A few years ago, Mexico’s insurance and surety regulation came under the radar of the National Insurance and Bonding Commission (CNSF), which according to the Insurance and Surety Institutions Law (LISF), is responsible for licencing, regulations and surveillance of the industry. When Ricardo Ernesto Ochoa Rodríguez became the president of the CNSF on the back of the changes in the Mexican government—all vice presidents and senior officials resigned creating room for uncertainty and more pressure on the regulator. Following the changes, the CNSF underwent a process of adjustment last year with the formation of a new administration to make an impact on the industry’s competence. President of Crawford & Company Roberto McQuattie told International Finance “In Mexico there is an applicable legal framework that is regulated by the CNSF.”
A vital coverage of insurers operating in the country
Last year recorded the presence of 103 insurance companies licenced to operate in the country, of which 59 of them are subsidiaries of foreign insurance companies. There are more than 238 foreign reinsurance companies registered with the Reinsurance Registry—which includes Lloyd’s of London. Nuclear insurance pools were also registered with the authority to capture the country’s reinsurance market. Last September, direct premiums in the insurance and surety industries had increased by 8.4 percent compared to the same period in the previous year—and the overall annual growth in the latter during the period between January and September last year was 8.7 percent. Based on the total amount of premiums, 98.2 percent of them came from direct insurance while only 1.8 percent was directed toward reinsurance.
Dividing the industry into sub-sectors, life insurance had increased by 9.1 percent, health industry by 3.5 percent and property and casualty by 10.7 percent. Excluding motor insurance, the property and casualty line had increased by 20.4 percent in the same period. But, whatever the strength and growth of the industry, it still requires reforms that can underpin its development in the coming years.
The new year must see sweeping reforms
Recently, Minister for Finance Arturo Herrera announced that the government is set to begin discussions with the private sector on sweeping reforms in the country’s insurance industry. It is reported that the industry seeks to make the private sector ‘an engine for economic growth and productivity’ following the coronavirus pandemic. He addressed AIMS which is the country’s insurance association at an annual meeting to reevaluate the industry and assess any new requirements in relation to regulations, taxes and investments. The work on the reforms is anticipated to begin in the coming weeks and they will be carried out in close collaboration with all agents.
In this context, McQuattie added “According to information originally reported, the government was in talks with the insurance industry aimed at turning the industry into an engine of economic growth and productivity. During the opening of the annual meeting of the Mexican Association of Insurance Institutions (AMIS), the government representative urged the industry to seize the opportunity to reevaluate the sector and collaborate on an agenda of reforms that they consider necessary to revitalise the industry. This was postponed due to the Covid-19 situation, and it is planned to resume before this end of the year or at the beginning of the coming year. At this point, in the immediate short-term, we are not aware of any major reforms that will be enacted.”
But the Congress has recently approved a Tax Reform 2020 bill, which carries huge implications for the industry. The tax reform contemplates changes to the income tax law, value added tax law and the Federal Fiscal Code. According to a report published by Ernst & Young titled Mexico’s Tax Reform Affects Insurance Industry, the modifications made to the law will affect insurance companies that make payments for reinsurance in other jurisdictions.
AIMS and the works, for deepening financial inclusion
Even if other new reforms take time, AIMS is working towards the greater good of the industry by deepening the levels of inclusion and access to affordable insurance products. This is one of the five policy priorities which are targeted by the association. Others—such as enhancing health insurance is also in focus to create change within the time that it needs to happen. For now, the penetration of insurance in the country’s gross domestic product is 2.2 percent—which points to the fact that more efforts need to be taken to make an impact. For that reason, AIMS and CNSF are working closely on a strategy to increase the penetration rate.
For years, Mexico has stood out for having strong policies and institutions—which even includes prudent fiscal policy and a central bank known for its autonomous functioning. Deepening the financial inclusion will not only benefit the industry but the country at large, for the simple reason that poverty will significantly reduce over time. Actually, a research report published by the International Monetary Fund shows that greater equality can reinforce economic growth and subsequent inclusive growth will lead to better opportunities for the population.
“Inclusion and access to insurance products are increasing in Mexico as much as innovation is allowing consumers to be a part of the process, and as the communication of such solutions expands,” McQuattie explained. Two years ago, the country worked toward expanding its financial services for the rural populace, so that women and underprivileged in rural areas can become a part of the system. With that, 3.4 million people were streamlined into the financial system, as more than 60 percent of women in rural areas gained financial inclusion. The data also showed that 9.5 million people were protected by deposit insurance; 1.8 million people received financial inclusion; and 4.5 million people had 3,800 new access points to financial services.
“There is certainly room for growth in Mexico’s insurance industry as overall awareness of insurance products and solutions among consumers is known to be low. I can understand the optimistic numbers that were predicted back in February relative to gross domestic product, which I would say were related to an expectation of further market penetration and improved communications by the industry,” McQuattie said.
Now the association has devised a plan comprising three pillars—public policy, internal tasks and insurance regulation which are collectively focused on increasing the penetration rate to 3.4 percent of the country’s gross domestic product this year. The country can make sense out of the situation if a national risk transfer policy is established to reach optimal insurance programmes for the government, industry and individuals. In addition, there is a common agenda set with the Ministry of Finance comprising initiatives linked to social programmes—all aimed at serving lower and middle income groups.
Even insurance companies are pledging to increase the penetration rates in the country in their own ways. Take for instance, Crawford which is “proud to lead the market with technological advances that provide access and improve the efficiency and safety in processing claims. These include not only the use of drones, but also, custom designed products like Inspección Remota—a solution that combines a consumer application with Crawford’s experienced desk adjusting operation,” McQuattie said.
Reinsurance creates fierce competition; carries a lot more risks
When these developments are narrowed in focus, it also highlights that the industry is heavily reliant on reinsurance and fronting arrangements because they help to cope with the existing complexities, drive financial inclusion, expand the lines of business and assess mechanisms to manage catastrophic events. This reliance has been in place for years, a very important one, for businesses that are capital-intensive or require additional capacity in catastrophic insurance. In Mexico, “Reinsurance is a very significant part of the industry given the size of the market. In fact, there are a variety of multinational businesses with pre-established reinsurance programmes in the country In addition, Mexico’s unique risks associated with catastrophic phenomena require the significant support provided by reinsurers,” he said.
Mexico is frequently exposed to a string of catastrophic events such as floods, hurricanes, earthquakes, the El Niño phenomenon—and more recently, the coronavirus pandemic. So the country has been open to the international reinsurance market for many years, and the law is not very complex for reinsurance companies looking to establish their business in the Mexican market. All they will have to do is register with the regulator to operate in the country and follow the local insurance and fiscal guidelines. It seems that there are more than 240 international reinsurance companies registered with the regulator to capitalise on the market, with another 170 specialised reinsurers participating in the nuclear pool. This points to the fact that the levels of competitiveness in the country is fierce among reinsurers.
Competition has created new business opportunities on the back of innovative products offered in the market. The country’s enormous supply capacity coupled with low prices and effective risk management could potentially lead to good dispersion for the industry. “Given the current economic conditions, we view the current policies as providing a fair playing field for both domestic and foreign carriers,” McQuattie said. There are two attributes which could help the industry and its players to reach optimal performance. First: A positive rating at a reasonable price is necessary to provide certainty under the new Solvency II legislation. Second: Transparency between brokers, cedents and reinsurers to establish trust between all stakeholders—which is the reason why international brokers will have to provide a full disclosure of their operations.
There are all these important efforts, but there is so much reliance on reinsurance through fronting arrangements, that it is creating new complexities in adjustments and settlement of claims. The industry has observed disagreements between reinsurers and the insured owing to inconsistency in the insurance process, issues while translating reinsurance arrangements into direct insurance and the difference in the applicable law for the practices followed by both parties.
How Mexican insurers and reinsurers are responding to the coronavirus
So now considering the extent of the coronavirus pandemic’s impact on the industry, it is certain that the industry will remain pressured through the next year. According to McQuattie, the pandemic is certainly propelling the insurance industry, but more as it relates to innovation and automation to keep people safe and continue to meet client needs. This is true considering that the industry has come up with various covers in response to the pandemic: Health insurance, life insurance, travel insurance and business interruption insurance.
For health insurance, any coverage related to the coronavirus illness is available under the country’s public universal health programme and private health insurance. In fact, the Mexican Institution of Social Insurance (IMSS) provides healthcare coverage for those who are registered with it—and it mandates that employers must register all employees with it in addition to paying a monthly fee for their access to the IMSS clinic. In private insurance, AIMS reported that 28 out of the total 32 private health insurers operating in the country will cover the coronavirus treatment as a respiratory disease.
Life insurance, on the other hand, affords coverage for death that results from the coronavirus. In fact, Mexican authorised life policies include the pandemic as a cause of death—assisting the country during catastrophic events. But international insurers believe that there might be financial difficulties if the death rates covered by policies rise to unexpected levels or if the investment yields are affected given the volatile scenario in capital markets.
Even travel policies in the country including health insurance coverage is likely to cover the expenses incurred from the pandemic. Although the pandemic is not considered as a valid reason for cancellations and that there would be no coverage under those circumstances, some travel insurers in the country are offering plans with restrictive or limited coverage.
Then there is the business interruption insurance which is an optional coverage provided by Mexican insurers across sectors—such as commercial property insurance policies. This sort of insurance is largely triggered by any physical loss or damage caused to insured properties during catastrophic events such as fire, floods, hurricanes and so on. But assessing whether the loss of business income is triggered by the pandemic would require specific policy terms and conditions—and unfortunately, many of them explicitly exclude loss caused by bacteria or virus.
But there are other types of policy covers like General Liability or Directors and Officers insurance that come to the rescue as they have conditions that are met by the pandemic. Because all of these coverages are provided by the Mexican insurance, it makes the industry more dynamic during extreme situations.
Diversification is needed to readjust during catastrophic events
For example, Crawford has built unique capabilities to quickly mobilise expert and experienced teams on-demand to address catastrophic events the moment they take place. “We also have on-going initiatives that further support those teams with technology and innovation. We support insurers with information on advanced technologies and innovation to address future catastrophes,” McQuaitte said.
“We also communicate via digital and social media channels to educate companies and the general public about the importance of coverage given the ever-rising risk of disasters. We are very good at communicating with companies and people about the possibility of catastrophic events, sharing valuable information and promoting awareness about the importance of catastrophic coverage across many industries. We leverage social media and other communication channels to not only report on the effects of catastrophes when they happen, but also, to provide critical information and support for those affected.”
What about the industry’s growth?
“Growth, however, is another matter,” he said. “In Mexico, as of July of this year, the insurance industry has seen a decline of about 12 percent in claims related to property damage, civil liability and transportation. Overall, the biggest decline has been in auto insurance for small and medium enterprises and personal insurance. The situation has been partially offset by health insurance. Back in October 2019 Moody’s was already projecting lower 2020 insurance demand in Mexico given overall economic slowdown.”
The pandemic has exacerbated some of the growth challenges given its impact on unemployment, lower interest rates and exchange rates. “We are hopeful for growth in the future, especially given the accelerated advances in innovation, but today, the state of Mexico’s insurance industry is one where the prioritisation of product solutions is in flux,” he said, further stating that things have changed since the early part of the year. “The latest economic data shows a 17.3 percent decline in gross domestic product as of June, mainly because of the pandemic. Interestingly, this compares to a 12.3 percent decline for the insurance market during the same timeframe. There is hope for a slight recovery in gross domestic product and in insurance activity as we enter the new year.”
The country’s Insurance and Surety Institutions Law which is a regulatory framework seeks to reinforce the effectiveness of the industry to become a world leader in surety. But it might be too soon to predict the full impact of the law because it was fully implemented recently. But McQuaitte pointed out that “as major institutional investors in the Mexico market, insurance companies would welcome any improvement that reduces the limitation period for claims. Strengthening of the actuarial and technical sufficiency mechanisms and incentivising new product development would also help create a more conducive environment for insurers. Lastly, adoption of measures to stimulate competition in the sector would go a long way to encourage growth.”