Covering Broader Advances


Colombia, a middle-income nation, has enjoyed both sustained economic performance conducive to the rise of a prosperous and young population, and weathered the negative impact of weak commodity pricing. Moreover, […]

Colombia, a middle-income nation, has enjoyed both sustained economic performance conducive to the rise of a prosperous and young population, and weathered the negative impact of weak commodity pricing. Moreover, it is clear that as the economy benefits from the new peace dividend, insurance and reinsurance penetration will rise in tandem. And meanwhile, insurers are seeking new ways to reach the uninsured, both to boost premiums and mitigate against the disasters that the economy is prone to suffer.

Challenges and Solutions

Headwinds to insurance penetration growth have been low income, but also a middle class tendency to accumulate assets, rather than buy a policy, and the operating cost of the insurer. Notably, to boost inclusiveness and support local SMEs, the majority of local insurers today are shifting toward mass-market product provision, while Microinsurance Network data shows that over 30% intend to offer microinsurance. Regarding the latter, bancassurance has thus far led the march as most insurance products are purchased from financial institutions. Meanwhile, EY confirms that Latin America in general is also witnessing an explosive digital transformation, whereby in 2015 e-commerce sales leapt 20% to USD50 billion. The digital platform is clearly a key component of the marketing mix, not least for the insurance sector.
The region’s insurers are also getting leaner for greater efficiency, as penetration gradually inches upward. A natural outcome is mergers, such as that of Colombia’s Suramericana, which has purchased British Insurer RSA’s Latin America operations to widen its regional footprint. Additionally, Jorge Alberto Zapata Builes, the General Manager of Coomeva Medicina Prepagada, told TBY about the firm’s merger with Christus Health, which in 2016 had acquired a 10% stake. “For five years, we have been looking for a strategic international partner (and) Christus wants to strengthen its brand in Colombia, while Coomeva wants to strengthen its position in Mexico, Chile, Peru, and the US.“

Catalytic Reform

Colombia’s mandatory social health insurance resulted from the game-changing healthcare reform package of 1993 aimed at covering the most vulnerable citizens. As an outcome of the country’s decentralization, healthcare reform increased the burden sharing of health risk and financing. And while critics charged it with the commercialization of health, an undeniable outcome was a competitive insurance sector. In fact, a decade later insurance coverage among the lowest income group had rocketed 18-fold, albeit off a low base, while coverage among the highest income bracket had seen modest growth of 1.4 times. And by 2008, over 85% of the population had become insured. This said, despite 100% coverage in terms of mandatory insurance, only around 3 million people have voluntary health insurance. Life insurance penetration, meanwhile, is at just 0.79%. However, the universal coverage of the social security system has fostered public awareness of having an insurance product, even if a subsidized one.

Building on Peace…

The insurance sector can only flourish in an era of restored peace, which has brought macroeconomic credibility; the nation has earned investment-grade status from the major credit rating agencies. In turn, this has rendered foreign investment more appealing. Free trade agreements propelling the economy abroad, too, are generating premiums. The local insurance sector, well regulated by the Financial Superintendence, has consistently witnessed annual growth of around 10% per year, albeit from a humble base. Back in 2013, regulatory amendments made it easier for international players to enter the market. Major players including Zurich and Swiss Re have pitched tents in Colombia, rendering Bogotá a regional insurance hub.
…While Mitigating Nature’s Wrath
A relatively recent entrant of note to the Colombian market is Lloyd’s, which set up shop in 2016 to ride the wave of infrastructure investments essential to the ascendancy of any EM. Latin America per se is a core component of Lloyd’s Vision 2025 strategy of increased activity in the world’s fastest growing markets. As the UK is widely acknowledged as being the world’s insurance hub, it follows that Lloyd’s has established a local presence as Colombia itself evolves into a regional force.
Sometimes one learns from others’ misfortunes. Sadly, following the Ecuadorian earthquake of April 2016 a mere 15% of losses—estimated at USD3 billion—were insured. On this theme, a Lloyd’s underinsurance report provides a telling, if not chilling, insight into the insurance requirements specific to Colombia’s geography. In short, Colombia has an underinsurance gap of USD570 million against natural catastrophe exposure. Furthermore, a Lloyd’s City Risk Index study concluded that while Bogotá and Medellí­n would generate USD2.5 trillion in economic growth over the coming decade, they potentially faced USD44 billion of risk from various quarters, with the former city facing USD35.2 billion and the latter USD8.77 billion of risk. This breaks down into the following five threats; earthquake USD15.03 billion, market crash USD14.57 billion, human pandemic USD3.8 billion, terrorism USD2.66 billion, and volcanic activity on USD2.58 billion. In February 2017 the regulator gave the green light to Colombia’s earthquake model, which will provide insurers key intelligence on which to base policy for the underwriting of disaster risk.

The Landscape

By law, Colombians may purchase any insurance abroad excepting of Social Security-related coverage, mandatory insurance, or insurance where the insured is a public entity. Sector data reveals that for 9M2016 in Colombia, like Ecuador and Peru, insurance sector performance had decelerated largely on stalled economic growth. In Colombia’s case, for the aggregate 12 months ending in September 2016, non-life insurance had generated premiums of COP11.73 trillion on nominal annual growth of 6.7%, having grown 14.9% in 2015. According to Lloyd’s, while in 2011 50% of Colombia’s reinsurance business was placed in London, the figure as of 2016 had halved. For the period, Colombia’s non-life reinsurance market generated healthy premiums of COP3.53 trillion, up 22.1% YoY.

Yet economic woes have meant a higher reinsurance loss ratio, peaking at 57.9% in August 2016 from a 38% low in July 2015, as the reinsurance market absorbs sector volatility. Total net income of the local insurance sector for 10M2016 was USD505 million up 15.6% YoY by insurance association Fasecolda data. At 40% of total earnings, the life insurance segment printed a 53.1% net profit rise to COP608 billion. Net income in the Property and Casualty (P&C) segment rose 2.8% to COP 253 billion, while net earnings from annuities shed 2.2% to COP653 billion. Overall January-October premiums climbed 10.4% YoY to COP19.3 trillion, headed up by annuities premiums, up 20.8% YoY to COP5.3 billion. Life segment premiums appreciated 10% YoY to COP4.4 billion, while P&C premiums climbed 5.5% to COP9.6 billion. Premiums of the major P&C line, car insurance, rose 12.4% YoY to COP2.4 billion, followed by mandatory traffic accident insurance (SOAT), up17.9% to COP1.7 billion. Meanwhile the density, or premiums per capita, is at around USD150. A BMI report forecasts stellar growth for non-life premiums from USD5 billion in 2016 to USD8.6 billion in 2020. Non-life insurance penetration is penciled in for moderate growth from 1.8% to 1.9%. Life coverage, meanwhile, is forecast accounting for 29% of total premiums by 2020, rising from USD1.9 billion in 2016 to USD3.5 billion.
Colombia represents a classic case of a virtuous cycle, where local insurers’ robustness encourages international participation, which in turn adds capacity and depth. What’s more, as the economy continues to diversify away from commodity dependence, the insurance sector will continue to meet the growing needs of the commercial arena and a more inclusive financial system.

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