The Colombian insurance industry in good position to increase its rate of growth

Colombia is the fifth-largest insurance market in Latin America by premiums collected. However, it features weak penetration and density – measures of premiums compared to the size of the economy and the population, respectively – compared to other large markets in the region.

Nonetheless, the fact that the country has been able to weather the recent economic storms better than many in the region, by avoiding an outright recession for example, leave it well placed to start narrowing the gap over the coming years.

This should be helped by the increasing number of new entrants – some of which are big players globally, even if operating in a niche in Colombia – adding to competition, as well as the acquisition by local insurers and financial conglomerates of insurers in Central America and across Latin America, giving them access to new know-how and business models.

According to Swiss Re, Colombia ranked 43rd globally in dollar terms by premiums collected in 2015, with $7.8bn. This should be understood in the context of a depreciating currency, which caused premiums in dollars to show a 17.5% fall for the year, even as inflation-adjusted premiums denominated in the local currency jumped by 7.6%.

During 2016 inflation-adjusted premiums continued to grow, but at a slower pace as economic growth slowed to 2%, while inflation peaked at 8.97%, a 12-year high, in July.

Macroeconomic Context

Hernán Avendaño Cruz, director of economic research at Fasecolda, the industry representative body, flagged broader economic performance as the key driver of the sector. “The macroeconomic environment is a crucial determinant of the development of Colombia’s insurance sector,” he told OBG. “Low unemployment, strong wage growth and decreasing labour market informality lead to more demand for life insurance, pension and employment insurance products. Strength in the construction and finance sectors fuels demand for insurance on property and bancassurance. At the same time, the depreciating exchange rate has a rapid pass-through to premiums in certain insurance segments, notably vehicles.”

Structure

According to the Superintendencia Financiera de Colombia (SFC), the financial services regulatory agency, there were 48 insurance firms operating in the country in early 2017. Of these, 24 were general insurance companies, 19 specialised in life assurance, two were cooperatives and the remaining three were capitalisation insurers.

While recent years have seen an influx of foreign players of varying sizes, the Colombian insurance sector continues to be dominated by a small number of local incumbents. Indeed, most of these key players are linked to the country’s three large and long-dominant economic conglomerates, namely Grupo Aval, Grupo Empresarial Antioqueño (GEA), a business grouping of companies based in Medellín, and Grupo Empresarial Bolívar (GEB).

These conglomerates also control Colombia’s main banking companies, while their insurance arms are benefitting from both economies of scale and increased opportunities for cross-selling insurance products to banking clients.

Main Players

Together, the top five insurers control 55% of Colombia’s insurance market. Of these, the top three locally owned firms account for 45%.

With a 24% share of the market, Grupo Sura is by far the dominant player. As part of GEA, it is also closely linked with the single biggest bank in the country, Bancolombia, as its majority shareholder.

Seguros Alfa, part of Grupo Aval, is second with a 14% market share. Grupo Aval includes four separate banks, making them together the biggest banking group in the country (see Banking chapter).

These are followed by GEB’s Seguros Bolívar, which accounts for 7% of the market and is linked to Colombian bank Davivienda. The only other insurance firms with a market share of 5% or more are Axa and Allianz, which are both foreign-owned and have 5% of the market each. “The top three players have been pretty stable for a long time, but outside these there has been more movement, with companies such as MAPFRE, Liberty and Allianz jostling for position,” Milena Carrizosa, director at Fitch Ratings, told OBG. “Sometimes this is done by focusing on niche segments rather than going head-to-head with the big players across all business lines.”

“There are a lot of smaller players in the market that are either part of large multinationals or domestic firms occupying strong niche positions,” Johann Goebel, associate director of insurance at Fitch Ratings, told OBG. “In either case, there is no significant pressure towards consolidation.”

Foreign Ownership Surge

With relatively low formal barriers to accessing the market, a large number of foreign players have entered the Colombian insurance sector in recent years. Foreign players now make up 36% of the market, based on SFC data from the end of September 2016.

Foreign entrants have typically targeted particular segments or niches, rather than competing across all business lines with the biggest market players. A notable example is the 2014 acquisition of a controlling share in Confianza by Swiss Re. Confianza was the leading surety writer in Colombia, with a particular focus on insurance related to infrastructure projects, such as the 4G road-building programme.

Another important entry was the 2013 acquisition of a 51% stake in Colpatria Seguros by France’s Axa Insurance, which made it the fourth-largest player in the market. Similarly, Germany’s Allianz has focused on niches such as auto cover and microinsurance since its 1999 entry to the Colombian market, making it the fifth-largest player by 2016.

Typically, foreign firms have entered through the acquisition of a domestic firm, but there are also some examples of greenfield entries, again usually with a focus on particular niches or segments.

For example, since its 2014 entry to the market, Berkley International Seguros Colombia has become a leading provider of marine, construction and engineering, liability, and surety insurance in the country. After establishing a representative office in Bogotá in 2014, offering reinsurance products, the firm expanded its offering in 2015. Another example is Switzerland’s Zurich Insurance, a leading global player that entered the market in 2015.

More recently, the UK’s Lloyds Insurance established operations in Colombia in 2016, focusing on the reinsurance segment. Juan Carlos Realphe, Lloyds’ country manager, explained the reasoning behind this latest move: “The reinsurance sector has changed dramatically in the last five years. Five years ago 50% of Colombia’s reinsurance business was placed in London; nowadays it is just 25%,” Realphe told OBG. “One reason for this is that more goes through our regional hub in Miami, yet another factor is that there is more capacity and interest from local groups to meet reinsurance demand. So with our direct local presence we hope that we can increase the placement of premiums from the Colombian market to the London market.”

Goebel told OBG: “We have seen a lot of foreign entrants in recent years, following the 2013 regulatory reforms and with a view to seizing opportunities promised by infrastructure projects, but we are unlikely to see as many entrants in the near future, particularly as the economy remains so weak.”

Market Moves

Mirroring the efforts of Colombia’s leading financial conglomerates at expansion into Latin American and Central American markets in recent years by acquiring banking assets, the same pattern is beginning to emerge in the insurance sector. One of the most significant developments in this regard was the 2015 acquisition of the Latin American insurance business of Royal Sun Alliance for $614m. This move saw Grupo Sura consolidate its position across Latin American insurance markets, becoming a top player in Chile and Uruguay, as well as an important niche operator in Brazil and Mexico, the continent’s two largest economies.

“We are seeing a very interesting dynamic in terms of Colombian banking, and insurance groups expanding into Central America then using the experience, capacities and business models of the acquired firms as a template to boost their domestic insurance business, and to increase penetration and market share in Colombia,” Goebel told OBG.

Premiums

Insurance premiums in 2016 totalled COP23.9trn ($7.2bn), up 10.9% on 2015’s COP21.5trn ($6.5bn) in nominal terms. This marks a modest slowdown on the 13% growth seen in 2015, but still a sharp increase on the 1.1% growth rate of 2014, when premiums contracted in real terms.

Premium expansion has waxed and waned in line with the broader economy over the past decade, though generally growing in real terms at a faster rate than GDP. Nominal premium growth peaked at 23% in 2008, and again at 19% in 2013, indicating that the current rate of growth is steady but not spectacular in historical terms. Analysts expect premiums to grow by 8-10% in 2017, which would see inflation-adjusted premium growth of 3.5-5.5%, in real terms, in line with the 4.4% real growth (11% nominal) in the year to the end of November 2016.

While much of this growth in premiums is organic, there is also an element of inflation indexation in certain segments. Auto and health insurance are particularly sensitive to pass-through inflation from currency depreciation, because the prices of motor vehicles and medical costs are often dollarised. Similarly, segments like social security and workers’ compensation are linked to wage increases. There has, therefore, been significant variation in premiums growth across business lines.

Claims

In the first 11 months of 2016 insurance claims across the sector increased as a share of total premiums to 60%, up from 57% in the same period of 2015, according to Fasecolda. Claims in the country were up across all segments apart from general insurance, with a notable spike in the social security segment from 93% to 109%.

Performance

With strong demand for Colombian assets on financial markets, 2016 was a strong year for insurance firms’ investments, with total gains rising from COP2.8trn ($840m) in the first 11 months of 2015 to COP3.8trn ($1.1bn) by the same point in 2016. On the other hand, technical performance in core insurance segments was not particularly strong, with increased price competition in life insurance taking a toll on profit margins, for instance.

Costs also increased by 10% across the sector, in line with premium growth, and remained relatively stable as a share of premiums, ticking up slightly in property and personal insurance, but moderating in social security. Technical losses therefore rose significantly from COP1.36trn ($408m) during the first 11 months of 2015 to COP2.34trn ($702m) in the same period of 2016. This was more than offset by the strong performance of investments, however, leading to an increase in profits for the sector from COP1.3trn ($390m) to COP1.5trn ($450m) for the January-November 2016 period.

Penetration & Density

Market penetration – measured by insurance premiums as a share of GDP – remains relatively low in Colombia, at 2.64% at the end of 2015. According to figures provided by Swiss Re, this sees the country ranked ahead of Mexico (2.21%), Costa Rica (2.04%), Peru (1.92%) and Guatemala (1.24%) in Latin America.

Penetration is nearly double this level in Chile (4.74%), and still significantly higher in both Brazil (3.9%) and Argentina (3.26%).

“Not only is insurance penetration relatively low in Colombia, but it would be one-third lower if it were not for insurance made mandatory by the government, such as social security and third-party auto insurance (Seguro Obligatorio de Accidentes de Tránsito, SOAT),” Carrizosa told OBG. “This low penetration signals a lot of room to grow, and we see particular scope for growth in the group life insurance segment in the coming years.”

However, some of the biggest barriers to increasing the penetration rate are cultural, and lack of awareness is a major issue. “We don’t yet have a strong culture of life insurance in Colombia. Penetration for this segment is less than 1%,” Joaquin Quiroz, CFO of Pan-American Life, told OBG. “However, this is a big business opportunity for insurance firms that are ready and able to offer life products tailored to the mass market. Another important development is that people are starting to see the savings value of life products, which could provide for their children’s education, for example.”

In terms of premiums per capita, Colombia ($162.60) ranks lowest of the large markets in the region, and well below the regional average ($251), but over three times higher than Guatemala ($47.40), one of the least-developed markets in the region.

Life

Within the life insurance segment, there is a traditional division between group and individual policies. The former are typically employee insurance schemes which have a large number of members or loans linked to, for example, auto loans. The latter are taken out by private individuals.

Following recent regulatory changes, firms are encouraging their employees to opt out of group schemes and to take out individual policies, resulting in a significant slowdown in growth in group life insurance to 2% per year, and a corresponding increase in individual life premiums growth to 15%. Overall, however, the life segment did not grow far ahead of the inflation rate. Previously it had been growing at double-digit rates annually.

One important regulatory change to have an impact on the life segment was new legislation to oblige providers to be more transparent on pricing – and the possibilities offered by alternative providers with more competitive pricing – when selling insurance products linked to, for example, mortgages or other loans. “In Colombia you need life insurance when you take out a mortgage,” Quiroz told OBG. “In the past this was a great opportunity for banks to cross-sell insurance products to their borrowers. But after the law changed recently it provided further impetus for growth in the individual life insurance segment in 2015 and 2016.”

This change also provided an opportunity for smaller players in the Colombian insurance sector – those not tied to the large domestic banks – like Allianz to grow their market share.

Property & Casualty

As in many countries, obtaining a mortgage in Colombia requires that house insurance be taken out. Most houses that are not mortgaged are uninsured, signalling that a culture of house insurance has not yet taken hold in a country where it is not obligatory. However, amid a building boom, mortgage-related insurance has been growing at double-digit rates.

Delays to financial closings and execution of infrastructure projects caused premium growth in the segment to underperform relative to expectations, contracting by 4% in the first 11 months of 2016. As these projects come on-stream in 2017 and 2018, however, the line is expected to pick up.

Given the extent of planned infrastructure investment in Colombia in the short, medium and long-term (see Economy chapter), this segment appears poised for rapid growth. Indeed, this dynamic was one of the factors attracting global players to the sector in recent years. This segment has also been one of the most important in terms of attracting new niche players to the sector.

Auto Insurance

On the back of rising costs due to currency depreciation as well as strong car sales, the auto insurance segment was growing by around 13% during 2016, following a similarly strong performance in 2015. However, this momentum is expected to slow in 2017 as exchange rates fade in importance to drivers, and a slowdown in consumption weighs on car sales. On the other hand, even more rapid growth in motorbike sales promises to grow the auto insurance market among consumers towards the bottom of the pyramid.

Third-party auto insurance, or SOAT, is mandatory in Colombia. Premiums have been growing at 7-9%, and 10% in the first 11 months of 2016, slower than growth in other auto insurance segments. This segment is blighted by issues relating to fraud.

“People involved in an accident might attend a clinic without making an insurance declaration. Then, six months later when a bill arrives from the clinic, they can make an insurance claim under SOAT, declaring the treatment to have been as the result of a traffic accident, whether this was the case or not,” Arturo Alonso Najera Alvarado, director of statistics at Fasecolda, told OBG. “It can be very hard to verify the veracity of the claim, so suspected fraud is considered to be very high.” Analysts expect the government to tighten regulations in this area so as to clamp down on fraudulent claims.

Accident & Health

Professional risk insurance has been growing slightly ahead of wages, with the minimum wage – widely seen as an economy-wide proxy – having increased by 7% in both 2016 and 2017. This segment was hit hard by the further fall in oil production in 2016, a sector with which it is closely linked. Otherwise, it has performed relatively well in recent years as the labour market has remained strong, but it may face greater pressures in 2017 as the unemployment rate rises.

Private health insurance is becoming increasingly popular among consumers, catering to an emerging middle class and its desire to receive better and timelier health care. However, firms operating in this segment are also effectively competing with health-promoting companies, which offer alternative products such as complementary plans and prepaid medicines, and provide varying degrees of expanded coverage and priority service.

Regulatory Reform

The most important regulatory change of recent years was the 2013 modification to the calculation of technical reserves through Decree 2973. More recently, 2015 saw the issuance of further guidelines related to the calculation of incurred but not reported reserves.

While some firms are expected to need to raise capital or restructure their balance sheets in order to meet the new requirements during 2017, many others are already well capitalised or are part of larger multinational insurance firms with access to significant cross-border financing.

According to the SFC, Colombia is taking a gradualist approach to the implementation of the Solvency II regime. “We are working towards the adoption of Solvency II, but we are going more slowly than Mexico, for instance, to avoid shocks to the market,” Ernesto Murillo, director of operational risk at the SFC, told OBG. “We have already done a lot in terms of strengthening reserve requirements and balance sheets across the insurance sector. In 2017 we envisage further work on themes like assets liabilities management and consumer protection.”

Meanwhile, according to Fitch Ratings’ 2017 outlook for Colombian insurance, “the sector’s regulatory environment is one of the most advanced in Latin America. Regulators continue to gradually align with international standards.”

Outlook

With GDP growth expected to accelerate moderately over the next two years in Colombia from its 2016 lows, and inflation on a downward trajectory from its 8.97% peak to approach the upper end of the central bank’s 2-4% target range by late 2017, there is scope for a medium-term lift in inflation-adjusted growth in premiums.

Similarly, increased investment in infrastructure projects is expected to boost business lines including construction and machinery insurance, as well as surety bonds, once construction is under way.

However, weak consumer confidence, the impact of recent tax reform – notably the hike in value-added tax (VAT) from 16% to 19% – and an expected uptick in unemployment likely mean that inflation-adjusted premium growth will be moderate in the near term. While the VAT is not imposed directly on life insurance, and remains unchanged at 5% on health insurance, it is expected to have an indirect effect on consumer demand by reducing real incomes. Likewise, Fitch views insurance business related to infrastructure projects as a more medium-term play, given delays in project execution.

Increased price competition, particularly in life and auto insurance, can also be expected to weigh on profitability in 2017, while the challenging investment environment (see Capital Markets chapter) could see profits from this source reduced.

Over the longer term, a bigger growth opportunity lies in increasing the penetration rate – currently a little over half the level of that in leading Latin American countries such as Chile – while the eventual ageing of the country’s still relatively young population bodes well for demand for the whole range of insurance products, particularly life and pensions. Increased digitalisation provides the prospect of improved financial inclusion generally, as well as increased insurance penetration in particular.