Best’s Market Segment Report: Three Years After Solvency II, Mexico’s Insurance Industry Unlocking Growth Potential

Business Wire

MEXICO CITY--(BUSINESS WIRE)-- Despite inconsistent premium growth in Mexico’s insurance industry, the introduction of the Solvency II-based regulatory framework in Mexico’s insurance industry three years ago has not been the limiting factor that some market observers had predicted, according to an AM Best market segment report.

The Best’s Market Segment Report, titled, “Mexico: Three Years Since Solvency II,” states that Mexico’s insurance market has benefited from the Solvency II framework, and that Mexico continues to offer significant growth opportunities for insurers. Since meeting the legislative thresholds for Solvency II equivalence in January 2016, the Mexican insurance industry grew just 0.7% in 2017, but in 2018, the volume of premiums increased by 5.2%. Overall, the market remains more correlated with economic growth and market conditions as opposed to the regulatory regime, but conservatism by insurers, which thoroughly evaluated the impact of the different risks they faced in accordance with the new formula to measure their regulatory solvency, also could have contributed to the low growth in the second year of implementation.

AM Best expects lower premium growth in 2019, between 2% and 2.3%, on a decline in economic growth, AM Best estimates Mexico’s 2019 GDP growth at 1% to 2%. This forecast considers the potential effects of the austerity plan proposed by President Andrés Manuel López Obrador, who seeks to cut government spending by canceling private major medical coverage, and potentially, life insurance to government employees.

Additionally, uncertainty about the scope of future legislative projects stemming from actions by the president, could adversely affect the performance of financial services providers.

Mexico’s insurance industry remains strong. The return on equity has been higher than 20%, and the return on assets has been nearly 3% in the three years since the introduction of Solvency II framework. The framework also has allowed for the ongoing strengthening of the segment’s capital base, with the industry maintaining nearly constant net premium leverage, at 2x—a level that AM Best considers appropriate—over the same period.

AM Best believes risk-based regulatory standards such as Solvency II may boost insurance penetration, because they provide a better assessment of different risks through the use of more technical tools. However, the execution and supervision of the process by insurers and regulators with strong industry expertise, as well as an appropriate set of technical skills, is critical. Otherwise, the risk of market distortions that could affect the competitive environment, or shift capital or asset allocations toward less efficient strategies, may diminish or even erase the benefits of modernizing insurance regulations.

AM Best considers the capitalization of Mexico’s insurance industry as the strongest, as measured by Best Capital Adequacy Ratio, and the adoption of the Solvency II framework likely will continue to promote sound development and strengthen the solvency of those insurers participating in the market.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=285260.

AM Best will be hosting a networking event with a brief Latin America market overview to mark the five-year anniversary of its Mexico-based subsidiary at Habita Hotel in Mexico City, on Thursday, May 9, 2019, beginning at 6 p.m. CDT. There is no charge for this event. To attend or for more information, please visit the event registration page or email [email protected].

AM Best is a global rating agency and information provider with a unique focus on the insurance industry. Visit www.ambest.com for more information.