WHEN THE HAMMER FALLS

Mexico 2014 | FINANCE | REVIEW: INSURANCE

Overall, 2014 is shaping up to be a dynamic year as low insurance penetration, regulatory reforms, and a growing middle class spur Mexico to catch up with its neighbors to the north.

Mexico's insurance industry has doubled in size over the past decade, and in 2013 total premium volume was $27.35 billion, representing a 13.9% annual growth rate, and an impressive increase over an $11.13 billion in volume recorded a decade ago. This was largely due Mexico's growing middle class. Around half of Mexico's population is now considered to be middle-class, whereas 80% lived in poverty in the 1960s. In 2014, Mexico's insurance industry represented 0.59% of total world premiums. The leading non-life insurance companies in Mexico in 2013 were Inbursa, with gross written premiums of $1.38 billion, followed by AXA Seguros with $1.32 billion, and Qualitas with $1.17 billion. The leading life insurance companies were MetLife Mexico, with gross written premiums of $3.78 billion, followed by GNP on $2.45 billion, and BBVA Bancomer at $1.52 billion. It is estimated that the insurance industry in Mexico will grow by approximately 8.5% in 2014. And with President Peña Nieto jumpstarting the car insurance market, promoting legislation to reinforce the industry's fundamentals, and the low penetration of insurance, the immediate outlook for the Mexican insurance industry is stable.

Further unpacking 2013, life insurance premium volume was $12.47 billion and non-life insurance was $14.88 billion. These numbers reflect increases of 14.9% and 13.1%, respectively. As new legislation introduces mandatory automobile insurance, a marked increase in non-life insurance will be seen in 2014 as well. Growth rates for individual life premiums were up 23% in 2013, on top of a 19% increase in 2012, suggesting similar numbers for 2014. Despite its recent performance, Mexico's insurance density for premiums per capita in 2013 was only $223, with $102 in the life business and the other $121 sourced from the non-life business. Compared to the US, which has an insurance density premium per capita of $3,979 (almost 18 times higher than Mexico), Mexico's insurance density is low enough to sustain healthy double-digit growth well into the future.

The numbers for insurance penetration are also significantly lower than Mexico's developed neighbors to the north. Overall penetration was only 2.2%, with the life business constituting 1% and the non-life business making up the other 1.2%. Here again, penetration was over three times lower in Mexico than in the US. In 2013, less than 10% of Mexican homes were insured against fire and theft, and less than 30% of automobiles had insurance. Of the $9.3 billion from the non-life direct insurance market in 2012, the majority of premiums were in motor insurance at $3.62 billion, and in PA and health with $2.62 billion. The Lloyd's Global Underinsurance Report pointed out that Mexico was significantly underinsured against natural catastrophes, ranking 31st out of the 42 countries surveyed. The average penetration levels in Europe are around 7%, with rates in the UK at 11.3%. Since countries in Europe are, for the most part, much less exposed than Mexico to natural disasters, it is imperative that Mexico increases its penetration rates as its economy develops, in order to offset potential setbacks from extreme weather and seismic activity. In the US, which is more prone to natural disasters, penetration levels are over 8%. Meanwhile, non-life insurance penetration in Mexico stood at only 1.1% of GDP. According to one analyst at Lloyd's, Mexican businesses need to spend at least $8.7 billion in premiums annually to reach minimum standards of coverage. Reinsurance markets in Mexico are predominantly international firms, with only two indigenous companies, QBE del Istmo and Patria Re, registered in 2012. The reinsurance destinations for Mexican insurance were led by the US, at $937 million, and the UK with $781 million.

Looking past the numbers, policy and business developments are about to kick start the relationships that Mexicans have with the insurance industry. In April 2013, The Mexican insurance regulatory authority (CNSF) scrapped the old Mutual Insurance and Insurance Company Law, for the new Insurance and Bonding Institutions Law (LISF) which introduces sweeping changes to the regulatory framework. The new law is set to go onto effect in 2015, allowing insurance companies time to adapt to the changes. Even though most insurance companies are expected to evolve without major difficulties, the new legislation may lead to mergers and acquisitions by firms seeking to acquire the necessary coverage and expertise. With 224 more articles than its predecessor, the objective of the new law is to strengthen the legislative framework of the insurance industry. The new regulation will mandate individualized investment strategies, and full disclosure of finances, risk profiles, and capitalization levels. The breakdown of these articles is an indicator of where the emphasis of the new law lies. The regulations concerning insurance and bonding activities constitute 348 articles, or 68% of the new bill. Next, at 103 articles or 20%, seeks to regulate specific insurance activities. The regulation of bonding activities takes up the remaining 59 articles (12%). The LISF strengthens corporate governance for proper management, and the Audit Committee emerges as the organization responsible for overseeing compliance with international regulations. The legislation also introduces solvency capital requirements that will see Mexico become the first country to mandate capital requirements based on solvency levels. Although Mexico's insurance industry is already considered sound, the new rules are expected to promote agility, risk awareness, and client focus in the coming years.

Car insurance is another area in which Mexican insurance regulation is implementing more rigorous standards. In April 2013, Congress approved mandatory insurance on all vehicles traveling on state highways (local roads are still exempt at this point). The government expects to fully implement the new regulations by the end of 2014. Under the new rules, drivers who are unable to furnish proof of insurance during routine stops will be penalized with hefty fines of $198, which is the equivalent of 40 days' earnings at the local minimum wage. And while Mexican drivers might chafe at the new regulations, the reforms represent a windfall for insurance companies. Qualitas share prices surged by 55% last year, thanks in part to congressional approval of the legislation. Shares for AXA also rose 51% in 2013. In all likely future scenarios, the Mexican insurance industry is a sure bet.