EMERGING MARKETS PRIMER
Mexico Insurance Industry – Non Life
2013
Table of Contents 1. Macroeconomic Picture ................................................................................................... 3 2. Insurance Market in Mexico ............................................................................................. 4 2.1 Non-Life Segment ............................................................................................................................ 5
3. Profitability...................................................................................................................... 6 4. Competitive Scenario ....................................................................................................... 7 4.1 Overall Market ................................................................................................................................. 7 4.2 Life Insurance ................................................................................................................................... 8 4.3 Non-Life............................................................................................................................................ 8
5. Distribution and Regulations ............................................................................................ 9
1. Macroeconomic Picture
Source: IMF
International economic situation was less favorable to the Mexican economy, which ended the year with a real GDP growth plunging to 3.6% in 2012 from 4% in 2011. This slowdown in the growth rate was due mainly to slackening of external demand, especially from the US. Domestic demand showed an upward trend throughout the year but in Q4 some of its components began to suffer from the slowdown in external demand. Slowdown was especially notable in the industrial sector and above all in the manufacturing sector. On the contrary the service sector continued to record an upward trend, showing signs of flagging only in the last quarter of the year. Farming output fell as a result of the February frosts and the persistent drought suffered by diverse regions in the last quarter. The shrinkage in domestic demand helped to bring annual inflation down to 3.6% from the 3.8% figure of the previous year. This reduction was also affected by other factors, such as monetary policy, the absence of price pressure on labour costs and fiercer competition.
2. Insurance Market in Mexico
Source: MAPFRE, RBC Capital Markets
Mexico is one of the most important countries in Latin American insurance industry and ranked second after Brazil in terms of total premium volume. In 2012, it has around ~16% of the region’s overall premium volume and estimated gross insurance premium of USD23.35 Bn. Mexican insurance market posted total premium volume of USD23.35Bn in 2012 with Non-Life insurance sector accounted for ~55% of the total insurance premium volume while Life branches have ~45% share. Motor has the largest premium volumes in the non-life market in Mexico despite the fact that the majority of cars are driven without any form of insurance. The high share and future growth is solely dependent on wealth of the population, combined with population growth. Mexico is yet to achieve the full implementation of mandatory Third-party motor insurance. Currently only a few states have introduced this obligation in their laws and implementation is meager. The mandatory environmental insurance is another example where implementation has not been achieved. Overall insurance market is extremely low penetrated in Mexico with current penetration level of 1.9%, largely owing to cultural hurdle (insurance is simply not embraced culturally in Mexico) coupled with Government’s complete disregard to promote and develop the industry. This huge uninsured portion offers the big opportunity to be exploited .It also suggests there is still room to grow and that Mexico is likely to dominate the Latin American market for some time along with Brazil. Growth has been influenced by the growth of insurance products with savings components (flexible life insurance). These insurance products include two principal components: protection and saving. Consolidation of financial groups has led to concentration of market participants and the top 10 insurance groups now hold around 88% market share across Life insurance products. While the life segment with extremely low penetration of 0.9% holds more potential, its capital-intensive nature will prove challenging for some domestic carriers amid strong competition from foreign-owned subsidiaries that dominate the segment.
2.1 Non-Life Segment Mexico: Written Premium Trend (Bn)
Mexico: Non-Life Segmental Break up (Bn)
Source: MAPFRE, RBC Capital Markets
Mexican insurance market is estimated to be at USD23.4 Bn in 2012 with CAGR of ~4.6% during the last five years with small decline in 2008 and 2009 driven to a large extent by economic growth and a fastgrowing middle class. Health and Automobile branches account for around 65% of the total premium volume in 2011. Market shows a positive balanced development among the different nonlife products. Over the last five years, the nonlife market has developed away from a dominant motor insurance business with property related insurance (Fire, Earthquake etc.), accident and health business gaining share. Automobile, the single largest branch (~37% share) of the Non-Life segment has declined with negative CAGR of ~2.7% during 2007-2011.However, it grew by ~8% in 2010 as compared to 2009 largely due to the efforts of Mexican financial authorities and the private insurance sector to make Third-party motor insurance mandatory. The market has struggled in the phase of economic recession and registered a decline of ~6% in 2008; however it has recovered 2009 onwards with around 4% and 7% y-o-y growth in 2010 and 2011.Growth prospects for the Non-Life segment remain positive with further implementation of mandatory Thirdparty motor insurance boosting motor insurance branch and insurance companies efforts to increase the use of insurance including development of micro-insurance by low-income population. Non- Life branches continued to dominate the market with average of around 55% of total premium share over the last five years. Mexico’s insurance industry weathered the global financial crisis fairly well with marginal decline in 2008-2009.Life insurance also attracts significant tax breaks from the Mexican government. Segment is dominated by foreign players, is also highly regulated and its financial health is sound. Non-Life branches in the Mexican insurance market are estimated to grow with CAGR of ~4.1% to reach ~USD12.77 Bn in 2012 as compared to ~USD10.4 Bn in 2007.Government-owned oil company (Petróleos Mexicanos, PEMEX) has multi-annual insurance policy, which has positive impact on 2011 market, this was done in 2009 and renewed in 2011. Auto insurance, which represents almost 37 percent (2011) of the nonlife insurance market slowed down in 2008-09 due to the decline in automobile sales. Earthquake and Fire are the only key Non-Life branches which have positive CAGR of around 6.2% and 2% respectively during 2007-2011.
3. Profitability Combined Ratios
Source: MAPFRE, RBC Capital Markets
Mexican market’s loss ratio has remained higher than that of other Latin American countries, which is why its operating income is usually low and its combined ratio has historically been slightly over 100%. Non-Life business shows a drop in the claims ratio only due to the effect of the PEMEX policy; without this policy it would have shown an increase due to the higher number of theft related claims. Industry’s claims ratio has traditionally been high because of large catastrophic exposure. A new regulatory system will go into effect for the Mexican insurance sector in 2014 which is based on risk management, and implements Solvency II concepts and principles .These regulatory changes — reserve estimates, risk margin, capital and solvency requirements, and economic balance — could impose higher costs on the industry in the short and medium term, pressuring profits. However, these same changes will strengthen the industry’s long-term solvency.
4. Competitive Scenario 4.1 Overall Market Leading Insurance Players 2009
2010
2011
Source: MAPFRE
As at 31 December 2011 the Mexican insurance sector was made up by 102 insurance companies; of these one was a national insurance institution, 2 were mutual insurance companies and the rest were private companies (99). Of these 15 were linked to some financial group, while 59 had mainly foreign capital (subsidiaries of foreign finance institutions. The Mexican insurance market is characterized by a high level of concentration with the 10 largest insurance groups in Mexico accounting for more than 70% of total premium volume. Industry has strong international presence where more than half of the insurance companies have majority foreign capital, Mexico is domicile to the main global insurance players, but national companies also have strong market participation and leadership. Metlife has been the frontrunner over the last couple of years with dominating position in Life as well as the overall ranking.
4.2 Life Insurance Leading Insurance Players in Life Segment 2010
2011
Source: MAPFRE
In the life insurance business the top five companies hogged 70.4% of the market. The top ten were still headed by MetLife with a 29.2% share against the 33.9% of the previous year. GNP is still in second place, increasing its share by almost two percentage points. Banamex rose from fourth to third with a 0.9% increase in its market share. Zurich, unranked in 2010, came in at number seven after the agreement reached with Banco Santander for the takeover of its Mexico operations.
4.3 Non-Life Leading Insurance Players in Non-Life Segment 2010
2011
Source: MAPFRE
In non-life business, AXA held onto top place with a market share of 15.4%. Zurich came into the ranking for the first time at number seven. MAPFRE held onto fifth place while Qualitas ceded third place to Inbursa. Banorte Generali considerably boosted its market share, rising from ninth to sixth. BBVA Bancomer, ranking tenth in 2010, fell out of the non-life top ten.
5. Distribution and Regulations Distribution Banks and agents are key distribution channels for reaching the Mexican insurance market. The distribution market in mainly dominated by brokers. Agents are second largest distribution channel which accounts for approximately 25% of the total distribution of insurance premium. Bancassurance also contributes a small share of distribution in the market .Moving forward, traditional ties in Mexico between the banking and insurance sectors will gain more strategic importance as competition escalates in bancassurance and other channels. Online sales have grown and future marketing efforts will target even more consumers at retail venues, driving a competitive need for value-added product delivery.
Regulations No individuals or entities other than those duly licensed by the Ministry of Treasury can operate as insurance companies and are permitted to carry on active insurance operations within Mexican territory. Consequently, non-admitted foreign insurers are thus generally prevented from covering risks in Mexico. In the middle of the 2000s, the Mexican government passed a law promoting the consolidation of financial groups which has led to concentration of market participants and the top seven financial institutions now holding around 90% market share across financial products. It is easier for these groups to cross-sell products to their existing customer base than to actively sell to new customers. This move has made it is easier for financial groups to cross-sell products to their existing customer base than to actively sell to new customers and does not emphasis on selling simple products to customers who have never bought a financial product before. However, regulators in Mexico are pushing ahead with plans to bring in Solvency II they are also keen to increase the penetration of insurance in the market which is believed to be positive for growth.