Mexico insurance sector report

Wednesday, November 15, 2017

In its most recent analysis of the Mexican insurance industry, insurance regulator (CNSF) reported sector-wide premiums at 257bn pesos (US$18.6bn) in January-June, a modest 1.4% annual increase in real terms, as solid P&C growth was countered by a retreat in life premiums.

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In 2017, Mexicans have been given painful reasons to purchase or expand P&C, flanked by a sharp surge in auto thefts and a barrage of natural disasters, including two deadly earthquakes in September.

Sector overview

According to the CNSF, there are 101 firms licensed to sell insurance coverage in Mexico, which stands as the second largest insurance market in Latin America after Brazil.

The industry has completed the switchover to Solvency II standards this year. A Moody's review of the process in August noted that Mexican insurers' full adoption of Solvency II revealed that companies accounting for 95% of industry premiums comply with the new capital standards.

In the same report, Moody's gave a 'stable' outlook to Mexico's life, P&C and surety insurance industries, likely to last through Aug. 2018-Feb. 2019, reflecting insurers' good liquidity, strong premium revenue, solid profitability and the successful implementation of the Solvency II regulatory framework.

The CNSF said sector-wide net income totaled 22.5bn pesos in 1H17, putting it on track to beat the 2016 total of 38.7bn pesos.

It must be noted that annual comparisons for both sector-wide net income and net cost of claims were unattainable. In an email, the CNSF's director of economic affairs, Homero Romero Gática, told BNamericas that it was unable to produce sector-wide net income or cost of claims for June 2016 due to discrepancies detected with reports from new firms, making year-on-year comparisons impossible.

The entity, nevertheless, reported that net cost of claims came to 123bn pesos in 1H17; however, September's earthquakes are certain to fuel much higher net cost in the second half of the year.

Even before the quakes, insurers' claims ratios were on the rise. The CNSF reported the average cost of claims ratio rose to 76.5% in June from 70.9% a year before, bringing the sector-wide combined ratio to 98.5% from 93.6% in June 2016.

For analysis purposes, the agency divided the biannual renewal of state-run oil giant Pemex's insurance coverage in June evenly over 2016 and 2017 to reach the 1.4% sector premium growth figure, adding that without the adjustment premium growth would have been 5.0%.

Life insurance, the industry's largest sector by market share (comprising 39.2%), saw premiums fall 5.5% in the first six months of 2017 over the same period of 2016. P&C premiums helped to counter that decline, rising 7.6%.

Concerning profitability in the sector, according to the CNSF, the combined ratio for the first six months of 2017 reached 98.5%, a 4.9 percentage point increase compared to 1H16, reflecting the loss in profitability this year. The following table represents the rate adequacy, calculated by subtracting the combined ratio from 100%. 

Theft booms, quakes rock

Mexican insurer association AMIS has reported that 85,943 insured vehicles were stolen from October 2016 to September 2017, a 27.5% year-on-year increase, costing the industry an additional 14.1bn pesos in claims over the period.

Claims associated with the Sept. 7 and 19 earthquakes are still being processed; however, catastrophe modeler AIR Worldwide's estimates combined insured losses from both events would be between 27bn and 57bn pesos, or between US$1.4bn and US$3.0bn in dollar terms.

There are indications, however, that the final total may be lower. AMIS said in early November its members had reported receiving 38,661 claims so far related to the quakes, adding it estimates this would translate into 16.5bn pesos in payouts for insured losses.

Nevertheless, as noted recently by Fitch Ratings, Mexico's industry is "well prepared" to absorb the impact thanks to extensive reinsurance protection, adding, "the average maximum loss under the priority of the catastrophe reinsurance programs represents only 2.3% of total equity."

"Insurers with exposure to catastrophe risk hold ample reserves and maintain capitalization levels to reflect the risks. Catastrophe reserves total about USD1.9 billion representing 36% of the sector's total equity," said the Fitch report.

Downside risks in aftermath

In the wake of three major hurricanes and Mexico's earthquakes, a number of reinsurers have issued profit warnings and appear poised to raise renewal rates. In a press release for Willis Towers Watson's recent report "Marketplace Realities," the firm said it expects reinsurance rates "to potentially rise 10% to 20% for catastrophe-exposed risks and 20% to 25% for catastrophe-exposed risks with recent losses," positioning firms with losses from the quakes firmly in the latter category.

Smaller Mexican insurers that are strongly dependent on reinsurance would be particularly exposed to higher renewal rates.

Beyond that, insured losses could damage profitability for those insurers with highly concentrated coverage in affected zones.

Larger firms, particularly those tied to conglomerates with banking units, should absorb impacts well financially, especially in light of the strong profits posted by banks with the help of high interest rates.

An opportunity to boost penetration

In its sector analysis, the CNSF reported that auto premiums are rising, up 6.9% y-o-y in 1H17. However, as noted in a Nov. 1 blog post, AMIS said only 3 in 10 cars have theft coverage, stressing this reflects the need to foment the culture of prevention in Mexico.

In another post, AMIS said recent natural disasters "are bringing people closer to insurance, although not at the speed needed for the level of risk we face, as 41% of the territory is exposed to suffer the ravages of nature, and only 6.5% of households have protection."

With the quakes, however, Mexicans may be now ready to move the needle on that penetration rate.

Last month, online real estate portal conducted a survey of 1,000 residents affected by the Sept. 19 central Mexican quake (pictured), showing that 62% were open to buying insurance for their homes, roughly ten times the percentage of households actually owning such policies.

Likewise, Susana Jiménez, director of client experience and products for Seguros Citibanamex, told BNamericas demand for home policies jumped 200% the week after the Sept. 19 quake.

What lies ahead

With the explosion of fintechs in recent years, the branch of insuretechs represents both an opportunity to innovate and a risk that they could lose business by failing to adapt. To date, insuretechs have been most often employed to ease or improve access to products offered by insurers or modify the sales interface and/or client communications. However, emerging innovations include tools for choosing coverage, buying it, paying premiums, reporting claims, checking the status on claims and other customer services.

Mexico's senate is currently discussing a final reform to both regulate and promote the fintech industry, insuretechs included; however, the so-called 'Ley Fintech' continues to receive input from public and private sector bodies, most recently a key report from competition watchdog (Cofece) in late October. Even if a final bill fails to pass both houses in the fall session, there is broad support to pass legislation as soon as possible.

The industry impact from the quakes may eventually result in regulatory changes. Legislators have been working to set hearings for officials from CNSF and banking regulator CNBV to discuss what the responsibilities are in the multiple collapses of relatively new structures during the Sept. 19 quake, likely touching on safety and inspection requirements for mortgages and insurance coverage, with particular focus on enforcement and transparency.