Future opportunities: New policy changes promise to help sustain sector growth

The insurance sector has consistently outperformed Colombian GDP growth in recent years. A rise in disposable income, an expansion of the formal economy, falling unemployment and gradual advancement on major infrastructure projects have helped push up demand across the spectrum of general and life insurance products. The number of insured has doubled between 2008 and 2011 and, at an average growth rate of 9.6% over the past five years, contributions from pensions and social security policies are raising the industry’s capitalisation to new levels.

BRIGHT FUTURE: The sector has some way to go if it is to unlock its full potential. A moderate penetration rate by regional standards – estimated at 2.3% by ratings agency A.M. Best – bears witness to the industry’s conservative approach, which has concentrated on the narrow upper and middle classes. While this has succeeded in driving premiums in the muchfavoured life segment, mass-market-products can provide underwriters an opportunity to escape the fierce competition at the top end. In particular, microinsurance policies are progressively attracting attention from both insurance companies and regulators.

Besides efforts to expand the market, structural changes in the regulatory framework are on the agenda in a bid to ensure profitability and cushion the fast growth of long-term savings. Market shares have changed little over the past few years, but the sector’s winners in the medium and long term will be those that can most rapidly and effectively adapt to these changes. Another key objective of ongoing regulatory amendments is an increase in financial education among sales agents as well as the wider public.

MARKET STRUCTURE: Looking at premium income, 61% of the market is in the hands of locally owned insurers, in particular well-established multi-line financial institutions. Foreign names like Allianz, Mapfre and BBVA are present but hold smaller shares. Total assets of general underwriters grew by 11.6% over the past year, reaching COP12.56trn ($7.54bn). Going by market capitalisation, the top eight players controlled 78% of the industry, while the remainder was divided among 16 firms, each with shares of less than 5%.

Domestic financial conglomerate Grupo SURA takes the leading position with a share of 12%, followed by Previsora, another Colombian player, which holds 10% of the market, similar to its share the preceding year.

The third and fourth positions were held by US-based Liberty Seguros and German Allianz, accounting for 9.6% and 8.9% respectively, followed by Bolívar, Colpatria, Seguros del Estado and Spanish player Mapfre with individual shares of between 5% and 7%. While no major movements were recorded in 2012, the market saw a new competitor completing its first full fiscal year. Cardinal Compañía de Seguros, a domestic underwriter, began operations in mid-2011 and closed its first year of operations with a capitalisation of COP17.7bn ($10.6m), or 0.14% of the segment.

LONG-TERM LINES: The industry’s 19 life insurance companies posted an increase in total assets of 13.6%, reaching COP25trn ($15bn) by the end of 2012. Similar to general insurance, no significant market movements were recorded over the period, with most incumbents maintaining their 2011 shares. Based on market capitalisation, Colombian-owned Positiva saw its leading share erode slightly from 21.7% to 19.6%.

Other members of the top four – which hold a combined share of 60% – include Grupo SURA (16%), Vidalfa (13%) and Bolívar (11%).

The year 2012 saw the number of private pension fund administrators (PFAs) fall from seven to five as the industry’s two biggest players both consolidated their presence. Grupo SURA, which owns Protección, purchased ING’s pension and insurance operations in five Latin American countries, including Colombia.

Another major acquisition involved Grupo Aval, owner of PFA Porvenir, which purchased BBVA’s pension branch, Horizonte. At present, the industry consists of five PFAs, of which two are foreign. By the end of 2012, Protección represented 36% of the market, while Porvenir came second with 27%. Horizonte occupied third position with 14.9%, while Colfondos, part of Canadian lender Scotiabank, and Skandia, belonging to South Africa’s Old Mutual Group, closed the ranks with 12.9% and 7.3% respectively.

In recent times, the Ministry of Finance has criticised the fact that Grupo SURA and Grupo Aval hold nearly 80% of the market and called for new regulations to increase competition. Asofondos, the association for PFAs, has defended the industry’s recent consolidation by stating that a higher number of contributors per administrator allows for lower administrative costs, to the benefit of the entire system.

OTHER PLAYERS: In May 2013, the Colombian Financial Superintendent (Superintendencia Financiera de Colombia, SFC), which regulates the insurance sector, registered 39 licensed brokers. While the majority of players are domestic, international companies lead the segment. As such, US-based Marsh holds the largest market share, with 24%, followed by UK player Aon at 12%. Third in line is the UK’s Willis, with 10%, while the fourth place is shared between Colombia-based Helm and Cooper Gay of the UK, with each controlling 5.9%.

In the reinsurance segment, 24 entities are currently operating, including established international companies such as Munich Re, Willis Re and Aon Re. In addition, at the start of the year 2013, Swiss Re announced it had applied for a licence to re-open a representative office that the firm decided to close in a global restructuring three years ago. Despite the presence of numerous reinsurance firms, the majority of risk is ceded outside of the country.

SECTOR GROWTH: According to the Federation of Colombian Insurers (Federación de Aseguradores Colombianos, Fasecolda), total premiums grew by 13% from COP14.08trn ($8.45bn) in 2011 to COP15.96trn ($9.58bn) in 2012, down from strong growth the year before, but a significant rise compared to 2010 and 2009 when respective growth rates of 6% and 10% were booked. General underwriters accounted for the lion’s share of premiums at a value of COP8.6trn ($5.16bn), which represented an increase of 11% on the previous year. Concentration by business line in the general segment is moderate. Similar to previous years, car insurance was the segment’s biggest contributor at 27.5% of premiums, up by 6.2% on the previous year, despite a drop in new car sales. A rise in tariffs linked to minimum wages and the number of policies saw premiums on mandatory third-party car insurance – abbreviated to its Spanish acronym SOAT – record a total of COP1.3trn ($780m), representing an annual increase of 15%. High growth was also recorded in civil liability at 22% over the year, followed by fire, which grew by 18%. Performance bonds (named seguros de cumplimiento) performed well despite a near 80% drop in public contracts, as these will take two to three years to show their impact on premiums.

Social security, including pensions, generated premiums worth COP3.9trn ($2.34bn), 15% higher than the previous year and a quarter of the sector’s total. Key drivers in this segment were rate growth, an increase in minimum wage, labour market formalisation, a drop in unemployment rates, and the strong performance of the mining and construction sectors, which increased demand for labour risk insurance.

“Our social security system is particularly successful and has contributed to ensuring the provision of needs to a wide portion of the population, as shown by the extensive coverage achieved by occupational risk insurance,” Myriam Dueñas Mesa, the president of Colmena vida y riesgos profesionales, told OBG.

Meanwhile, the life segment accounted for COP3.4trn ($2.04bn), constituting 21% of total premiums. Group life was the primary business line of this segment, accounting for 49.8% of segment premiums and posting an 18% growth rate for 2012. Voluntary health premiums came in second at a total of COP849bn ($509.4m), 14% more than in 2011. Individual life and personal accidents both accounted for 15% of the segment’s total and reported healthy growth figures of 8% and 14% respectively.

PENSIONS: Pensions are administered by public and private systems. While the public model incorporates more than 6.5m members, about a quarter of the entire system, contributions are minor at less than 4% of the total. This is largely due to a 70% share of members that lack the means to contribute. The private system – consisting of an obligatory and voluntary scheme as well as a severance fund – holds a larger share of the population as well as total contributions. By the end of 2012, 10.5m members were subscribed in the compulsory system, while 5.6m of these contributed towards severance funds and 669,000 to the voluntary scheme. “There are almost 6m Colombians making periodic contributions to private pension funds. That represents COP100bn ($60m) in savings and a potential for the insurance industry in the form of vital income,” the president of Positiva, Gilberto Quinche Toro, told OBG. In all, assets under management grew by 17.5% to COP145trn ($87bn). Of this, COP126trn ($75.6bn) was contributed to mandatory funds – up by 21% on the previous year – COP12.2trn ($7.32bn) went to voluntary funds and COP6.47trn ($3.88bn) to severance funds. Despite a rise in total contributors, this growth was largely due to an increase in the asset valuation of portfolios.

Since May 2011, mandatory contributions can be allocated to either a moderate-, conservative- or highrisk fund. Accounting for 92% of all mandatory allocations, the default moderate fund leads the way, explained by both risk aversion and inactiveness on the part of the contributors. The conservative fund holds 6.2% of obligatory contributions, with the remainder going into the high-risk fund. The risk profiles are largely limited to investments in two main asset classes, fixed income and equities, with minor shares in deposits and private capital funds. While private and public debt titles occupy the largest share of investment classes for the conservative and moderate funds, 76% and 47% respectively, the high-risk profile distinguishes itself by a dominant share in equities.

The existing regulations allow for investments in foreign private and public equity, although investments have been predominantly focused on the national capital markets. This has helped shield Colombian PFAs from the full effects of the 2008-09 financial crisis, although policy makers are now encouraging an increase in foreign exposure. In April 2013, Finance Minister Mauricio Cárdenas Santamaría called on PFAs to diversify their investments towards foreign-based assets in a bid to support the central bank’s efforts to alleviate the rising pressures on the currency.

CLAIMS: Despite a rise in claims from COP6.37trn ($3.82bn) in 2011 to COP7.19trn ($4.31bn) in 2012, its share of accrued premiums dropped from 63% to 62%, according to figures from Fasecolda. Performance is healthy for the general insurance and life insurance segments, where claims constitute about half of accrued premiums, with both factors growing at similar rates. One notable discrepancy is the level of claims on social security policies, which maintained their excess levels, closing the year at 103% of accrued premiums. Some improvement in product categories could be noticed, such as in pensions, which saw claims fall from 121% to 108% of premium value. Nevertheless, this was predominantly due to rapid premium growth and masks a structural mismatch between long-term assets and liabilities.

COMBINED RATIOS: Despite the comfortable margin between premiums and claims for most product categories, the sector’s technical result remained negative, putting the onus of sector profitability on investment returns. Overall, the sector booked a technical loss of COP1.26trn ($756m) in 2012, down from a loss of COP1.07trn ($642m) the year before. This deterioration occurred despite the absence of major industry setbacks such as that seen in the fourth quarter of 2010 and the first quarter of 2011 when winter flooding caused losses of some $600m. In 2012, non-life insurance made a loss of 3%, while overall performance of social security products deteriorated by 43% compared to the year before. The only segment that showed improvement in its combined ratio, albeit marginal, was that of life (2%).

One reason for this is the high level of costs underwriters are facing. By far the biggest cost contributor was sales commissions, whose growth exceeded that of premiums. This bears witness to the large weight of the brokerage network, which generates an estimated 70% of total premiums. In 2012, commissions to intermediaries per premium were 13% for life products and 11.7% for general business. Meanwhile, general costs per premium increased from 28.2% in 2011 to 30.6% for life insurance, while that for general business stabilised at just over 25%.

As well, the ongoing growth in long-term product lines such as life annuities is causing companies to increase their reserves. In 2011, total reserves reached COP25.6trn ($15.4bn), a rise of 10% on 2011. This is set to increase as limited growth of suitable longterm investment options reduces companies’ ability to invest premiums. “The lack of investments with proper life spans and yields to match the growing portion of long-term technical reserves may pressure [the sector’s] results going forward,” Fitch, a ratings agency, said in its 2012 report on the sector.

INVESTMENTS: Investment returns are therefore essential to ensuring the sector’s profitability. Sound growth was recorded in 2012, as total returns rose by 57% on the year, reaching COP2.48trn ($1.45bn). Similar to investment portfolios throughout the Andean region, almost 80% of the investments are focused on debt instruments, which continue to attract much attention by guarantee-seeking asset managers. This trend was further spurred by reductions in the policy rate over the course of 2012.

Nevertheless, at around 15% of investment portfolios, Colombian underwriters hold a substantial portion in equities, compared to neighbouring countries. Helped by a recovery of the Colombian stock exchange, which climbed 16% over the course of 2012, the sector’s equity holdings generated returns of 12.6%, a notable improvement from 2011, when a 5.8% loss was registered. The highest overall investment returns were booked in the life segment – including pensions and social security – where COP1.95trn ($1.17bn) was generated in 2012 compared to COP1.2trn ($720m) in 2011. In the general segment, returns rose to COP525bn ($315m), up from COP351bn ($210.6m) the year before. Of this amount, 65% came from debt instruments; this was a notable change from the year before when the investment class accounted for 82% of returns. The share of returns on equity investments doubled, reaching 24%. Despite the dominance of fixed-income classes, investments in shares grew by 24% for 2012, compared to 12% the year before.

The industry’s reliance on investment returns for short-term profitability remains a key concern. In its 2013 outlook on the sector, Fitch cautioned that, although economic growth fundamentals are sound, the combined ratio may deteriorate as a result of the competitive environment and low prices, especially in automotive and property insurance.

The government and PFAs are working to create a new class of infrastructure bonds, although final details were unavailable at the time of publication. The government is keen to let pension funds help raise more than $22bn of funding for the so-called fourth generation infrastructure concessions, involving 30 new infrastructure projects. With many details up in the air, the government has already indicated the duration of bonds will likely be 25 years, with yields close to those on fixed income.

A new law on public-private partnerships is also planned to increase scrutiny on the allocation and execution of concessions, overseen by a dedicated infrastructure development agency. This proposal has caught the attention of financiers as public project funding has often been marred by fraud, corruption and mismanagement. Nevertheless, as infrastructure bonds are likely to apply to the management of concessions, not the construction phase, they are not expected to come on stream until 2015.

REGULATORY REFORM: The SFC is in the advanced stages of implementing reforms covering the calculation of technical reserves and upgrading provisioning levels to global standards. While upcoming plans will address various facets of current accountancy guidelines, the most far-reaching amendments will involve the implementation of reserve requirements for premium insufficiency, which is a growing problem in automotive policies and surety bonds in particular. The measures are taken in light of plans to implement International Financial Reporting Standards by 2016 and are aimed at underscoring the traditionally strong reputation enjoyed by Colombian underwriters. This was confirmed during the recent global financial crisis when, in contrast to developed markets, Colombian financial institutions strengthened their solvency margins, reaching levels of 12% to 13% against a regulatory minimum of 9%.

A review of the reserves regime is part of a wider range of reforms and policy amendments scheduled for 2013 and 2014 (see analysis), which includes a close look at health coverage. After implementation of a mandatory health care system, access to public health care has risen from 20% to 80%. However, premiums have not risen in line with claims, putting a drain on public funds. While details were yet to be published at the time of writing, a reform of the health care system, including insurance, is on the cards.

Also on the agenda is the opening of the sector to previously banned providers of international transportation risk covering maritime, aviation and satellite traffic. Besides foreign underwriters selling their products in Colombia, the measure will allow Colombians to shop abroad for a variety of policies and will be paired with guidelines on the disclosure of product details that will allow consumers to better compare the domestic and foreign offerings.

In addition, the SFC is undertaking efforts to adopt rules and regulations specific to microinsurance.

Despite the segment’s strong growth in recent years, there is not yet a definition in current legal statutes and therefore this remains a grey area for underwriters. As part of a concerted effort involving Fasecolda and GIZ, a German development organisation, the SFC is outlining rules and regulations specific to microinsurance. Besides a strategic growth area, microinsurance is considered a fundamental pillar for an increase in penetration figures (see analysis). “The keys to greater penetration into the Colombian market are education and the creation of products for each of the various socio-economic strata,” Mauricio García Ortiz, president of Liberty Seguros, told OBG.

Ratings agencies, including Fitch and A.M. Best, have called for an increase in actuarial capacity, which is estimated at fewer than 120 professionals. The agencies have called for the introduction and promotion of more actuarial programmes at Colombia’s universities as well as a plan to develop a self-regulating actuarial profession that oversees actuarial standards, accreditation and evaluation of members.

Although it doesn’t feature on the regulator’s ambitious agenda, calls for the introduction of more mandatory policies have become more frequent. At present, SOAT is the only obligatory insurance line, which, according to some underwriters, goes against the regulator’s commitment to increase penetration. As Jose Luis Plana Villarroel, president and CEO of Aon Risk Solutions Colombia, told OBG, “The country needs more obligatory insurance to accompany the economy’s growth. For example, with increased car sales and the ensuing rise in road accidents, the country should consider adopting obligatory civil liability insurance. Besides the benefits for the public, this would also help drive insurance premiums.”

TAX REFORM: A tax reform introduced at the start of 2013 has resulted in changes for employer contributions to social policies. Under the old system, employers paid up to 58% of salaries to help fund the public health system; the National Apprenticeship Service, a government-owned training institute; and the Colombian Public Welfare Institute, which oversees welfare allocations. This acted as a disincentive to formal employment for many companies, indirectly contributing to Colombia’s ranking as the region’s largest informal economy. Under the new scheme, companies will pay lower contributions determined by variables such as gross revenues and number of employees. This has led to an overall drop of taxes of 13.5% of turnover to 9% until 2015 and 8% thereafter.

OUTLOOK: The insurance sector is expected to continuing growing in line with economic and social development. Key drivers will include governmental efforts to tackle the infrastructure deficit, a rise in disposable income available for voluntary pensions, and increasing demand for life and micro policies by Colombia’s growing middle- and lower-income groups. According to A.M. Best, total premiums are set to reach COP20.3trn ($12.18bn) by 2016, an increase of 27% on 2012. Furthermore, industry efforts to grow large-scale, low-premium policies and diversify distribution channels will help increase market penetration.

Besides a low penetration rate, insurance per capita is also behind the region’s average. According to Fasecolda, Colombians spend an average of $163 per annum on insurance products compared to $261 for the region and $3500 for North America consumers, indicating a strong potential for a widening and deepening of the domestic insurance culture. Growth is also expected to come from new product classes as a result of government incentives as well as fierce competition in conventional areas. One such example is agricultural insurance, which is being incentivised by a reduction of value-added tax from 16% to 5% and distributed en masse by the government with the aim of ensuring farmers’ losses are covered in case of adverse weather conditions. This will equally encourage higher coverage of natural disasters such as floods, droughts and earthquakes. “The name of the game now is diversification. If you want to make a return, you have to take a risk,” Manuel Francisco Obregón, president of Chubb Colombia, told OBG.

Another issue is the growing mismatch between long-term assets and liabilities. Risks are higher in Colombia due to adjustments to the minimum wage and to the technical interest rates needed to guarantee minimum profitability. Companies must also increase their reserves in order to cushion the effect of unallocated funds. To alleviate this, momentum must be sustained on the creation of new long-term asset classes and foreign exposure should be optimised. The regulator’s reform agenda is set to strengthen the industry as well as uphold the sector’s sound reputation among international ratings agencies.