A growing economy offers a brighter future for Colombia's insurers as unemployment drops and domestic spending increases.

The Colombian insurance industry represents around 2.5% of GDP, making it the sixth largest insurance market in Latin America. The most significant development expected in 2013 is a liberalization of operations expected in July that will permit Colombians to purchase insurance products from abroad. The move is being carried out to circumvent the lack of sufficient risk capacity in the domestic sector. Both domestic and international insurers alike should thus have ample room to grow as national infrastructure projects, as well as increased individual demand, boost the demand for insurance products.

The sector generates around $7.5 billion annually, over $5 billion of which is represented by non-life premiums. The individual segment is a significant driver, representing 45% of total premiums. Of this percentage, roughly half is sourced from social security, which around 8 million Colombian workers have access to. The remaining 12 million of Colombia's 20 million workers are employed in the informal labor market, and could represent a growth area for pension funds should government action to boost the formal economy succeed.

The Colombian insurance segment is well consolidated, with the top five insurance firms representing 56% of total premiums in the sector. Over 60% also belongs to local firms, with 40% issued by foreign companies. The system consists of 24 non-life insurers and 22 life insurers in total, and only one of the top five non-life insurers is foreign owned, with Boston-based Liberty Mutual the second ranking firm in the sub-segment with an almost 10% market share as of end-2011. A similar situation exists in the life insurance sector, with only one of the top five players foreign—the honor in this case goes to Mapfre.

Five lines account for 65% of total premiums, including auto, group life, professional risk, retirement, and health insurance. Around 35% is represented by around seven other lines, which have a share of approximately 5% each in the overall total.

Bank networks represent the main points of sale for the country's top insurers, a fact that has afforded wide access and generated a competitive environment. With new players thus unlikely to enter the market, the country's domestic insurers are increasingly turning their eyes outward. “Among our strategic business development plans we aim at expanding activities abroad, and to export our expertise in fields such as risk management," said Gilberto Quinche Toro, President of Positiva Compañía de Seguros, adding that, “we have been looking at Peru, Panama, Costa Rica, and Guatemala."

The insurance sector's combined ratio has remained high in recent years, growing to 111% by the end of 2011, up from 108% in 2010, suggesting underwriting profitability is under pressure. Analysts point to the continued growth of long-term products as the cause, with countries in the region with high long-term insurance penetration growth experiencing similar figures. The non-life insurance sector has a slightly lower combined ratio of 101%, due mainly to growth in premiums. Fluctuations are common in Colombia due to weather abnormalities, including floods in 4Q2010 that cost insurers $600 million. The government also remains vigilant in the face of natural disaster, completing a vulnerability reduction program for schools and hospitals in the capital. It is estimated that a once-in-250 year earthquake could cause damage of up to $35 billion. The government has also taken the initiative to subsidize insurance for farmers in order to boost the penetration rate in rural areas and ensure minimal impact should disaster strike.

Now in a period of steady growth, increasing premiums should offset the effects of local disasters such as flooding, allowing the sector to continue growing. “The industry is constantly growing, regardless of economic downturns, and I expect the insurance sector will finish 2012 with a growth rate of 15%," said Ignacio Borja Noboa, President of Allianz Seguros, adding that he expects the middle class to continue growing quickly. “That factor is driving the growth of industries like ours," he concluded.

Demographics have also been outlined as key to continued growth. Just over 26% of Colombia's population of 42 million is under 15, meaning that insurers have a growing base of potential new customers without having to dislodge existing clients from competitors. Additionally, 6.3% of the population is over 65 according to Ernst & Young's 2013 Latin America insurance outlook, with a further 10 million in the pension system that will soon be eligible. “There will be a huge mass of people that are going to retire, and we have to profit from that," said Jorge Enrique Uribe M., President of Seguros Bolívar. AM Best is also predicting solid growth in coming years, expecting total premiums to reach $11.1 billion by 2016.

Increasing demand for personal and corporate insurance products will offset high claims over the coming years, as well as mitigate the effects of price wars between major lines. Boosting the formal employment sector will also remain a significant hurdle to greater penetration in the individual segment, although the country's positive demographics are likely to offer a positive long-term growth curve. Although it is yet to be seen how the mooted July 2013 liberalization allowing Colombians to purchase foreign insurance products will impact the sector, it is likely to reduce pressure on domestic insurers and allow safeguards to protect the country's growing list of infrastructure mega projects that local capacity is unable to cover.