Colombia Insurance Report

By
Tuesday, September 26, 2017

A large economy with a growing middle class, low insurance penetration and a massive infrastructure pipeline are all factors that ensure a positive outlook for Colombia's insurance industry. But certain risks – including a slow economic recovery and next year's presidential elections, where the leading leftist candidate is ahead in the polls – could temper the appeal of the market.

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The Colombian insurance industry has experienced a strong expansion in the past decade that drove it to outperform the regional growth average in Latin America and the Caribbean last year in inflation-adjusted terms.

The industry has seen a number of foreign players enter in the past several years as it has become one of the most attractive insurance markets in the region for international insurers.

The country's insurance and reinsurance companies are represented by insurance federation Fasecolda, created in 1976.

The insurance and reinsurance sectors are overseen by financial services watchdog Superfinanciera, which is also in charge of regulating banks, non-bank lenders, pension and investment funds, trusts and brokers, among others.

SIZE & PERFORMANCE

In terms of premiums, Colombia's insurance market was the fifth biggest in LAC last year in US dollar terms after leader Brazil; Mexico, Argentina and Chile, according to figures from Swiss Re.

The country's 45 insurance companies saw their written premiums increase 9% year-on-year in January-July to 14.7tn pesos (US$5.016bn), the latest data from Fasecolda shows.

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The growth rate is a bit lower than the annual growth rate of 2016 (11%) and insurance-focused ratings agency AM Best expects the expansion for the full year to be around 10%.

Growth in January-July was lead by the social security segment (comprised of annuities, other retirement products and workers' compensation insurance) where premiums rose 16% to 4.18tn pesos. The life and P&C segments saw increases of 12% and 4%, respectively, to 3.42tn and 7.06tn.

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Data from the first seven months also shows that the industry's loss ratio and net earnings stayed pretty much flat compared to the same period 2016, with some variations among the different market segments.

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M&A

This year has seen US and Italian insurance giants AIG and Generali announce the sale of their Colombian operations. These moves were due to global strategic reasons, which included the sale of units in other countries, as opposed to Colombia-specific reasons.

The sale of AIG's operations in Colombia was completed at the end of July.

The buyers of the AIG and Generali operations, Canada's Fairfax Financial Holdings and the German Talanx Group, show that the Colombian insurance market remains attractive to foreign players.

Going into the deal, Talanx had operations in six Latin American nations via the HDI brand.

"For Talanx, the acquisition of Generali Colombia is a strategic step to open up the fifth largest Latin American market," said Talanx managing chair Torsten Leue, when the deal was announced in July.

More proof this is offered by the US-based BMI Financial Group, which is in the process of setting up a life insurance company in Colombia. BMI announced at the end of January that it had obtained regulatory authorization to launch operations with 28bn pesos in initial capital.

THE TOP PLAYERS

The Colombian insurance industry is still dominated by local players, with Grupo Sura's Suramericana insurance companies reigning supreme at the top.

The dominance of home-grown insurers is especially noteworthy in the life insurance market.

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However, in recent years insurers from abroad have gained market share as more companies have entered the market, and Colombia has become a priority for several with strong bets on Latin America.

THE ECONOMY

Affected by low oil prices, slower investment and weak exports, the Colombian economy slowed last year to its lowest rate of growth since 2009 with a GDP expansion of 2%.

The economy is expected to gradually recover in the next few years, and it will grow faster than the regional average this year, according to the latest forecast from the UN's Eclac.

POLITICAL RISK

Colombia will hold legislative and presidential elections next year in March and May, respectively.

The presidential election will mark the end of the eight-year era of President Juan Manuel Santos, who will be most remembered for the historic peace agreement with the left-wing Farc guerilla group.

The Colombian elections form part of a very busy regional election year that could affect economic and investment policies in Latin America, which BNamericas' August political risk report takes a close look at.

The leading names ahead in the current presidential polls are Germán Vargas Lleras and Gustavo Petro. Vargas is a former vice president and a long-time establishment politician while Petro is a former mayor and the leading leftist candidate.

"At this very early stage, polls for next year's presidential elections in Colombia seem to indicate a slight edge for left-leaning Gustavo Petro, a former mayor of Bogotá. Colombia has never had a leftist government, but with the Farc now part of the political fold, this could well change. Even still, Petro seems moderate in comparison to Nicolás Maduro in neighboring Venezuela, and to date he hasn't really said anything that should terribly worry investors," said Christopher Lenton, the Political Risk editor at BNamericas.

FINANCIAL INCLUSION

Progress was seen last year as average annual spending on insurance per individual increased 9.6% to 492,021 pesos, according to the 2016 financial inclusion report from Superfinanciera and the government's financial inclusion vehicle Banca de las Oportunidades.

With relatively low insurance penetration at 2.7% of GDP, "Colombia shows substantial room for organic premium growth," Alfonso Novelo, senior director of analytics at AM Best, told BNamericas.

Financial education will be a key factor for further progress on the financial inclusion front in Colombia.

"We must, as an industry, educate clients better on their risk exposure; unless clients understand why they need insurance, how it can enable business growth and protect the things that are important to individuals, we cannot expect them to buy our products," José Manuel González, CEO of Howden Iberoamerica, told BNamericas.

A UK-based specialist insurance broker, Howden entered Colombia in 2014 when it purchased local insurance brokerages Wacolda and Proseguros.

"We have found affinity partnerships with banks, cooperatives and professional associations provide a useful channel for educating clients on their insurance needs as these organizations are already talking to clients and so are often better placed to remove the barrier of apathy," said González, who added that technology also represents a major opportunity to improve the customer experience.

Insurance companies have also recently been allowed to offer their products at so-called corresponsales in the same way that banks have successfully done for some time, through non-financial sector distribution partners such as drug stores, shops and supermarkets.

This new distribution channel could become an important driver of increased insurance penetration in the coming years, Milena Carrizosa, insurance director at Fitch Ratings Colombia, told BNamericas.

REGULATIONS

Colombia is one of the countries in Latin America that is in the process of implementing the EU-based Solvency II rules, which will eventually bring regulations in line with the highest international standards.

Novelo said that AM Best expects Colombia to continue to move gradually towards these standards. "So far the most relevant changes have taken place in the reserves side, in which adjustments to mortality tables and asset sufficiency reserves are in the middle term pipeline," he said.

OUTLOOK

The outlook for the Colombian insurance industry is attractive, especially in the medium to long term as the economy is expected to recover and the country continues to produce a larger middle class and more infrastructure projects.

The IMF views the medium-term economic outlook as favorable and helped by the implementation of the peace agreement and an agenda of structural reforms.

The long-term insurance potential is reinforced by low insurance penetration and efforts by the government and private sector to improve financial inclusion and education.

"A.M. Best believes that increased participation from personal lines will persist in Colombia and will boost future growth of the industry, as a larger percentage of the population gains access to banking and financial services, as well as with the introduction of insurance products developed to target the lower income segment of the economy, such as microinsurance," said Novelo.

Competition will however remain fierce, especially in the P&C market, which will put pressure on future profitability. Overall, Fitch expects the profitability of the Colombian insurance industry to be somewhat lower in the next two years due to moderate economic growth, weak underwriting results, new reserve requirements and lower investment income, Johann Goebel, associate insurance director at Fitch Ratings Colombia, told BNamericas.

As in the rest of Latin America, the Colombian market offers significant opportunity for new and emerging market niches, particularly policies that provide coverage against cyber-related risks.

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