Underwriters in Mexico's insurance sector look to improve industry, reach greater penetration levels

Given the relatively high administration costs, and low profitability, serving the insurance sector in Mexico has not traditionally been a priority for leading market players. The country can be a challenging market for insurers to operate in as it is exposed, for instance, to a full range of natural disaster risks including earthquakes, active volcanoes, hurricanes, and tsunamis. At the same time, concentrations of organised crime in certain regions pose an additional persistent threat to property. The sector has traditionally been perceived as conservative in some respects and slow to exploit new products or market segments. Further development has also been held back by the fact that nearly half the population still lives in poverty. Among this demographic, awareness of the value and necessity of insurance products is very low.

Opportunities

However, even with its challenges, and as the sector laboured to meet new reporting standards, signs of strength have been showing in terms of profitability and premium growth. According to figures provided by Swiss Re, Mexico ranked 26th globally in US dollar terms by premiums collected in 2015, with $25.2bn. Although, this should be understood in the context of a depreciating currency which caused premiums in dollars to show a 8.3% decline for the year, even as inflation-adjusted premiums in local currency jumped 6.4%. As rising costs were passed on to clients due to the weak exchange rate, some segments – notably health – have seen a rise in premiums. It is expected, however, that regulatory reforms will ultimately limit the rising cost burden faced by consumers. A bigger growth opportunity lies in increasing the penetration rate – currently at half the level of leading Latin American countries like Chile – while the eventual ageing of the still relatively young population bodes well for demand for the whole range of products, particularly life insurance and pensions.

Structure

The number of operators in Mexico’s insurance sector has remained relatively constant in recent years, varying from 100 players in 2008 to 101 in late 2016, having reached as high as 105 in 2014. In recent years entries and exits have mostly related to marginal, domestic players. Of these 101 providers, 46 specialise in life insurance and five in pensions, while the remaining 50 have mixed business models.

In broader terms, market analysts see three types of business models in the sector. Traditional or multi-channel operators that tend to account for a large amount of premiums in the sector, but have weaker profitability than the players that are part of larger banking and insurance groups. Of the latter, those with a pure banking and insurance model – such as HSBC Seguros and Zurich Santander – can achieve returns on equity in the 30-60% range, while those with a more mixed or niche approach – much as Banamex, Banorte and BBVA Bancomer – still manage to achieve strong profitability performance, with returns on equity in the 15-30% range. Insurance providers that operate as part of such bigger banking entities have a significant advantage in terms of their cost base. For example, they are well placed to cross-sell insurance products to their existing banking clients, with only modest increases in marketing costs. They are also able to sell high-margin insurance products which are tied to their traditional banking products – such as insurance on credit cards, mortgages or auto loans.

Foreign Ownership

Of the 101 players operating in the sector in mid-2016, 52 foreign firms accounted for 58% of market share, with 51 Mexican-owned providers making up the remaining 42%. For the most part, entries and exits in recent years have related to smaller, domestic players, meaning the level of foreign participation in the sector has remained relatively stable. One notably new foreign entrant to the sector in late 2016, however, was SeguroSimple, a Peruvian financial technology company that specialises in digital insurance brokerage. While it does not provide insurance directly itself, it acts as an intermediary which allows consumers to rapidly consult competing insurance quotes online. It is initiatives such as these that are helping to promote competition in the sector.

Concentration

Despite the diversity of insurance providers in the sector, market concentration has long been a concern. Some progress has been made over the past decade, however. The market share of the top-five players decreased from 53.9% in 2006, to 45% by mid-2016. By the same token, the sector’s Herfindahl-Hirschman score, which measures concentration, declined from 7.6% to 6.2% over the same period. This continues a trend that began with the reforms introduced after the 1994-95 financial crisis.

According to the Mexican Association of Insurance Companies (Asociación Mexicana de Instituciones de Seguros, AMIS), the top-five firms by market share across all segments of the sector were Metlife Mexico with 15.2% of market share, followed by Grupo Nacional Provincial (GNP) on 11.7%, AXA (7.6%), Qualitas (5.8%) and Seguros BBVA Bancomer (5.7%).

By Segment

Market concentration varies according to the insurance segment. In the pensions segment, for example, there are two dominant players – Pensiones Banorte with a 37.1% market share and Seguros BBVA Bancomer with 35.8% – which together with Profuturo GNP (18.2%) and SURA (8.7%) account for almost the totality (99.8%) of the market.

At the other end of the spectrum, the top-five players in the property insurance (non-auto) segment account for only 37.9%, with each holding a market share of between 6.7% and 9%. The life insurance, auto and accidents, and health segments display similar market concentration characteristics to each other, with a leading player having a market share of between a quarter and a third, while the top five account for approximately two-thirds of the total market share.

However, the leading players vary within those segments. In life insurance, the biggest players account for 66.6% of market share, led by Metlife with 29.5%. This are followed by Seguros Banamex (10.3%), GNP (9.7%), Seguros BBVA Bancomer (8.8%) and Monterrey (8.3%). In the auto segment Quálitas is the market leader with a 29.4% share, followed by GNP (12.5%), AXA (10.9%), ABA Seguros (7%) and Seguros Banorte (6.2%). Lastly, GNP has the biggest market share in accident and health insurance, with 24.8%, followed by AXA (16.1%), Metlife (13.7%), Monterrey (10.7%) and Seguros Banorte (4%).

Market Moves

In September 2015 Colombia-based insurance giant, Grupo SURA, announced its acquisition of the Latin American operations of the UK-based RSA Insurance Group for $620m. The take over of Mexican operations was completed by mid-2016 following regulatory approval. In January 2016 ACE acquired leading insurer Chubb in a $29.5bn deal that created the world’s largest publicly traded property and casualty liability firm. The firm subsequently announced plans to invest approximately $1.2bn in Mexico as it seeks to expand into the personal and commercial insurance segments. This move is expected to complement the firm’s longstanding activity, as ACE Seguros, in the industrial, commercial and personal accident segments, as well as in its more recent life insurance operations. ACE has also acquired Fianzas Monterrey, the country’s second-largest surety bond providers, as well as ABA Seguros, the sixth-largest property and casualty insurer in the country. To date, the market is still lacking an entrant with an internet-only business model, although this is something that could be anticipated in the medium term, once the regulatory arrangements have been properly clarified and implemented.

Performance

Profits in the sector for the first three quarters of 2016 reached MXN27.3bn ($1.7bn), up 49.6% from MXN18.3bn ($1.1bn) a year earlier. At the same time, however, there is some evidence that the increasing cost of claims was hitting the bottom line. According to the industry’s main regulatory body, the Insurance and Surety National Commission (Comisión Nacional de Seguros y Fianzas, CNSF), the surplus of premium income over costs for the sector as a whole declined from 3.9% in September 2015 to 3.4% in September 2016, reflecting a similar rise in the average cost of claims as a proportion of premium income from 72.7% to 73.2% over the same period. Nonetheless, the CNSF also noted that this number was still a healthy operating level for the sector.

Premiums

Between 2005 and 2015, premiums outpaced both inflation and economic growth, with an average real annual growth of 6.5% for the period. By end-2015 total direct premiums reached MXN389bn ($23.4bn), or 2.2% of GDP. At the end of the third quarter of 2016, premiums had already hit MXN324bn ($19.5bn) for the year, up 6.9% on the same period in 2015. If the large premium paid once every two years by state oil company Pemex is removed from the equation, the like-for-like increase in premiums was a very healthy 9.3%. At the same time, premiums in some segments were growing faster than inflation due to the fluctuating exchange rate. For example, in the health and accident insurance segment, many claims are derived from charges that are to a large extent dollarised. For instance, the cost of many medicines is quoted in dollars, leading to a direct pass-through to the cost of claims, which is then reflected in premiums charged.

A similar phenomenon is also being seen in the auto insurance sector. According to Swiss Re, premiums per capita in US dollars – otherwise known as insurance density – are relatively low in Mexico, ranking 59th globally at $198. This is less than a third the level in Chile ($630) and less than half the level in Argentina ($447) – showing differentials far higher than would be suggested by the respective differences in GDP per capita. The country still, however, ranks ahead of neighbouring Colombia ($163), Ecuador ($138), Peru ($115) and Guatemala ($47).

Sector Leaders

Life insurance is by far the largest market segment in Mexico’s insurance sector, accounting for 42.3% of all premiums in the first three quarters of 2016. Premiums in the segment were also growing strongly, up 9.9% in real terms over the same period compared to a year earlier. A survey published in late 2016 by ReMark International showed that use of the internet is underpinning continued growth in the segment, with approximately 90% of consumers in the country undertaking web-based research before buying a life insurance product, and 75% prepared to share personal data online to get a discount.

The auto insurance sector is the second-largest segment of the market, accounting for around 19.9% of premiums in the first three quarters of 2016. It was also the segment with the strongest premium growth, up 15.9% in real terms over the same period. This growth has been underpinned by record auto sales as well as the passing on of favourable exchange rates to consumers, since claims in this segment are derived in large part to costs quoted in US dollars.

Given that there is no mandatory requirement at the federal level for drivers to have insurance when driving on all of the country’s roads, the proportion of cars covered by insurance is traditionally low in Mexico, with barely one in four currently covered. Stiffer regulation and, particularly, stronger enforcement, could lead to a cultural shift and a big growth opportunity for insurers over the longer term (see analysis).

“In 2016 there were 23m vehicles on the road in Mexico that were not insured,” José Luis Morales, partner at RiskManagement ASF, told OBG. “What is needed is a more streamlined, uniform federal legislation that instils the importance of car insurance to the population while simultaneously providing financially attractive premiums to all socioeconomic classes,” he added. After auto insurance, the next largest segment is property insurance, which accounted for 17.9% of all premiums in the first three quarters of 2016.

While gross premiums actually decreased by 7.9% over the same period, when the biennial Pemex payment is stripped out of the 2015 figures it shows that premiums in the segment actually saw an improvement, increasing by around 3% in real, like-for-like terms.

Accident and health insurance accounted for 15.3% of all premiums in the first three quarters of 2016, making it the fourth-largest line of business in the insurance sector. The segment showed strong double-digit premium growth of 13.1%.

Pensions are a small market segment, which accounted for only 4.6% of all premiums in the first three quarters of 2016. It was also the only segment in the insurance sector that declined, with premiums down 6.1% in real terms in that period.

Penetration

Market penetration – measured by insurance premiums as a share of GDP – remained very low in Mexico, at only 2.21% at end-2015, placing the country 57th globally. This rate has increased only marginally, albeit steadily, over the past decade from a little under 2%. According to figures provided by Swiss Re, this sees the country ranked ahead of only three countries in Latin America – namely, Costa Rica (2.04%), Peru (1.92%) and Guatemala (1.24%). By comparison, in Chile penetration is more than double the level recorded in Mexico, at 4.74%.

According to the CNSF, further progress is in store, but the speed of this change will depend on the rate of economic expansion. In a scenario where growth averages 3%, the rate of penetration could double to 4.2% by 2030. Were growth to average 5%, the penetration rate could reach 5.1% by 2030, while slow growth averaging around 1.9% would only see an increase in penetration to 3.8% over the same period.

Some of the biggest barriers to increasing the penetration rate are due to cultural issues and a general lack of awareness. “Mexico is a country with one of the lowest insurance rates in Latin America and each year penetration rates gradually rise demonstrating the opportunity for growth in the market,” Manuel Álvarez, director-general of Seguros de Carga, told OBG. “However, more insurance education is needed alongside a more competitive cost if penetration rates are to rise significantly.” Some, however, see certain demographics as the key driver to opening up the insurance sector. “The growing Mexican middle class is one of the key transformers of the service economy in 2017,” Manuel Escobedo, president of reinsurer Patria Re, told OBG. “Specifically, their understanding of the importance of insurance products is opening up the sector in a promising way,” he added.

Regulatory Reform

First introduced in 2013, Mexico’s Insurance and Surety Institutions Law (Ley de Instituciones de Seguros y de Fianzas, LISF) came into force in 2015. This followed a two-year transition period, and the publication of a key piece of implementing secondary legislation in December 2014. By aligning the country with the Solvency II insurance industry regulatory standards developed and implemented in Europe, the law is currently considered one of the most advanced of its type in Latin America. It aims to strengthen the sector by raising solvency standards and improving corporate governance.

Whereas the quantification of capitalisation levels used to be carried out on the basis of risk-based assets, sometimes leading to over-capitalisation, under the LISF regime they will be calculated using the more sophisticated best-estimate liability technique. This should allow insurance companies to better manage their capital requirements, reducing the need for them to keep high margins in reserve, thereby boosting profitability by freeing up more capital for productive investment. As for those investments, they now need to be marked-to-market, taking into account changes in assets prices on a daily basis, as well as factors like foreign exchange and interest rates. At the same time, overall capitalisation across the sector is expected to rise, leaving the industry well guarded against risks.

Governance & Reporting

Another area in which implementation of the Solvency II standards has implied important advances in the sector has been with respect to corporate governance and disclosure where requirements have been formalised. Auditing requirements have increased while regulators are now empowered to demand justification for certain actions taken by insurers under their watch.

One of the more obvious changes under the new regime, affecting both consumers and providers, is the shift from monthly to annual payment of premiums, reflecting the fact that insurance policies are usually yearly in duration. This complicates the comparison of interim 2016 figures with those from corresponding periods in previous years, but this will no longer be an issue once the annual figures are published from 2017 onwards. The last piece of the Solvency II jigsaw relates to the electronic purchase of insurance, with the necessary further changes in this regard expected to be implemented by the end of the first quarter in 2017.

Challenges

The transition has not been without its initial challenges, however. During the 2014-15 period, insurance firms were required to report their quarterly figures using the old rules.

The first reporting period under the LISF regime was for the first quarter of 2016. According to the CNSF, a range of technical issues complicated the migration for many firms in the sector. Given the extent of errors in the reports, a decision was made not to publish them on a quarterly basis during 2016, so as to avoid giving inaccurate signals to the market.

Over the course of 2016, the CNSF worked closely with firms across the sector, and saw a progressive improvement in terms of adherence to the new reporting standards in the second and third quarters. It was expected that most, if not all, of these issues would be ironed out by the time final figures for 2016 were due to be published in the first quarter in 2017. This would see a return to levels of disclosure and transparency that market participants have come to expect, and mark the successful transition to the new reporting standards. This could also be a catalyst for the long-expected consolidation and restructuring in the sector as it becomes clear which firms and business models are most exposed under the new regime.

While underpinning the solidity of the sector in Mexico, the regulatory changes have imposed a particular burden on smaller providers which do not benefit from the same economies of scale as larger players. “Solvency II has put a lot of pressure on insurers”, Marcos Gunn, president of Chubb for Northern Latin America, told OBG. “The implementation of new regulatory quarterly reports, plus improved corporate governance, requires comprehensive management focus and a very strong multidisciplinary team to make sure all aspects are complied with and result in an adequate business strategy. In general, large companies have the resources at local, regional and global levels to set up and execute the correct framework; however, smaller firms can run into challenges has they are less able to tap into global best practices and resources,” he added.

Outlook

After a strong performance in 2016, prospects for 2017 look good, but are clouded by the uncertain macroeconomic environment.

Speaking to market researcher EMIS Media, Mario Vela Berrondo, President of AMIS, forecast in late November 2016 that the sector would grow by a robust 7% in 2017. In the short term, however, growth in incomes from premiums and profitability, as well as the continued increase in market penetration, are likely to be hampered by prevailing uncertainties around the performance of the broader economy.

Over the long term, an acceleration in economic growth, and consequent reductions in poverty rates, should boost insurance market penetration as more of the population begin to consider it as an essential product. Microinsurers have begun to target low-income segments of the population, and continued development in this sector holds a lot of promise. Given the wide ownership of mobile phones, new technology is another potential avenue for serving less affluent segments of the population. However, further efforts to raise awareness and promote financial education among these segments, particularly in rural areas, will remain crucial. While the number of market players has remained relatively stable in recent years, the large number of smaller and loss-making firms still operating suggests that some restructuring and consolidation is likely going forward. This trend is expected to be underpinned by the bedding down of the recent migration to the Solvency II framework. Factors may vary, but what is agreed is that concrete plans are needed in order to boost the overall penetration rate in the country.