How AMLO cost-cutting, social focus could hurt insurers

Weighing in on the July 1 landslide victory of Mexico's president-elect Andrés Manuel López Obrador (AMLO), insurance-focused ratings agency A.M. Best said budget-cutting policies announced by the victor could have a considerable impact on the local insurance sector.

AMLO has won immense political capital with the election. With the final tally becoming clear, the political coalition backing the leftist leader has won 307 seats in the lower house of congress and 69 in the senate, just 27 lower house seats and 17 senate seats short of a two-thirds majority needed to make constitutional changes.

His party Morena has also won 17 state-level legislatures, giving it the power to propose constitutional amendments, and AMLO has been keen in recent days to express his desire to give referendums unprecedented power to effect changes to the law.

Hence, the recruitment of a handful of lawmakers, potentially from the traditional left-wing party (PRD) or the independent-minded Movimiento Ciudadano party, AMLO is nearly in reach of enacting changes to hard-won structural reforms, presenting a major risk to macroeconomic stability moving forward.

In the short-term, however, AMLO looks to focus on cost-cutting initiatives and the repeal of educational reforms that have proven to be extremely unpopular with the AMLO-supporting teachers unions.

Medical costs in focus

In its analysis, A.M. Best noted that AMLO aims to pursue several cost-cutting initiatives and the reallocation of some public spending, and if implemented, they could have a "significant effect" on the medical expense segment.

Potential AMLO efforts to remove private insurance coverage from thousands of high-level bureaucrats alone could represent billions of pesos in lost income at major providers like MetLife México and GNP.

AMLO's future finance minister Carlos Urzúa said in a recent interview that the plan measures could generate 7bn pesos (US$371mn) in savings, A.M. Best pointed out.

An eye on FX

Insurers in Mexico will also have to monitor peso fluctuations in the coming months, with possible strong movements in the exchange rate stemming from twists and turns in Nafta renegotiations, now set to resume in the coming weeks.

"While the peso has gained some ground after the recent elections, failure or unfavorable conditions in the renewal of NAFTA could burden the Mexican currency, which most likely will impact claims as a result of an increase in the cost of commodities, auto parts, and medical supplies that are priced in USD," said A.M. Best.

"The insurance sector in Mexico generally tries to avoid currency mismatches between assets and liabilities. Nevertheless, some participants hold long positions in US dollars with excess capital, which could translate into currency gains." it added.

Potential winners

A.M. Best pointed out that microinsurance, agriculture insurance and catastrophe risk could benefit from programs promised by the president-elect, though caveats exist.

"In line with López Obrador's agenda to reduce inequality, the development and more efficient commercialization of microinsurance products could play an important role in providing welfare and risk coverage to the large low-income segment of the economy," said the agency.

A.M. Best added that the new government's goal to support agricultural production could increase demand for agriculture insurance, but given the volatile nature of this line and the exposure to catastrophes, few insurers in Mexico have the risk appetite to underwrite this line.

"The existence of government trusts such as Fonden and alternative risk transfer options such as CAT bonds are critical to achieving an additional level of coverage," said A.M. Best. "We will continue to monitor key developments in the economic, political, and regulatory landscape for any impact on credit risk and ratings."