Insurance practices in Mexico
Discussing insurance practices in Mexico means talking about the 81 authorised insurers currently operating under the Ley de Instituciones de Seguros y de Fianzas (LISF) [Insurance and Sureties Institutions Law]. This is because only companies that have been granted authorisation by the Federal Government, which the Comisión Nacional de Seguros y Fianzas (CNSF) [National Insurance and Sureties Commission] has the discretionary authority to grant, can engage in insurance activities.
While many of these companies are foreign affiliates, others are made up of 100% foreign capital; very few insurers are made up of 100% Mexican capital. Several companies have merged in the last few years, which has reduced the number of insurers. In 2016, there were 101 insurance companies; that is to say, four years ago there were 20 more insurers than there are now.
Perhaps these mergers went hand in hand with the intention of offering more competitive products or strengthening service by combining the expertise of the merged companies, but these mergers undoubtedly also occurred because of issues related to the minimum capital that all insurance companies are required to have. This is due to a change in the legal framework in the insurance sector with the repeal of the Ley General de Instituciones y Sociedades Mutualistas de Seguros [Mutual Insurance and Insurance Companies Law] and the publication of the now not-so-new LISF, which was enacted in 2013 but did not enter into force until 4 April 2015, i.e. two years later.
The LISF gave rise to the Solvencia II system, which was able to establish each insurer’s minimum financial requirements based on the risks it assumed and how each risk was handled.
Solvencia II contains three fundamental pillars. The first involves a more demanding evaluation of the insurer's statement of assets along with the new legal framework requiring an analysis and assessment of the risks of different types of transactions and products; the second refers to the government’s rating and supervisory processes, which require insurers to self-assess their own activities; and the third relates to information provided to consumers and supervisors, focusing on transparency when handling all transactions with insurance companies.
Corporate governance is now part of the Mexican insurance system, so insurers are required to comply fully with the LISF and the CUSF. This has resulted in the Mexican insurance system becoming one of the strongest in the world.
A little over five years after the system was introduced and up until the global pandemic caused by COVID-19, different rating agencies were anticipating that the Mexican insurance market would grow in 2020. However, the current situation seems to have changed this, and the result will be affected by the financial, health and social crises we are currently experiencing.
In other words, the AM Best market segment report entitled “Mexico: Three Years Since Solvencia II” suggested that the Mexican insurance market was benefiting from the Solvencia II regulatory framework and offered excellent growth opportunities for insurers. It should also be pointed out that after meeting the legal thresholds for equivalency with Solvencia II in January 2016, the insurance industry in Mexico grew by merely 0.7% in 2017, but in 2018 the number of premiums increased by 5.2%.
It also suggested that the market is basically keeping pace with economic growth and market conditions but not with the regulatory framework, although conservative views from insurers, who measured the complete impact from the many different risks they faced with the new formula used to measure its regulatory solvency, could also have contributed to the poor growth during its second year.
At the end of 2018, AM Best, taking into account the impact of the austerity plan proposed by President Andrés Manuel López Obrador, revealed a potential slowdown in economic growth, estimating that the Mexican Gross Domestic Product (GDP) in 2019 would grow by between 1% and 2%. In 2018, this rating agency also recognised that Mexico had a solid insurance industry. The return on capital had exceeded 20% and the return on assets had almost reached 3% three years after introducing the Solvencia II regulatory framework.
In Mexico the culture of having insurance is not as developed as in other countries, because, according to figures from the Asociación Mexicana de Instituciones de Seguros (AMIS) [Mexican Insurance Institutions Association], only around 50% of the working population has life insurance and only 8% has medical insurance. By the end of 2019, with the ratification of the United States-Mexico-Canada Agreement (T-MEC in Spanish), according to the rating agency Fitch Ratings Mexico, growth in the Mexican insurance sector was expected to be between 2.5% and 5% in 2020, which is supported by the correlation between GNP and industry development.
The same rating agency concluded that prospects for the Mexican insurance sector were “stable,” pointing out that expansion could be limited due to a potential slowdown in premium outputs. However, the rating agency estimated that this could be offset by the sale of bancassurance products for life and liability coverage. This is because in the third quarter of 2019, life insurance grew by 9.1% in real terms, exceeding the 8.5% obtained during the same period the year before and greatly benefiting from bancassurance production.
Agricultural insurance recorded an annual reduction of 54% in the number of premiums. By the close of the third quarter in 2019, this decrease was caused by a fall in the sector budget, and spending also showed hints of hardship.
Even though there was a large cancellation of policies for federal government officials in 2019, the AMIS projected that the insurance sector would grow in 2020, without considering the effects of the current year, and estimated growth of between 3.16% and 3.26% for the insurance sector.
According to the AMIS, growth in 2019 was driven by a rise in premiums for all sectors: liability insurance (which includes fire, agricultural contingencies, home and catastrophes) saw a nominal increase of 23.3%, while pensions saw an increase of 12.8%, life insurance 11.4%, and accidents and illnesses 7.9%.
In contrast to those figures, since the pandemic was declared and the Executive Order (which stated that only activities considered essential could continue) was published in the Federal Daily Gazette on 31 March 2020, the economy has been severely damaged, and it is still impossible to quantify such damage.
Although it is true that financial activities, which include insurance, are considered essential, it is also true that economic activity throughout the country has been severely affected, resulting in a decline in rating and growth projections throughout the insurance sector. As expected, the economy has declined during the second quarter of this year, caused by a disruption in distribution channels, a decrease in external demand from the United States, and the impact on internal demand due to social distancing measures during quarantine. Manufacturing exports and tourism in Mexico have also been severely impacted.
The Mexican Insurance Institutions Association has said that factors such as companies closing down, unemployment, cancelling manufacturing projects and closing trusts, among others, will affect the sector and could result in a decline of 5.4% in 2020, which would compare to the CNSF, since there is a discrepancy between what happened with the insurance sector in 2010, when the consequences of the economic recession of 2009 did not appear until the following year.
It is true that the figures are not yet final, because before this health and financial crisis there had been an estimated growth of between 2.42% and 3.7%, but it will not be until the end of June that we will know how 2020 will go for the insurance sector in our country.
In this regard, COVID-19 has affected the insurance sector and will continue to affect several different issues, from cancelling group insurance or bailouts on products with a savings component, due to unemployment or lack of cash flow, to claims for death or medical insurance coverage.
On 30 April, the Instituto Nacional de Estadística y Geografía (INEGI) [National Geography and Statistics Institute] stated that its data showed an estimated economic decline of around 2.4%. This is the most severe decline in GNP since the 2009 crisis, when it collapsed by 5% in the first three months of that year. These figures, aside from the impacts arising from the spread of COVID-19 in the closing of businesses throughout the country, are also a sample of the economic downturn experienced by the country since the middle of last year, as GNP has shown negative growth in three consecutive quarters compared to previous years.
Effects of COVID-19 on the insurance sector
As expected, health insurance will have the most incidences among claims and, except for policies that expressly exclude claims due to pandemics, claims filed must be covered. Life insurance is the same, meaning the insurer must cover any claim pertaining to anyone who dies as a consequence of the pandemic.
What happens to credit insurance associated with unemployment or payment default coverage for any reason is relevant, because the effect of closing non-essential businesses has been the loss of millions of jobs, and several employers have been unable to maintain the economic conditions of their workers, creating a succession of defaults. Business interruption coverage in Mexico is linked to property insurance, where direct harm is necessary to trigger coverage. However, several insured parties are beginning to seek out an interpretation of their insurance agreement in search of coverage. Finally, regardless of whether or not insurers intend to grant coverage or not, it will ultimately be up to the courts to decide.