Mexico's insurers enhance distribution channels to increase penetration rates

With high levels of employment in the informal sector and a significant section of the population living in poverty, Mexico has traditionally been a challenging market for insurers. Added to this, a high level of exposure to earthquakes, hurricanes and other natural disasters presents a permanent issue for insurance firms. This was highlighted in September 2017, when two powerful earthquakes hit the country over a two-week period, causing considerable damage. These incidents brought added scrutiny to the sector, highlighting the challenge of low penetration levels, as well as inadequacies in the manner in which some insurance products are structured. Despite this backdrop, the Mexican insurance market presents significant opportunities. The economy has been growing at a steady pace, and the government and the private sector have invested heavily in the upgrade and expansion of the country’s infrastructure. Furthermore, increased prosperity is bringing with it a rising awareness of the value of insurance, while the expansion of smartphone usage and the lowering of telecommunications prices is opening up new distribution channels for insurers, reducing customer acquisition costs. Innovation is coming from both new financial technology (fintech) firms operating in the sector, as well as from traditional players that are increasingly utilising technology to improve services and reduce costs. These growth factors are supported by recently implemented regulatory reforms, which have changed reporting standards for insurers.

Expansion Effort

While the sector’s growth potential is high, penetration rates remain comparatively low. Despite a population of 123.5m, insurance penetration was 2.3% of GDP in 2017, equal to that of Costa Rica, but behind countries like Brazil (3%) and Chile (4.2%), according to data from the professional services firm EY. This underscores both the challenges faced by Mexican insurance firms and the room for development in the sector. Besides providing protection for consumers and their property, cultivating broader insurance penetration could also help improve other areas, such as rule of law. “In several countries, to open a business, for example, you require insurance, and by having it you are already in compliance with several regulations,” Jorge Jiménez, insurance specialist at Deloitte, told OBG. “In Mexico there is an excessive amount of regulation to open that same business, but no compulsory insurance to abide by. The more prevalent insurance becomes, the less administrative regulations are needed and the less corruption you are likely to have,” he added.

Key Figures

In terms of premium growth and profitability, 2017 was a successful year for the industry. According to the Insurance and Surety National Commission (Comisión Nacional de Seguros y Fianzas, CNSF), total sector premium for 2017 reached MXN490.6bn ($26.5bn), a 9.6% nominal increase on the MXN447.6bn ($24.2bn) collected in 2016. Meanwhile, sector profits totalled MXN47.2bn ($2.6bn), up 22% in nominal terms on the previous year. Just under 2% of the real growth in premium was driven by the renegotiation of the two-year insurance policy covering the state-owned oil firm Petróleos Mexicanos.

However, increased insurance penetration in other segments also contributed to growth, with maritime and transport insurance expanding by 37.1%, and fire insurance up 20.4% over the same period. At the end of 2017 life insurance made up 39.8% of total premium, followed by auto insurance (21.3%), non-auto property insurance (18.7%), health insurance (15.8%) and pensions (4.4%). The average cost of claims as a proportion of premium income has also risen from 73.2% in December 2016 to 77.3% one year later. This was particularly notable in certain segments, with the cost of claims increasing from 85.1% to 92.6% in the life segment. Nevertheless, the low level of coverage in the country was highlighted by the extensive damage resulting from two major earthquakes in September 2017.

In Mexico City, where damage was extensive, only around 8% of homes were found to be insured, according to the CNSF. Significantly, some of those who expected to be insured against property damage were frustrated by the inadequate coverage provided by some of the market’s housing protection policies.

Market Structure

The number of operators in Mexico’s insurance sector has remained relatively constant in recent years. A small reduction between 2014 and 2017 saw the total number of insurance companies go from 105 to 98, according to the latest figures by the CNSF. Of these, 52 providers were majority-owned by foreign companies, highlighting the market’s ability to attract international players.

Although sector regulators have at times expressed uneasiness with the level of market concentration, this indicator has, nevertheless, improved over recent years. At the end of 2017 the five biggest players – Metlife, GNP, AXA, Quálitas and Monterrey – had a 43.1% share of total market premium, down from 46.1% in 2016. Despite this, market concentration levels are markedly higher in some areas. In the life insurance segment, the top-five firms – Metlife México, Banamex, Grupo Nacional Provincial (GNP), Monterrey New York Life and BBVA Bancomer – had a 67.1% market share, The top-two firms, Metlife México and Banamex, together held a plurality – 37.9% – of the market, with 24.7% and 13.2%, respectively. A higher level of concentration was found in the accidents and diseases segment, where six firms accounted for around 70% of premium.

Regulatory Changes

The Mexican insurance and reinsurance sectors are overseen and regulated by the CNSF. The highest priority for regulators in recent years has been the strengthening of the financial and governance structures of the industry.

The sector is gradually experiencing the impact of the Insurance and Surety Institutions Law (Ley de Instituciones de Seguros y Fianzas, LISF), which came into force in 2015 and was followed by a two-year implementation period. The regulation was first introduced in 2013, with a package of secondary laws approved in 2014. The regulation is designed to raise solvency standards and provide a new corporate governance framework for Mexican insurers. The law adopts best practice established by the Solvency II insurance industry regulatory standards developed by the EU, and is considered one of the most advanced frameworks in Latin America. “The new law rewards the good performance of companies,” Juan Ignacio Gil, vice-president of insurance at Peña Verde Group, told OBG. “By controlling risk, capital requirements are lower.” Under the previous regulatory regime, the quantification of capitalisation levels was based on risk-based assets, which could lead to over-capitalisation. The LISF rules allow insurance companies to use the best-estimate liability technique, establishing a more direct link between risk and the necessary reserves to cover them. This is expected to free up capital for investment and contribute to the overall capitalisation of the sector. The law has strengthened the industry’s capital position; in mid-2017 the combined capital of companies in the sector reached MXN210.9bn ($11.4bn) after having already undergone a 23% increase in 2016.

Good Governance

The new rules are also likely to improve corporate governance of the sector. New auditing requirements are set to bring greater transparency as insurance regulators can now demand clarification regarding measures taken by market players.

While the implementation process has been largely successful, some companies have experienced challenges along the way, including technical errors in the reports of some firms. As a result, the CNSF refrained from publishing quarterly industry reports during the first half of 2016 in an effort to avoid generating misunderstandings in the market. Regulators cooperated with industry firms in order to improve reporting standards throughout 2016, which allowed the market to return to its normal transparency and disclosure standards by early 2017. Despite these initial adaptation challenges, the new reporting rules are expected to make the management of insurers more professional and transparent.

Life Insurance

Better governance and improved risk management is expected to contribute to growth in all segments of the market. Chief among these is the life insurance segment, which accounts for over a third of premium, although its relative weight has seen a reduction from 42.6% of total premium in 2016 to 39.8% in 2017. At the end of 2017 the life insurance segment registered a 4.2% decrease in real terms, although results were partly shaped by inflation and the annualisation of premium. “Life insurance continues to show the most growth potential, through new products and new ways to capture investment,” Jiménez told OBG. “Many companies have shifted their focus away from traditional insurance segments and moved their resources towards life insurance and savings.”

Auto

Although auto insurance provides a gateway product in several developing markets around the world, it does not have the same role in Mexico, and continues to have a low penetration rate. According to the Mexican Association of Insurance Companies (Asociación Mexicana de Instituciones de Seguros, AMIS), only around 30% of the country’s vehicle fleet had up-to-date insurance in 2017. However, penetration rates vary across different states, with 60% of vehicles being insured in Mexico City in 2017, more than three times the number in neighbouring Mexico State, where only 17.3% were insured. In spite of this, auto insurance is the second-most valuable segment, accounting for 21.3% of total premium in 2017, a slight increase from 20.6% in 2016, according to the CNSF.

The lack of adequate enforceable legislation to make auto insurance compulsory is part of the reason why the segment’s penetration remains low. Regulations establishing mandatory insurance for vehicles using federal roads, bridges and motorways were brought into effect in September 2014. The regulation was first introduced to cover vehicles from 2011 onwards, with the government aiming to enlarge its reach to cover all vehicles by 2019. Furthermore, a law making auto insurance compulsory for vehicles driving within Mexico City also came into effect in January 2016, setting a requirement for a basic civil responsibility insurance for third-party coverage with a total liability of MXN250,000 ($13,500). The legislation carried with it a penalty for non-compliance of between MXN1400 ($75.7) and MXN6600 ($356.7).

Despite the threat of fines, the legislation has proven ineffective in generating higher insurance penetration due to a lack of enforcement. “There is no effective sanctioning of drivers caught without insurance, so in practice there is no compulsory requirement to have it,” Jiménez told OBG. Nevertheless, authorities at the federal and state level are working to improve the regulations and increase the enforcement of compulsory auto insurance. This, combined with increased offerings for customised auto coverage that can be limited to specific days or pre-paid to cover a certain number of kilometres, is likely to increase penetration rates.

Theft Exposure

One issue that has been causing concern among insurers operating in the segment is the rise in incidents of auto theft across Mexico. The number of stolen vehicles increased by 42.7% in 2017, while the total number of stolen cars climbed from 68,815 in 2013 to 90,187 at the end of 2017, according to figures by AMIS. Ensuring the long-term sustainability of auto insurance will, therefore, require insurers to provide additional services beyond basic coverage. “Selling auto insurance is not enough,” Gil told OBG. “Companies should add complementary systems that reduce car theft; this would make insurance cheaper for the customer and reduce risk for the insurers.”

New Markets

The need to diversify product offerings is part of a broader problem facing the industry. The sector has traditionally been perceived as relatively conservative in its approach, being slow to exploit new products and markets. This is evident in its distribution networks, which are reliant on individual agents and brokers, which generate more than 60% of premium, according to EY. This distribution structure in part prevents the industry from expanding into new areas. “Agents work under commission, so if an insurance premium is very low, their commission will be small,” Gil added. “They are not interested in reaching lower-income segments of the market because their return will be low.” However, one channel that has enabled insurers to increase coverage among lower-income customers has been the banking sector. This has largely occurred because some insurance products are compulsory for customers accessing financial credit.

Technological Drive

Distribution models could soon be prompted to change further, with insurance distribution set to face the same wave of disruptive technology as other financial services. According to EY, the majority of the country’s insurance customers will be digitally adept by 2027. This development, coupled with the rising penetration of smartphones, will provide insurers with opportunities to expand penetration rates through new products. Change is already taking place in several segments of the market. Adding a larger technological component to the distribution of insurance products is helping reduce customer acquisition costs for insurers and increase access to new sections of the population. Work is under way to provide the necessary regulatory environment to facilitate this change, with the congressional approval in March 2018 of the Law to Regulate Financial Technology Institutions, also known as the Fintech Law (see Banking chapter). The new law was established to regulate fintech providers and crowdfunding platforms that have been on the rise in the country. Upon implementation, the law will provide a legal framework regulating online payment methods, cryptocurrencies and the fair use of customer data.

Fintech

According to Fintech Radar, which tracks technology-based financial services firms in Mexico, of an existing 238 fintech start-ups operating in the country in July 2017, 15 were focused on the provision of insurance services. Despite their small number compared to other fintech start-ups, fintech insurers are likely to have a play an increasingly important role in the coming years. The technology has significant growth potential, in that it allows insurers to separate larger, more costly products into smaller components that can be priced independently. For example, Truvius, an insurance app launched in 2016, allows users to administer different insurance contracts and receive alerts to pay insurance premium, while allowing the customer to immediately access their documentation and even report a car accident to their auto insurance provider using their smartphone. Additionally, the company acts as an insurance broker and offers customer services through the instant messaging provider WhatsApp. One notable new foreign entrant to the sector – beginning operations in Mexico in late 2016 – was SeguroSimple, a Peruvian fintech company that specialises in digital insurance brokerage. Customers can compare prices from a wide variety of suppliers and pay their insurance premium online. Furthermore, the company has started offering car insurance in association with domestic providers. Product innovation through customisation is also coming from more traditional players. In early 2018 the Mexican subsidiary of US-based insurance provider AIG launched a car insurance product that adapts premium to each customer. Using tracking technology, the product charges premium based on the distance driven. The insurance policy can be bought pre-paid at a rate of MXN0.6 ($0.03) per km, with the minimum coverage starting at 500 km. The product is designed to detect collision and contact the customer directly. “The use of technology and digital services is crucial for the longterm future of the insurance sector. There are countless ways to harness current digital capabilities, improve the client experience and increase penetration,” Marcos Gunn, northern Latin America regional president of Chubb Insurance, told OBG. “Above all, this needs to be done by developing innovative new products for existing and potential clients.” Although car insurance remains the main segment for fintech-based insurance services, it is likely that the trend will extend to other areas of the market over the coming years.

Outlook

The stable growth of the Mexican economy and the low level of insurance penetration in the country are likely to continue to drive growth in the sector over 2018 and 2019. In the absence of further natural disasters the loss ratio of insurers, which rose following the 2017 earthquakes, can be expected to stabilise in 2018, according to Fitch Ratings. Nevertheless, the rise in incidents of car theft will likely require action on the part of insurers, with a more comprehensive product design. However, new regulations and a closer management of risk sho-uld support the industry in overcoming these challenges. Incorporating emerging technology into the design and distribution of products will be key for insurance firms to stay competitive. Over the medium term this will likely involve a closer relationship between traditional insurance firms and insurance-focused fintech start-ups. The technological aspect will be increasingly critical if companies are to expand and cover segments of the Mexican population that have remained uninsured, including life and auto segment and health insurance and pensions.