Economic growth creates opportunities for insurance in Colombia

Total premiums paid to Colombia’s insurance companies have been growing at a strong pace in recent years, supported by the country’s underlying rate of economic expansion, a growing middle class, product development and the entry of new players into the industry. Growth has been strongest in the life insurance segment of the market. However, penetration and density rates remain low. According to the Colombian Insurers Association (Federación de Aseguradores Colombianos, Fasecolda), penetration, or total premiums as a percentage of GDP, is 2.6%, while density, or premiums per capita, currently stands around COP400,000 ($147).

Mixed Indicators

While the sector is enjoying strong growth, not all metrics are showing improvement. According to the report “World Insurance in 2014: Back to Life” from Sigma, Swiss Re’s research and analysis arm, insurance density stood at $194 in 2014. This compared unfavourably with the average density of $304 across Latin America and $662 across the 88 countries surveyed, which include more developed economies. Ranked by density, Colombia was 12th out of the 16 Latin American countries surveyed and 60th out of 88 economies worldwide. Sigma also suggested that despite strong growth in disposable income, in 2014 Colombian households actually reduced the share of their total budget spent on insurance by 6.3%. Sigma’s data on insurance penetration was slightly different to Fasecolda’s findings, which said premiums represented 2.5% of GDP, ranking Colombia 9th out of 16 countries in Latin America and 52nd out of 88 globally.

While the low penetration and density levels may seem negative, they are also a sign that the market has plenty of room for growth. Gonzalo Alberto Pérez, president of insurance firm Suramericana, has taken that view. In July 2015 Pérez told Bogotá-based daily El Tiempo, “I have always said that in a market like Latin America companies do not need to steal business away from each other, rather there is a lot of room for everyone to choose their growth path.”

Hernán Avendaño Cruz, head of economic research at Fasecolda, told OBG, “The insurance business is growing in Colombia because the middle class is growing, and because it is doing more things than what is required by compulsory insurance. For example, the middle class is buying more cars, and that means acquiring the minimum level of third party automobile damages insurance, or mandatory transit accident insurance (seguro obligatorio de accidentes de tránsito, SOAT). Because payroll taxes were reduced in 2012, a greater proportion of the population is now also in formal employment. And if you are in formal employment, your company has a legal obligation to insure you against accidents at work.”

According to Avendaño, premium growth has been running at around 14% per year in local currency terms. However, he warned that there are some statistical issues with that number. As a result of the introduction of new accounting standards and capital reserve requirements, he believes it may overstate the real growth rate by a couple of percentage points, meaning the industry is likely growing at around 12%. Avendaño also estimated that within this, total surety insurance has been growing at 8-9%. Annuities, known as rentas vitalicias, have been lagging behind, but may begin to catch up. Insurance of labour risk insurance, such as accidents at work, has been growing faster than the average due to growth in the level of formal employment.

Premium Growth

According to industry data compiled for the first half of 2015, total local currency premiums grew by 14% yearly to COP12.1trn ($4.5bn). BN americas reported in September 2015 that the fastest-growing segment was property and casualty, up by 18% to COP6.5trn ($2.4bn). Life insurance, including pensions, grew by 10% to COP5.7trn ($2.1bn), while life premiums, excluding pensions, grew 13% to COP2.8trn ($1.03bn). Pensions insurance rose by 7% to COP3trn ($1.1bn).

According to Fasecolda figures, in the 11 months to November 2015 claims totalled 63% of gross premiums, down from 64% in the same period in 2014. Life insurance claims, including pensions, were 70% of premium income, down from 72% in November 2014. Fees as a proportion of total premiums sold increased by 30 basis points to about 3%, but were still below the 4.8-5.3% range achieved during 2006-12, taken as a reflection of growing competition in the industry. General expenses as a proportion of gross premiums improved, falling to 30.9% in life, 25% in property and casualty, and 10.7% in pensions. In addition, in January 2015 Fitch Ratings’ reported that it expected the sector to see premium growth of 6-8% in 2016.

Profitability has remained strong. Data for the first seven months of 2015 indicated that insurance firms reported net profits of COP1.1trn ($404.8m), a big improvement on the COP612bn ($225.2m) achieved a year earlier. Total insurance company assets at the end of June 2015 stood at COP52.9trn ($19.5bn), up by 14% on mid-2014. Investments were also up by 14% to COP39.1trn ($14.5bn). Net worth was COP9.7trn ($3.6bn), an increase of 0.6%. Measured in terms of its contribution to GDP, growth in the insurance sector decelerated from 5.5% in the first half of 2014 to 3.9% in the same period of 2015. In both cases the sector grew faster than the economy as a whole. According to the National Administrative Department of Statistics, the Colombian economy grew 5.3% in the first half of 2014 and 2.9% in the first half of 2015.

Industry Regulation

The Colombian Financial Superintendence (Superintendencia Financiera de Colombia, SFC) regulates the industry. The regulatory system has moved towards a risk-and-value-based solvency framework, in line with the Common Framework for the Supervision of Internationally Active Insurance Groups. Foreign insurance companies are allowed to have up to 100%-owned local subsidiaries. In 2009 the government began a phased introduction of International Financial Reporting Standards, with local companies required to comply, rather than using the previous standards, known as the Colombian Generally Accepted Accounting Principles.

As a result of the transition, the way technical reserves are calculated has changed. By law, insurance companies must maintain technical equity levels (primary plus secondary capital) that are at least equal to capital adequacy, which is defined as underwriting risk, asset risk and market risk. In a 2014 report titled “Latin America: Insurance risk and Regulatory Developments”, consultancy EY stated, “Colombia is ahead of many global rapid growth markets in reforming regulatory processes, protecting investor rights and cross-border trading to increase the ease of doing business for small companies.”

Ownership Structures

The SFC distinguishes between general insurance companies and specialist life insurance companies. According to SFC figures, as of the end of October 2015 there were 27 general insurance companies in operation, with combined assets of COP18.7trn ($6.9bn). By share of total assets the top six companies were Suramericana (13.4%), Previsora (9.1%), Liberty Seguros (7.6%), Seguros del Estado (7.6%), Seguros Bolivar (7.2%) and Mapfre Colombia (6.9%). These six general insurance companies controlled nearly 52% of total assets.

Also at the end of October 2015 the life insurance sector had 19 firms with combined assets of COP31.3trn ($11.5bn). The top six life insurance companies by assets were Suramericana Vida (18.3%), Vidalfa (16.6%), Bolivar Vida (12%), Positiva Compañía de Seguros (10.3%), Mapfre Colombia Vida Seguros (8.2%) and ARL Sura (5.6%). The segment had a slightly higher degree of ownership concentration, with the top four players controlling 57% of total assets.

Upcoming Changes

Competition has been intensifying in automobile insurance, putting downward pressure on pricing. The sector is also anticipating significant technological changes. Nicolás Delgado González, president of insurance firm QBE Colombia, said the global industry is incorporating telematics-based products over the next few years in order to assess a whole range of additional customer data, such as average driving speeds, geography-specific road accident risk and driving habits. Total Colombian auto insurance claims in 2014 were close to COP2trn ($736m). Delgado said better calibration of risks and premiums could help reduce that number. Rainer Schellenberg, vice-president of business development at AXA Colpatria, told OBG that as competition has been driving down car insurance premiums, companies are seeking to differentiate themselves by offering other benefits, such as courtesy cars for use during repairs or roadside assistance. Designated driver services is another benefit being offered by insurers which is growing in popularity since the introduction of tough new drink-driving laws a few years ago. Carlos Arturo Vélez, general manager at Nacional de Seguros, told OBG, “The elements that differentiate insurance service are somewhat limited. Differentiation can be achieved through the speed of delivery, the quality of services and also price.”

An innovation proposed in September 2015 by Fasecolda is the practice of companies developing mobile apps that allow their customers to capture and send in road traffic accident details. The idea is that customers will be able to send in their policy number, details of the vehicles involved and a description of the accident. They will also be able to upload photographs of the damage. The insurers’ association said apps of this type could be used by up to 2.3m drivers in Colombia and help to reduce the number of fraudulent claims. The association added that the Spanish insurance association UNESPA has reported that these types of apps have led to very positive results, and in some cases have even allowed for claims to be settled within 24 hours. The government also told Bogotá-based daily El Colombiano in late 2015 that it was working with insurance companies to introduce electronic issuance of SOAT.

Annuities Face Obstacles

Avendaño told OBG that annuities products have been lagging behind the general growth of the market because under existing regulations annuity benefits must be linked to the country’s prevailing minimum wage. While there is a government commitment to keeping the minimum wage in step with general levels of inflation and productivity growth, this is not necessarily guaranteed. The authorities do have the power to “decouple” the two, and can award higher or lower increases at their own discretion. Therefore, it can be difficult for insurance companies to accurately price their annuities products and ensure a reasonable commercial return over the lifetime of each agreement.

A related issue is the lack of long-term securities in Colombia’s capital markets, such as bonds with 30- or 40-year terms. The insurance industry would welcome the emergence of a market in such long-term instruments, which would allow companies to diversify their investments and match them to their longer-term policies, particularly for life insurance. The need for such instruments was one of the points raised by Humberto Botero, president of Fasecolda, at the annual International Insurance Convention in Cartagena in September 2015, as part of a call to the government to consider various pension reforms. Botero also suggested changes to annuities and the introduction of electronic subscription for SOAT vehicle insurance policies as a way of reducing fraud and cutting down on operational costs.

4G Road Programme

Insurance companies are hoping for a big boost in the non-life sector over the next few years as a result of the government’s fourth generation (4G) road concession programme. It is considered Colombia’s most ambitious infrastructure initiative to date and could involve investment of up to COP50bn ($18.4m) over a seven-year period. The scheme is administered by the National Infrastructure Agency (Agencia Nacional de Infraestructura, ANI). Midway through 2015, it was announced that under ANI’s proposed contracting model, projects would be divided into three stages: pre-construction, construction, and operation and maintenance, with insurance coverage sought for each stage.

A potential disadvantage is that costs and terms may vary between stages. Reinsurance firm JLT Re de Colombia told BN americas that if a claim arises in the first phase, coverage for subsequent phases could become more costly. Andrés Restrepo, president of Previsora Seguros, noted that the 4G programme was likely to boost car usage and ownership, and therefore increase demand for car insurance. There have also been estimates that the 4G programme will help keep the annual insurance industry growth rate running at least twice the prevailing levels of GDP growth. Vélez told OBG, “Colombia has massive infrastructure needs. We are a country under construction. I am convinced that once started, this infrastructure building process is irreversible and it will provide demand for insurance cover for many years.”

Product Innovation

Despite being in good health financially, some players support doing more to innovate and develop products that appeal to the younger generation, particularly millennials. In September 2015 Carlos Rivera, senior vice-president of consultancy at DeLima Marsh, told El Tiempo, “For a young person between the ages of 17 and 23 their most valued possession is likely their phone, tablet or computer, but there are no insurance policies geared to protecting these devices.” Car ownership is also lower among urban millennials, who largely prefer bicycles, and the insurance sector is proving slow to recognise the implications of this. Nor are there many policies guarding against cybercrime. The industry also recognises that millennials are unlikely to use traditional insurance agents or brokers, but are more easily reached via online and mobile marketing. This requires the industry to develop more effective multi-channel strategies, known as omnicanalidad.

Foreign Entrants

Two foreign-owned general insurance companies, the US’s Metlife and Switzerland’s Zurich Insurance, were in the process of entering the Colombian market in late 2015. Other firms that have recently announced plans to begin operations in the country include UK-based health insurer BUPA and Spanish firms Mutua Madrileña and Santalucía Seguros. Also in mid-2015 the government authorised Lloyd’s, the London-based insurance and reinsurance firm, to open a representative office in Colombia. In 2014 seven new players joined the industry, with Axa of France acquiring a 51% stake in the insurance operations of financial group Colpatria, for which it paid €259m. In November 2014 Swiss Re completed its acquisition of a controlling shareholding in Seguros Confianza, and Nacional de Seguros took over policies previously operated by domestic firms Ecoseguros and Cóndor. Berkley Insurance of the US is a recent entrant, joining the local sector in July 2015. In March 2014 Howden Broking Group of the UK acquired local insurance brokers Wacolda and Proseguros, and reinsurance broker NMB Colombia.

In September 2015 Suramericana reached an agreement to buy the Latin American operations of UK-based RSA Insurance Group for £403m. RSA Insurance is active in property and casualty lines in Chile, Mexico, Colombia, Uruguay, Brazil and Argentina. It was reported to have total assets of $1.9bn, net reserves of $631m and total gross written premiums of $1.1bn. The acquisition would place Suramericana among the market leaders in Chile, Uruguay and Argentina. The deal also provided Suramericana with its first presence in Brazil and Mexico, Latin America’s two largest insurance markets.

Credit Insurance

There has also been strong interest in the credit insurance sector, with France’s Coface Group setting up a local operation in this specialised segment, as did a joint venture formed by Solunión, Mapfre and Euler Hermes.

Manuel Arévalo, president of the subsidiary of Coface, told OBG, “Slower economic growth has had two impacts on our business. There is more non-payment of loans and more insolvency, which means we have to pay out more in claims. However, on the plus side, more companies are becoming aware of the business need for credit insurance, so our premium income increases.” Arévalo added that claims as a proportion of premium income tend to stand at around 40% during the growth phase of the business cycle, rising to 70-80% on the downturn and averaging around 50% in the long term.

Outlook

Looking forward, various factors are underpinning optimism in Colombia’s insurance industry. Although the country’s general economic growth rate has eased back in 2015, the majority of the industry is confident that because of low insurance penetration and density rates there is sufficient room to continue achieving double-digit percentage growth in premiums. Of key importance is the 4G round of government-funded infrastructure projects, which is expected to give a boost to general demand.