-insurance sector that specialises in covering relatively small individual risks at competitive premiums. The challenge facing micro-insurers is to keep distribution costs to a minimum. In this area there is also a challenge to come up with innovative and flexible insurance products that meet the needs of the target customers. Some companies, for example, are suggesting that one-trip travel insurance cover could be included as an optional extra to the price of long-distance bus fares. There is also a need for more flexible insurance products for small and medium-sized enterprises (SMEs). Insurers recognise that a failure to offer sufficiently flexible products is holding back market penetration among SMEs.

Even outside the micro-insurance sector, traditional insurers are seeking to widen their appeal. MetLife, the market leader in life insurance, said in January 2015 it would focus its marketing on the C and D income groups where it already had over 4m customers. The company has more than 9m customers in total. Former CEO Carmina Abad told local press that it was still a challenge to reach these income groups, for which it was essential to offer a life insurance product that also contained an investment component and opportunities to save. Medical coverage was also described as a significant opportunity for growth. Abad said more needed to be done to inform people of the benefits of insurance. Contracts also needed to be simplified.

Natural Disasters

Covering catastrophic risk is an important part of the Mexican insurance business, given that the country regularly experiences hurricanes, tropical storms and earthquakes. José Luis Bustos, manager of government relations at AXA Seguros, has pointed out that hurricanes and earthquakes have caused an annual average of 89% of the fatalities, and 93% of the economic losses associated with natural disasters in the country. He believes adequate insurance cover is becoming more important because these events “are having increasing impact due to climate change and population growth, which is leading more people to settle in vulnerable areas”. According to the CSNF the number of policies written to cover “hydrometeorological” risks nearly doubled in the year to September 2014, while earthquake polices nearly tripled over the same period. The most serious natural disaster during 2014 was Hurricane Odile, a category 4 hurricane which made landfall in the Baja California Sur peninsula on September 14. Odile was considered one of the worst hurricanes in Mexican history. Initial assessments by AMIS put economic losses in the $ 900mhad offered catastrophic coverage. However, the insurance and reinsurance industry was able to absorb the high level of claim pay-outs without major financial stress, reflecting good solvency margins, substantial risk reinsurance, and the effectiveness of the Catastrophic Fund System set up by the regulator.

New Entrants

Since November 2014 a total of three new players have entered the insurance industry. They are Umbrella (personal injury insurance), Neo Salud Seguros (health and medical expenses) and Tláloc ( agricultural and livestock). While Mexican insurance firms have tended to focus on the home market, in early 2015 reinsurer Patria Re said it was opening a branch in Chile, establishing its first foothold in the Southern Cone of Latin America. As Mexico incorporates the Solvency II regulatory regime, bringing it into line with European standards, this may ease market entry in two directions: increased European investment in Mexico and, in the other direction, a possibility that some Mexican companies might move into Europe.

Outlook

The long-term outlook for the sector is very encouraging, with demographic factors playing a significant role in addition to projected economic growth.

In early 2015 Fitch Ratings said it was projecting the combined insurance and sureties sectors to achieve 2015 growth in a 6-8% range in nominal terms. It warned, however, that the combined ratio for the industry could increase due to “pricing flexibility, high-impact catastrophic events, costs associated with the implementation of the new regulatory framework and, to a lesser extent, remaining claims from Hurricane Odile”.

Focusing on the short term, AMIS president Mario Vela has noted that insurance sector growth in 2014 was the lowest in the past 10 years, due to the combined effects of the fiscal reform and sluggish economic growth. However, he believes premium income could rise by approximately 7% in 2015, reflecting better growth, the gradual expansion of obligatory car insurance and improved marketing. A remaining concern is that both 2015 and 2016 will see fiscal austerity being imposed due to lower oil prices, which will affect government spending and a number of capital projects.