REVIEW

How to Grow?

The Mexican insurance industry has long been underrepresented in the economy, but the introduction of compulsory policies could boost the industry well over regional averages.

The 7.4 Richter scale earthquake that struck off the coast of Acapúlco on March 20, 2012 proved to be a near miss for Mexico’s burgeoning insurance sector. With losses to the industry only estimated in the $160 million range, the damage caused by the trembler was well below estimates for payouts over 2010 for Hurricane Alex and the Mexicali earthquake, which saw the industry hit with a combined damage bill of $450 million. However, the earthquake has once again underlined the need to introduce compulsory natural disaster insurance premiums nationwide. With insurance representing a low 1.9% of GDP in 2011, compared to Chile’s 3.5% and Brazil’s 2.4%, the potential for the industry to grow through compulsory insurance types is clear. However, the insurance sector may well undergo a profound wave of consolidation in the near future, as Solvency II regulations are slowly applied, making survival for the smaller companies the name of the game.

The Mexican Association of Insurance Institutions (AMIS) is expecting premiums to show 7.7% growth to reach Ps286 billion by the end of 2012, spurred by the country’s burgeoning middle class. The life segment remains the top performer in Mexico according to AMIS research, representing 39.8% of all premiums in the personal market, while auto comes a distant second at around 20.6%. Other components, such as pensions, represented just 5.8%, while accidents and illness made up 15.3%, and non-auto damage was at 15.3% of personal policies. In the split between life and non-life, research by Swiss Re Sigma estimated that of a total $19.2 billion in premiums written over 2010, the life segment took in $8.9 billion, while all components of the non-life sector took in $10.2 billion.

According to AMIS, Mexico’s insurance industry saw premium growth of 9.6% in real terms over 2011, though if the biennial renewal of policies by national oil company PEMEX is taken out, the real rate drops to 6.8%. Total premiums for all segments over 2011 came in at Ps271 billion, up on the Ps238 billion recorded over 2010. Compensation claims paid out by the industry increased by 3.4% in year-on-year terms to Ps148 billion, with accidents and illnesses (12.8%), pensions (12.1%), and life (8.1%) being the major growth drivers, though a significant reduction in the non-auto damage category (-15.4%) calmed the overall figure.

Of the top five insurance companies in the country, four of them have some level of foreign ownership, with the only national representative at the top being Grupo Nacional Provincal. The other companies with foreign interests in the top five are MetLife Mexico—considered the market leader—AXA Seguros, Seguros BBVA Bancomer, and Seguros Monterrey New York City Life. AMIS is anticipating rapid growth in the insurance market as the economy grows, and is estimating the sector may double to represent up to 4% of GDP by 2020. Just over half of all Mexicans hold some form of insurance, and according to the Global Director of Insurance at BBVA-Bancomer Seguros, José Antonio Palacios, some 55% of the population had some form of life insurance in 2010. “Our three biggest segments are life, auto, and home, in that order,” he told TBY.

MARCH TO COMPULSORY

In terms of even the most basic insurance lines, such as third-party auto, Mexico has still not adopted compulsory coverage. As Fernando Solís Soberón, President of Seguros Banorte and AMIS, puts it, “Among all the member countries of the Organization for Economic Cooperation and Development [OECD], Mexico is the only one without compulsory motor insurance.” Only around a quarter of all vehicles on Mexican roads have some form of auto insurance, with the most popular being third-party accident. For comprehensive auto insurance, the market is dragged down by the high rate of auto theft nationwide, making the category an unpalatable one for some in the industry.

Xavier de Bellefon, Executive President of AXA Mexico, also sees a correlation with credit availability, “Insurance and credit availability are strongly related. If people don’t have access to them, they can’t pay for insurance.” However, as the economy has begun to climb back out of the global financial crisis, new car sales are feeding directly into auto premiums. The category saw 11.5% growth to Ps56 billion over 2011. AMIS estimated that for 3Q2011, 72% of the growth in auto premiums could be attributed to the consumer segment, with the remaining 28% related to commercial transport operations. The latter category has seen a strong boost, with the US and Mexico finally agreeing to a temporary deal allowing Mexican truck companies access to the US market. According to a Swiss Re Sigma report from 2012, the deal could affect around 6,900 Mexican-owned trucking firms, and another 1,000 foreign-owned transporters. In order for Mexico’s truck operators to access the US market, substantial insurance coverage will be needed, which should assist the growth in premiums for insurers.

Another potential growth area for both insurers and reinsurers is natural disaster coverage, which if made compulsory could boost the insurance sector’s share of GDP substantially. At present, it is estimated that for every $1 loss after a natural disaster in Mexico, only $0.07 is covered by insurance.

SOLVENCY II

A looming issue for all in the insurance industry is the gradual introduction of Solvency II requirements, specially adapted to the nature of the Mexican insurance market. As Soberón told TBY, “The new regulations may lead to consolidation in the market, and some companies may not survive.” Or as Palacios at BBVA-Bancomer Seguros put it, “It will be a big change for companies to change and comply with Solvency II.”

The new regulation, known as Ley de Instituciones de Seguros y Fianzas, is set to replace the factor-based requirement framework used currently that has limits set for different lines with a more “risk-sensitive, principle-based approach to capital requirements and supervision,” according to a 2012 Swiss Re Sigma report. AMIS currently estimates the solvency of the sector at 20% according to its index, well in excess of the potential new standards.