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Mexico’s Insurance: NAFTA, AMLO Challenges
Latin America’s second-largest market continues to have low penetration levels.
BY FINANCIAL SERVICES ADVISOR
Inter-American Dialogue
Mexico continues offering insurance companies significant opportunities for growth, ratings agency A.M. Best said in a report released May 6. The introduction of the Solvency II-based regulatory framework in the country’s insurance industry has not become a limiting factor for the sector, the report added. What are the major drivers of growth in Mexico’s insurance sector? What effects is Solvency II having on insurers operating in the country? What headwinds could Mexico’s insurance sector face in the future?
Manuel S. Escobedo, president of the Mexican Association of Insurance Companies (AMIS): In any industry, financial stability is fundamental for growth. Mexico has enjoyed this for almost 25 years, and although GDP hasn’t grown significantly, it has maintained a positive stable trend most quarters. The public sector is very important and represents about one-fifth of Mexico’s insurance market. With the state as the last-level guarantor and as a public risk manager, it has a fundamental role in the development and penetration of the sector. The insurance sector has been working with the Finance Ministry to propose a risk-management public policy within the framework of article 4 of the agreement with the IMF. Once this policy materializes, it will be invaluable to align, coordinate and structure risk management work of all areas of government and the interaction between government and the private sector. We trust that the effect will be to enhance the efficiency of risk management in the country and, in this context, promote the penetration of insurance. The last effect of Solvency II (SII) must be to empower companies to manage their risk in a self-regulated manner.
The process is on the right track. However, the learning curve is relevant. The SII model implies a level of sophistication and complexity that significantly affects the volatility of the solvency indexes. The Mexican insurance sector is a very solvent sector and has successfully overcome the challenge of implementing new regulations. By nature, the insurance sector confronts innumerable risks and obstacles. Among the most important macro trends are: the deterioration of the country’s economic indicators, such as financial stability, sovereign credit quality, growth and economic development; digital transformation and accelerated competition in the virtual field; cybersecurity; an aging population and migration displacements; deterioration and/or collapse of the public and private health systems; climate change; public insecurity and inefficiency in risk management; and supervision and regulatory risk.
Thomas Morante, member of the Financial Services Advisor board and chair of the Insurance Regulatory and Transactional Practice Group, and Yani Contreras, consultant, both at Kaufman, Dolowich & Voluck: To achieve growth of 7.5 percent for 2019, as projected by the Mexican Association of Insurance Companies, Mexico’s insurance market faces challenges. Recent government decisions (cancellation of private damage insurance Pemex had obtained, and cancellation of private health and life insurance for public officials) affected the insurance industry. Despite low insurance penetration, the future looks promising if the insurance market can align with President López Obrador’s development plans. The government seeks to make insurance available to a wider segment of Mexico’s population by promoting a culture of ‘insuring.’ As an example, the 2017 earthquake demonstrated the need for mortgage insurance to cover earthquake damage. Thus, if coverage is expanded, mortgage insurance will experience growth opportunities. In addition, many Mexicans lack health coverage. So, demand for private health insurance is likely to increase to complement public health care services, and insurers stand to benefit by introducing broader health plan options. Another insurance product line likely to benefit is auto insurance, as demand increases to address the mandatory obligation to obtain coverage for travel on federal highways, coupled with the coverage requirement imposed in 14 of 32 states in Mexico. In the life sector, insurers offering life and retirement products seek to introduce legislation that would promote savings by increasing the tax-free limitations on the amount of contributions that can be made to retirement plans. Also, new growth opportunities exist in Mexico for specialized products like representation and warranties (R&W) insurance to protect buyers against a breach of sellers’ R&W in cross-border deals. As Mexican insurers adjust to Solvency II, adopt data analytics to facilitate underwriting and claims management and utilize digital distribution platforms, and assuming Mexico manages potential tariff wars, the insurance sector faces a vibrant future.
David Ross, global fund manager at La Financière de l’Echiquier in Paris: The Mexican insurance market is the second-largest insurance market in Latin America, but it has one of the region’s lowest insurance penetration rates, estimated at 2.3 percent. The insurance industry traditionally has found the Mexican market to be a difficult one to develop due to both low levels of formal sector employment and a significant portion of the population living in poverty.
Adding to these historical hurdles, automobile insurance, a gateway product that leads consumers to other types of insurance, before this year had not been completely mandatory. However, the Mexican insurance industry has been gaining ground.
Changes making some level of automobile insurance compulsory as of the beginning of this year have helped. It also seems that the Solvency II regulation, instead of being a drag, has been somewhat beneficial to insurance companies because it addressed one of the major problems of insurance in Mexico: public trust. Lack of trust in insurance companies has been a deterrent to buying insurance, but with Solvency II, trust in the industry has been bolstered by providing regulation on reserves, capital requirements and disclosures. Another growth driver for the Mexican insurance industry is the increasing penetration of banking services in the country. While individual agents and brokers have been the most significant distribution channel for insurance, generating more than 60 percent of premiums, bancassurance is becoming an increasingly important channel, growing at double digits. As banking penetration continues to expand in the country, bancassurance will continue to expand access to insurance products.
Tapen Sinha, professor of risk management at the Instituto Tecnológico Autónomo de México and professor at the University of Nottingham Business School: In the insurance industry, Mexico has remained a country with potential, but unfortunately that potential does not seem to have been realized in the past quarter-century. With NAFTA in 1994, Mexico opened its insurance business to the other NAFTA countries with the hope that it would increase the penetration of insurance business in the country.
That has not happened. It has stayed under 2 percent of GDP. Mexico has more than 100 operating insurance companies, and Solvency II has been implemented. Everything looks good on paper. However, no compulsory third-party insurance has been implemented nationwide for automobiles.
Group life insurance has stayed only with the large employers, whereas most of the jobs are created in the informal sector, which has no life insurance at all. Insurance companies have remained profitable, with the return on equity above 20 percent and the return on assets above 3 percent. But in 2015, the return on equity was below 11 percent. There has been a huge volatility in the insurance market (compared with insurance markets in the other developed markets in the region, such as Canada or the United States). This characteristic of the Mexican market has not changed since the implementation of NAFTA. Now, the future of NAFTA itself is being challenged in the political arena. That fact alone would give a pause to large U.S. insurance companies to venture further into Mexico. However, it might open doors for the companies in the Trans-Pacific Partnership countries to make forays into Mexico.
Republished with permission from the Inter-American Dialogue's bi-weekly Financial Services Advisor
