Increase in premium highlights potential of Mexico's insurance sector

Mexico is very much a multi-risk insurance market. In addition to natural disasters such as earthquakes, active volcanoes, hurricanes and tsunamis, high levels of organised crime in certain parts of the country pose a constant risk to individuals and property. Despite this high potential for growth, the sector’s development has been held back by disappointing economic growth in recent decades. Around 50% of Mexico’s 129.5m-strong population still live in poverty, making them effectively shut out of the market for formal financial products. In 2018, 47% of the adult population had a bank account, while 31% had access to credit.

As a result, many Mexicans do not yet recognise the potential value of insurance products. “Policymakers believe that the real issue is a lack of social understanding of the importance of insurance, when in reality most problems are economic and not necessarily social,” Marcelo Hernández, CEO of AIG Seguros México, told OBG. “If people live in poverty, they do not have the means to insure their houses, cars and lives. If we can raise the level of economic security in the country we will also boost insurance penetration,” he said.

Structure

At the end of 2018 the insurance market comprised 98 insurance institutions as well as a further 13 in the surety segment. More than half of the firms operating in the sector were under majority foreign ownership, at 57 out of a total 111, and eight were part of a wider financial holding group. Of the remaining 54 domestically owned companies, 10 were part of financial holding groups. A total of 36 firms were authorised to operate in both the life and non-life segments, while 59 solely provided non-life products and 16 offered life products.

In addition to the smaller surety segment, 24 insurers also confined their operations to relatively narrowly defined niches. In 2018 there were nine pension funds, nine health insurers, four companies offering financial or other forms of guarantees, and two mortgage insurers. The 111 firms operating on the market in 2018 was a slight increase on 2017, when there were 109 insurers, but a decline compared to 2014 when the sector peaked with a total of 121 companies. In recent years there has been a degree of consolidation as some smaller players have merged or been acquired by larger firms, and others have exited the market.

Sector Breakdown

Despite the large number and diversity of providers, the sector remains relatively concentrated. The five largest insurers in 2018 accounted for 43.5% of the market, only a modest decline in their collective market share since 2012, when they accounted for 45.1% of the market. This is mirrored in the decline in the sector’s Herfindahl-Hirschman Index score – used by economists to measure industry concentration – from 6% to 5.5% over the same period.

In 2018 the largest insurer was Metlife México, although the firm saw its market share decrease from 11.9% in 2017 to 11.6%. It was closely followed by Grupo Nacional Provincial (GNP) Seguros with 11.3%. The fastest-growing company in recent years has been BBVA Seguros (formerly known as Seguros BBVA Bancomer), which increased its market share from 4.4% in 2017 to 7.5% in 2018, jumping from the fifth-largest to the third-largest insurer in the space of one year. BBVA Seguros is the insurance arm of BBVA México (formerly BBVA Bancomer), the country’s largest commercial bank. The fourth- and fifth-largest insurers in 2018 were AXA Seguros and Quálitas Compañía de Seguros, with a market share of 7.0% and 6.1%, respectively.

Oversight

The National Commission of Insurance and Surety is responsible for overseeing and regulating the sector. Its roles include authorising intermediaries, monitoring intermediaries’ solvency, ensuring compliance with legal responsibilities and sanctioning offences. The new Insurance Law came into force in April 2015, setting the scene for the sector to abide by the EU’s Solvency II regulations, raising capitalisation rates and improving corporate governance. The initial implementation of the law in 2015-16 proved challenging for insurers in Mexico, but by 2018 the transition was complete. Although higher capitalisation improves the sector’s resilience to economic shocks, it also reduces the need for insurers to hold high margins in reserve, thereby improving profitability and releasing resources for productive investment.

“Compliance is more challenging for smaller players, which is driving consolidation in the sector,” Gustavo Méndez, partner and financial services leader at Deloitte México, told OBG. “At the same time, optimising capital remains a challenge, partly because insurers’ legacy infrastructure does not provide an adequate information base to allow resources to be shifted to more profitable activities,” he added.

In May 2017 the International Accounting Standard Board issued the International Financial Reporting Standards 17 (IFRS 17), the new global regulatory framework for insurance accounting. IFRS 17 particularly affected European insurers active in the Mexican market and firms with long-term insurance products such as life assurance. “Implementing IFRS 17 is both a challenge and an opportunity,” Méndez told OBG. “Although it will raise compliance costs, it will also help insurers to better understand long-term contracts, allowing them to optimise risk and profitability.”

Performance & Size

Insurance premium in 2018 totalled MXN543.7bn ($28.1bn). Direct premium accounted for 98.3%, or MXN534.6bn ($27.6bn), while the remainder was made up of reinsurance and refinancing operations. In 2018 direct premium increased by 3.2% compared to the previous year. However, taking into account the renewal of the two-year non-life insurance policy issued to the national oil company Petróleos Mexicanos (Pemex), in June 2017, the real year-on-year increase in premium was 5.4%.

According to the “World Insurance Report” published by international reinsurer Swiss Re, premium density in Mexico was $209 per capita in 2018. The country ranked 60th out of 88 countries, just ahead of Colombia ($188), but less than one-third the level in Chile ($747), less than half the level of Uruguay ($429) and trailing Brazil ($345), Argentina ($271) and a number of other regional peers. In terms of insurance penetration, Mexico ranked 59th globally with 2.2% of GDP, compared to 4.6% in Chile, 3% in Brazil and 2.4% in Argentina.

Financial Performance 

Total profits across the insurance and surety sector amounted to MXN22.4bn ($1.2bn) in 2018, equivalent to 4.1% of premium issued. In real terms, this was an increase of 231.9% compared to 2017, when the sector generated MXN6.4bn ($330.9m). This considerable rise in profitability can be attributed to the fact that overall premium experienced real-term growth of 5.4%, while costs rose at a slower pace: claims costs increased by 3.6%, operational costs by 3.3%; and acquisition costs by 1.9%. Meanwhile, technical reserves across the sector experienced real-term growth of 0.6%, reaching MXN1.2trn ($62bn).

Life

As the population has become more educated about the benefits of life insurance products, this segment has become increasingly dynamic. This is an impressive feat given the relatively weak economic climate in Mexico in recent years. However, in 2018 real wages began to recover as inflation fell from a 20-year high in late 2017, and nominal wage growth was relatively robust. In 2018 life insurance products generated MXN218.6bn ($11.3bn) and accounted for 40.9% of total direct premium, making it the largest segment. Life cover was also the second-fastest-growing insurance product, increasing its profits by 7.7% in 2018.

Within the segment, individual life insurance policies contributed 6.8 percentage points, while group life insurance policies accounted for 1.2 percentage points. However, premium on collective policies decreased by 0.3 percentage points. In 2018 Metlife México was the largest player in the segment with a 22.8% share of the market, followed by BBVA Seguros (15.2%), GNP Seguros (11.2%), Citibanamex Seguros (10.5%) and Seguros Monterrey New York Life (9.3%).

The fastest-growing life segment in 2018 was pensions, which increased by 8.2% in real terms. In addition, the number of individuals with a pension plan increased by 11.9% over the same period, from approximately 20,850 to 23,341. However, this still only represents a small section of the population. As a result, pension plans remain one of the smaller insurance segments, accounting for only 4.5% of all direct premium.

Pensions are also the least competitive segment, with the four largest players accounting for almost the entirety of the market. The largest player is Pensiones Banorte, with a 42.9% share, followed by Profuturo GNP Pensiones (26.4%), Pensiones BBVA (25.0%) and Pensiones Sura (5.5%). In addition, Citibanamex held a 0.1% share in 2018, with the remaining providers collectively accounting for 0.1% of the market.

According to stakeholders in the sector, the segment remains relatively small in Mexico as there is a clear discontinuity in uptake across the country’s workforce. As a result, the market has not yet developed a long-term sustainable pension system. The gradual formalisation of the labour market should support the segment’s growth over time, but weak economic conditions may affect pension saving in the near term.

The accident and illness insurance segment experienced real-term premium growth of 6.4% in 2018, accounting for 16% of all direct premium. The largest provider was GNP Seguros, with a market share of 21.9%, followed by AXA Seguros (17%), Metlife Mé xico (14.2%), Seguros Monterrey New York Life (10.3%) and Seguros Imbursa (4.5%), with smaller companies collectively making up the remaining 32.1%.

The change in national government in late 2018 had a profound influence on some life insurance segments as austerity policies introduced by the new administration put an end to private health coverage and individual separation insurance (seguro de separación individualizado, SSI). Metlife México, the sole provider of SSI policies – which insure government workers against income loss from leaving employment – lost out on a contract worth $239m in 2018. These austerity measures are expected to reduce premium growth in 2019 by 0.8%, while Swiss Re estimated that the changes will shrink the life segment by 2%.

Non-life

In 2018 the non-life segment experienced a decline of 3.2%, with total premium worth MXN195.7bn ($10.1bn), compared to around MXN202bn ($10.4bn) the previous year. However, this figure is distorted by the fact that one of the largest insurance contracts in the country, taken out by Pemex, is renewed every two years. With this taken into account, the segment’s real year-on-year growth was around 1.8% in 2018. Although it is not growing at the same pace as the life segment, this is nonetheless a promising result given slow economic progress in the country. The only nonlife segments to record positive growth in 2018 were loan insurance and automotive insurance, which posted real-term growth of 6.6% and 2.1%, respectively.

In 2018 the largest player in the automotive insurance segment was Quálitas Compañía de Seguros, which held a 29.9% share of the market. It was followed by GNP Seguros (12%), Chubb Seguros (10.6%), AXA Seguros (9.0%) and HDI Seguros (7.0%), with the remaining 31.5% made up of a number of smaller firms. Chubb Seguros and HDI Seguros saw the largest gains in market share in 2018, contributing 1.3 percentage points each to the sector’s 2.1% growth. Recent legislative changes are likely to support the segment’s continued expansion. In 2019 a new law was introduced requiring that all cars travelling on federal roads have civil liability insurance against third-party damage. Any driver that is found to not be insured is subject to a fine of between MXN2000 ($103) and MXN4100 ($212).

However, reflecting the broader economic environment, most non-life segments saw annual premium contract sharply in 2018. Non-automotive property insurance, one of the most competitive segments, saw total premium decrease by 9.3%. Nevertheless, it remains one of the more profitable insurance products, with total costs amounting to 72.5% of premium income in 2018, albeit compared to 69.4% in 2017. Fire insurance premium also fell by 13.7%, while the worst-performing segment in 2018 was maritime and transport insurance, which contracted by 26.6% in real terms.

In mid-2019 the country’s largest non-life insurance contract was awarded to Mapfre Mexico for the third consecutive two-year period, covering damages experienced by Pemex through to mid-2021. In 2017-19 the contract amounted to $546m, up from $423.3m in 2015-17. The value of the 2019-21 contract had not yet been announced as of September 2019, but it is not expected to rise significantly due to the current weakness of the hydrocarbons sector.

Health Insurance

In 2018 health insurance accounted for 2.3% of GDP, considerably less than the OECD average of 8.9%. Around 60% of the population, or 80m people, have access to health insurance under the Mexican Institute of Social Security, which is offered to those in formal employment. However, the private health insurance segment is still underdeveloped, with around 8% of the population covered by private plans – the majority of which are over the age of 40. According to the Mexican Association of Insurance Companies (Asociación Mexicana de Instituciones de Seguros, AMIS), families covered by private health insurance spend an average of MXN35,000 ($1810) on coverage per year. As the minimum wage is around MXN102 ($5.30) per day, private plans remain inaccessible to a large proportion of Mexicans. In addition, the segment is limited by a lack of investment in medical technology. “The reimbursement mechanism is deficient in Mexico, as the government does not invest enough in medical devices for public laboratories,” Carlos M Hernández Álvarez, managing director of biomedical firm Beckman Coulter, told OBG. “The industry is dependent on government spending, and there is uncertainty about how much investment will come from public institutions.”

Surety 

Accounting for 2% of total premium in 2018, or MXN10.7bn ($553.3m), the surety segment was not as dynamic as the broader insurance sector, with a 3.9% real-term increase on premium compared to 2017. However, the segment remains highly profitable, with costs totalling 64% of premium in 2018, up from 59.3% the previous year. The market is relatively concentrated; of the 13 companies operating in 2018, the five largest firms held a market share of 80.1%, up slightly from 79.2% in 2012. The top-five firms were ACE Fianza Monterrey, with a 22.5% share, followed by Fianzas Guardiana Inbursa (18.9%), Aseguradora Aserta (18.5%), Afianzadora Sofimex (14.2%) and Fianzas Dorama (6%). The remaining 19.9% was made up of smaller firms, such as Berkley International Fianzas, the fastest-growing surety provider in 2018. The firm accounted for 1.8 percentage points of the segment’s total expansion.

Alternative Distribution

The insurance sector is in the early stages of a digital transformation. In recent years a large number of smaller insurance technology (insurtech) firms have entered the market. This is expected to improve the offerings available to existing clients, as well as broaden access to insurance. In particular, it is hoped that insurtech will encourage the uptake of micro-insurance products among low-income households and small businesses. In turn, this should enable Mexico to keep up with its regional peers in terms of insurance penetration. “The intelligent use of data is essential for insurers to remain competitive,” Federico Prozanti, director of risk at credit risk and surety firm Solunion, told OBG. “Many insurance companies now use sophisticated technology to analyse their clients’ needs and create tailored products.”

According to AMIS, around 20% of Mexicans that are insured are millennials, with this proportion expected to rise in the coming years. Young people generally prefer to access insurance contracts remotely, often using mobile phones. They are also more interested in some products that are not as popular with the older generation, such as insurance for pets, bicycles, travel and electronic devices, as well as life insurance. This rapidly growing market segment therefore offers great potential for both new insurtech companies and established players to deliver new and tailored products. “For a variety of reasons, insurance policies for niche products are becoming increasingly popular,” Felipe Sánchez, president of Assurant México, told OBG. “These include cover for specific high-value items such as watches and handbags, content insurance for vehicles and – due to Mexico’s uncertain security situation – even cash insurance after using an ATM.”

Reinsurance 

The reinsurance and refinancing segment accounted for 1.7% of total premium in 2018, down 0.07 percentage points compared to the previous year. Approximately 67.8% of all reinsurance premium comes from the damages segment, down from 71% in 2017. Annual premium in the life segment remained the same over this period, at 5.1%, while accident and emergency reinsurance decreased its share slightly, from 6.5% to 6.4%. The only segment that witnessed an increase in its market share in 2018 was auto reinsurance, which grew from 5.8% to 6.6%.

Outlook

Although the sector’s medium-term growth is likely to be impeded by weak economic conditions, AMIS forecast that total premium would rise by 3.4% in 2019. However, downgrades in growth forecasts since then suggest that this estimate may be optimistic. This is likely to weigh most heavily on the non-life segment due to the impact of fiscal austerity on government spending. The life segment, meanwhile, is expected to continue to perform well, but its expansion will still be constrained by the weaker labour market.

In the longer term, economic recovery and increases in real wages are expected to gradually reduce poverty rates and broaden the potential market for both life and non-life plans. With insurance penetration still only around half the level of the more advanced Latin American countries, there is significant scope for growth in the years ahead. The country’s young population holds potential for increased uptake of insurance products, while the rise of insurtech and micro-insurance will further support the sector’s development by enabling insurers to provide tailored products, especially for rural and unbanked populations.

The trend towards consolidation is expected to continue as smaller insurers are acquired or merge with competitors. While there is little reason to expect a dramatic change in market concentration, large firms are well placed to leverage their scope for cross-selling financial products in order to bolster their market share.