Tag Archives: mexico

Implications of Our Aging Population

Aging is a key force shaping our societies and the economy. Too often, the current debate on aging and demographic change narrowly focuses on the direct implications for pensions system and healthcare and neglects the broader economic implications. An understanding of the wide ranging economic implications of demographic change, however, is fundamental for insurers and policymakers in order to make sound long-term decisions.

The world of shrinking workforces

The world is quickly entering a new phase of demographic development. The new world is characterized by a shrinking or – at best – stagnating workforce due to the continuous decline of birth rates since the “baby boomer generation.” While Germany’s working age population peaked about 15 years ago, according to UN figures, China is currently at a record. In the U.S., the working age population is expected to continue to grow due to immigration, albeit at a much slower pace than in the past.

But decreasing birth rates not only mean that that the workforce is shrinking (or at least not growing). It also means that the average age of the workforce is increasing, especially until the baby boomer generation will be retired within the next decade. We refer to this phenomenon as “silver workers.”

Furthermore, as people live longer, the proportion of retirees in the total population is going to increase. This increase will be far more pronounced in the future than it was in the past. In developing economies, this trend is starting at a much lower level, but the eventual change will be far more rapid and dramatic than in developed economies.

The economics of aging

These demographic developments – shrinking workforces, the rise of silver workers and increasing share of retirees – will have profound economic implications.

In a world of shrinking workforces, we cannot expect the economy to expand rapidly, unless productivity can be increased far beyond long-term historical averages. In fact, past growth rates were driven considerably by an increasing labor force. This is especially true for some developing economies like Brazil and Mexico. But also in the U.S., more than 40% of economic growth over the past 25 years can be attributed to an increasing working age population. We will have to get used to low GDP growth rates.

See also: The Great AI Race in Insurance Innovation  

However, overall GDP growth says little about the development of individual living standards. To assess living standards, we need to consider the implications of demographic change on GDP per capita.

Three forces are at play:

First, because fewer workers will have to provide for more retirees, demographic change depresses GDP per capita. In the U.S., the share of working age population to total population is expected to decline from 60% to 54% over the next 25 years. In China and Germany, the decline is more pronounced: from 67% to 57% in China and from 61% to 51% in Germany. This implies that, as long as the production of each person of working age does not change, per capita GDP would decrease by 9% in the U.S. and by 15% in China and Germany by 2040.

Second, future GDP per capita will depend on the development of investments and savings. As people will have to live longer on their savings in retirement, we expect saving rates to increase. As these savings are invested, there will be more machines per person (i.e. the capital stock will increase relative to the labor force). This will partly compensate for the negative impact of the labor force development on GDP per capita.

Finally, advances in productivity may entirely or partially offset the demographic pressure on GDP per capita. Projections of productivity growth are fraught with high uncertainty. However, based on historical productivity growth rates (about 1.5% per year in most developed countries), productivity growth will likely compensate for the negative demographic impact on GDP per capita in most countries (Italy being a potential exception).

Taking these three factors together, we conclude that GDP per capita will continue to grow in most countries, albeit at a slower pace than in the past.

The next question is: How will this per capita income be distributed among workers and retirees?

We expect that aging will depress real interest rates as the demand for capital is likely to shrink relative to savings. In fact, real interest rates have been steadily declining over the last three decades. We will have to get used to a low-interest environment and, hence, low returns on retirement savings.

At the same time, the relative scarceness of labor should bolster wages. Hence, the future workers will likely benefit relative to future retirees (who are today’s middle-aged savers).

A threefold challenge

This analysis suggests that there is a threefold funding challenge from aging.

First, low interest rates make it difficult for individuals to accumulate sufficient savings to fund their retirement.

Second, the increasing share of retirees in society exerts a rising funding pressure on public pay-as-you go pensions systems. While in the U.S. there are currently 25 people of retirement age per 100 of working age, it will be 40 people of retirement age in 25 years.

Third, the increasing average age of the workforce raises the risk of disability. Inability to work due to critical illness or disability reduces the ability of individuals to accumulate sufficient savings to fund retirement.

Policymakers have to consider a number of policy measures to address this threefold funding challenge. Potential measures include increasing the retirement age, providing incentives for individual savings, enhancing productivity, increasing labor force participation and increasing pensions contribution or reduce benefits.

See also: Demographics and P&C Insurance  

In most countries, however, none of these measures seems desirable or politically feasible on its own. In the U.S., for example, pension contributions would have to be increased by 63% between 2015 and 2040 to compensate for the increasing share of retirees in the population. Alternatively, the retirement age would have to be increased by seven years.

Policymakers therefore need to develop strategies that combine a broad range of different measures in varying degrees. There is a risk, though, that measures to enhance productivity, namely investments in education, will be de-prioritized as public finances come under increasing strain.

For insurers, this analysis suggests that they must adapt to a world of slow growth and low interest rates in the longer term. Furthermore, in a world of aging workforces, products designed to protect the income against disability and inability to work will become more important. Hence we expect to see a stronger shift from savings products to protection products.

What Trump Means for Business

Donald Trump’s stunning win in the U.S. presidential election, together with the election of Republican majorities in both the House and the Senate, has generated a wave of coverage about the deep changes that will surely occur with Obamacare but not nearly as much about what the voting will likely mean for businesses in general and the insurance ecosystem in particular. While there are far more questions than answers, I’ll venture a few observations.

The biggest concern is that Trump brings with him enormous uncertainty that could cause a pause in planning for investments, especially given that we are in the year-end budgeting season. Yes, a transition of power at the presidential level always brings uncertainty, especially when the new president is from the other party, but the uncertainty surrounding Trump will likely last longer than usual — possibly far longer — for three reasons and could cause significant problems for the economy.

First, while companies plan investments based partly on an incoming administration’s policies, it’s not at all clear what Trump’s policies are in many instances. Often, he said something startling during one portion of the campaign, such as that he planned a 45% levy on goods from China that would start a trade war, but then backed off and let the furor die. Will he try to impose that levy; build a wall that would damage relations with Mexico, one of our biggest trading partners; cut taxes so much that he adds $500 billion a year to the federal deficit? Who knows? He likely doesn’t even know at the moment on many issues.

He has expressed some plans consistently. For instance, he expects to lower nominal tax rates on businesses and simplify the tax structure, which businesses will welcome and which congressional Republicans will likely support. Trump plans to invest heavily in infrastructure, which draws mixed reviews among Republicans. He plans to reduce regulation, including defanging a major consumer watchdog group, which businesses generally welcome, though his thinking on regulation could cause consternation on health insurance. (He says he thinks health insurance costs can be driven way down by allowing any policy approved in one state to be sold in other states — an approach that state regulators would surely resist and that would leave many companies in limbo while the fight played out.)

But even when Trump has been thematically consistent, he has been shy on details or even contradictory — his campaign simultaneously cited two different versions of his tax plans that were $1.2 trillion apart in terms of how much revenue they would generate over 10 years.

Even under the best of circumstances, it will take many weeks for Trump’s team to build out the details of the many policies that an incoming administration needs to have — and that most have on Election Day. It could be months before the team even gets to the point of starting to turn the policies into legislation.

Which brings me to the second point about the unusual uncertainty surrounding a Trump administration: He doesn’t have a team.

He needs to build a team numbering in the thousands to take leadership roles in the vast federal bureaucracy, but he just has the core of a team at this point, which is very late in the game as it’s usually played. That core is mostly his family, four politicians and two political operatives. Two of those politicians — former New York City Mayor Rudy Giuliani and former Speaker of the House Newt Gingrich — have experience but have been out of office at least 15 years and don’t bring sizable organizations with them. The two sitting governors on the team — Indiana’s Mike Pence, the vice president-elect, and New Jersey’s Chris Christie — have access to organizations, though Christie may be hampered by the Bridgegate scandal. The two political operatives — campaign Chairwoman Kellyanne Conway and campaign Chief Executive Stephen Bannon — have only modest resources to contribute to a team, and Bannon’s organization, Breitbart News, is toxic to many.

Traditionally, the Republican Party would provide the core of the incoming president’s team, but Trump has been at war with most of the leaders of his party — notably not Chairman Reince Priebus — almost as much as he has with the Democrats. In addition, many politicians will avoid Trump, at least initially, because of the racist, xenophobic and misogynistic things he said during his campaign.

He will surely build a team. The lure of high office will overcome the scruples for many. But the mechanics will likely take longer than normal, and there could be more than the usual sorts of problems getting the people Trump wants in the jobs where he wants them.

My third and final point: Even once Trump builds a team, it’s not clear that he really wants one. He has said that he runs his business pretty much as a solo operator, reserving all key decisions to himself, and he certainly ran his campaign that way. He publicly contradicted his vice presidential nominee on a policy matter related to Russia. Trump and Gingrich reasonably often ventured contradictory opinions in public. Conway has said that she sometimes said things on TV to get Trump’s attention, because she knew he was watching her on TV and couldn’t always get his attention in private.

What will Trump delegate, and which decisions will he keep for himself? Will he be consistent in the division of responsibility? He has said that he trusts his instincts and doesn’t read, so how will he manage a bureaucracy traditionally built on careful analysis, detailed briefings and internal debate? Does he have something entirely different in mind?

Those answers aren’t yet clear, and they need to be as Trump figures out how to delineate policy and work with an enormously large team for the first time in his life.

This list of three reasons for additional uncertainty actually assumes otherwise benign conditions. It assumes that he controls his worst impulses, even though he surely wants to wreak revenge on or at least belittle so very many people at the moment. It assumes that he doesn’t get bogged down in the lawsuits that are either already proceeding (the Trump University fraud trial begins later this month) or that may be filed against him, including by the women who allege he sexually assaulted them. It assumes that no crisis erupts in, say, Syria or in the economy, which could well pose some problems.

For me, the first big test will be whether he can make peace with the congressional leaders of the Republican Party. If he can, then he has the chance of building a team quickly enough to eliminate much of the uncertainty. But that will be tricky. His personal relationships with many of the leaders are awful, and allying with them would mean turning his back on the many supporters who urged him to “drain the swamp” in Washington, by which they meant getting rid of the entire elite, perhaps mainly Democrats but with many Republicans included.

The uncertainty will be with us for a while – and could well cause a pause in investment during a still fragile time for the economy.

The Dark Side of Rapid Change

Global trade and investment have been great engines of progress for much of the world. Over the past two decades, poorer countries reduced the gap between themselves and their richer counterparts for the first time since the Industrial Revolution, in no small part because of the opportunities opened by global trade. Technology has the same transformative potential in industries as varied as energy, health care, transportation and education. Inventions that are imminent or already here could transform the lives of billions of people for the better.

Yet, as we see in the 2016 U.S. election campaign, and as we have seen in Europe and elsewhere, rapid change has a dark side. If too many people are unable to adapt quickly and successfully to these changes, they will push back – blaming trade or immigrants or the elites – and demand a reversion to a simpler time.

The task of governments is to help people manage these transformations so that they benefit many and do as little harm as possible. In the U.S., governments mostly failed at that task during the era of globalization; if the full benefits of the coming technologies are to be enjoyed, governments will have to do much better this time around.

See also: ‘Interactive Finance’: Meshing with Google  

The competitive pressures created by globalization should have been no surprise. About 45 years ago, President Richard Nixon’s top international economic adviser, Pete Peterson, warned him that rising competition from Japan and Germany, with much more on the way, “poses adjustment policy which simply cannot be ignored.”

Americans have unquestionably gained by the lower prices and higher quality that import competition enabled. Apple iPhones and the latest Boeing jets are the result of the collective input of tens of thousands of collaborators in dozens of countries around the world. But many lost well-paid manufacturing jobs to import competition or outsourcing, and the U.S. government has made little effort to mitigate those costs, even in worker retraining.

President John F. Kennedy promised in 1962 that the government would help American workers who lost out to trade competition as the U.S. lowered its barriers to imports. “When considerations of national policy make it desirable to avoid higher tariffs, those injured by the competition should not be required to bear the full brunt of the impact,” he said. But today, the U.S. spends a smaller proportion of its wealth on worker retraining than any of the other 34 member countries of the Organization for Economic Co-operation and Development except for Mexico and Chile.

Too often, the attitude of the U.S. government has been deeply irresponsible, assuming that markets would simply sort everything out for the best. In the long run, everybody may end up with work and income, but, in the short run, as Peterson told Nixon, the failure to help Americans adapt to the new reality will “leave long periods when the transition is painful beyond endurance.”

With technology change, too, we know well in advance exactly what is coming. Driverless technology, for example, will soon become the standard in the trucking industry. Driverless trucks can run 24 hours a day and won’t demand overtime pay. There are 3.5 million truck drivers in the U.S., and an additional 5.5 million jobs in related industries – roughly one in every 15 American workers. They could perhaps go to work for UPS or deliver pizzas, but many of those delivery jobs will be lost to drones.

Personal-care robots will increasingly replace home healthcare aides, and self-checkout machines are already replacing retail-store clerks; these are jobs that filled some of the gap left by the disappearance of manufacturing jobs to global competition, but they, too, will soon be under siege. Automation is even hitting law and education, two sectors long thought immune to technological substitution.

See also: How Technology Breaks Down Silos  

These vulnerabilities necessitate something that too often was absent in the era of globalization: good public policies. Artificial intelligence will transform teaching, for example, but, without access to the highest-speed broadband, students in poor and rural areas will fall further behind their urban counterparts. And unless we strengthen social safety nets and retraining schemes, there will be far too many losers in the labor market. There is no way to avoid the huge impact that technology will have on employment; we have to prepare for it and help those whose skills it antiquates.

Much more even than globalization, technology is going to create upheaval and destroy industries and jobs. This can be for the better, helping us create more interesting jobs or freeing up time for leisure and artistic pursuits. But unless we find ways to share the prosperity and help Americans adapt to the coming changes, many could be left worse off than they are. And, as we have seen this year, that is a recipe for an angry backlash—and political upheaval.

This article was written with Edward Alden.

Opportunities in Latin America

The Latin America insurance outlook for 2015 is generally favorable, with high-single-digit premium growth across the region presenting complex risks and opportunities. Although real economic growth has slowed recently in the largest markets of Brazil and Mexico, stronger economic growth and inflation in some areas continue to drive premiums. Long-term trends (reduced poverty, shrinking unemployment and a population increasing above the pace of most mature markets) are bolstering consumer demand for insurance products.

In general insurance, catastrophic risks from floods, hurricanes and earthquakes are driving premium growth in a number of Latin American countries. Premiums peak following major losses as demand increases and supply becomes more costly. In contrast, the underwriting cycle slowly reduces premium rates after benign catastrophe-loss periods, such as those experienced in the last few years. The development of efficient distribution systems to increase insurance market penetration and encourage product acceptance remains a critical challenge.

As economic, political and regulatory environments evolve inconsistently across the region, inflation risk continues to persist at varying levels. While Chile’s, Peru’s and Colombia’s annual inflation rates averaged 2% to 3% from 2009 through 2013, Argentina’s and Venezuela’s percentages were the highest in the region. Argentina’s battles with its creditors, and its governmental hand in business, have destabilized its currency. In contrast, Mexico’s government remains stable and is progressing with reforms to modernize insurance and other business sectors.

From a tax perspective:

  • Brazil imposes the highest income tax in the region, with insurer profits taxed at 40%. Popular products include health insurance and term life insurance, as well as auto and property covers, which are sold by independent brokers. Tax incentives for retirement accumulation plans are growing in popularity.
  • Mexico’s tax incentives, promoting retirement savings and a reasonable income tax structure, are contributing to growth. In a country where third-party auto liability coverage is mandatory in several cities, auto insurance generates the highest premiums.
  • The scenario is similar in Chile, where auto insurance is also compulsory and characterized by intense price competition. Provisional life and retirement products are part of the national social security system. Approximately half of all insurers are subsidiaries of international firms. Although an open market has led to stability and a competitive balance, insurers continue to adapt in the wake of earthquakes and other natural disasters.
  • In Argentina, independent agents and brokerage firms account for an estimated 75% of total premiums. The nationalization of private pension funds in 2008 changed the insurance industry structure, sharply reducing the size of the life and annuity market and the number of insurers in the country. Argentina imposes a high income tax burden, with profits taxed at 35% and a 10% dividend withholding tax.
  • Colombia, the fifth largest Latin American insurance market,
    is partially focused on investing in infrastructure to encourage demand for guaranty bonds. Automobile insurance, compulsory personal auto accident protection and reinsurance and earthquake insurance are the most important product lines. The industry aims to develop catastrophe insurance markets and enhance risk models, hoping that a stable commercial market will help deter government response to gaps in market coverage.
  • Peru has upgraded its economy in recent years to manage its rapid growth. Significant changes are being made in consumer protection, tax legislation and new regulation. Peru’s growth forecast is 6% this year, compared with predicted growth of 1.5% for Brazil and 1.1% for Mexico. Many foreign companies are considering Peru as a safe and desirable country for investment.

The Latin America insurance environment is becoming more similar to mature markets. Strong economic growth rates and regulatory reforms in the past decade(s) have attracted a number of global insurers, reinsurers and insurance brokers to the region. Mergers and acquisitions continue to help these global players build their positions. And cross-regional expansion efforts by Latin American-based insurers have increased their size and market reach, as well. These deals are enhancing insurers’ capabilities in product development and risk management. The implementation of new Solvency II insurance capital management regulations in 2015 is expected to result in a shift toward greater insurance industry consolidation and increased sophistication in risk management.

Low penetration rates in Latin America are caused by a number of factors and afford significant room for growth if economic expansion continues. Factors include:

  • Wealth disparity
  • Insufficient tax incentives for retirement products
  • Lack of knowledge among the general population about the value of insurance

Also contributing to potential opportunity is the changing perception of insurance as a necessity or investment, rather than a cost. This comes about with a change to the region’s income disparity, which in most countries is shrinking. Brazil is expecting double-digit declines in premiums across many low-hazard markets. In this heightened competitive environment, many insurers believe they can accelerate premium growth by targeting rapidly growing market clusters.

In comparison, Argentina is experiencing high inflation, tight regulation and a fluctuating economic market; nevertheless, insurance is a fast-growing industry that continues to show resilience in premiums and tolerance for expansion in a challenging environment. Argentina and Venezuela also have strict foreign-exchange control regimes. These generally do not allow residents to pay dividends or inter-company services/royalties outside of the country — in some cases, also limiting the deductibility of certain payments.

In general, it is worth discussing the value added tax (VAT) system in these countries,which is a key concern for insurers.TheVATpaid on the local purchase or importation of goods or services constitutes “input VAT” that typically should be credited against the “output VAT” generated on the taxable sale of goods or services. VAT should not be a cost of doing business. However, VAT is often an unexpected cost when entering a market. In the case of Latin American insurers with VAT taxable and non-taxable activities, the VAT calculation methodology is complex and usually generates some level of irrecoverable VAT.

Some products sold by insurance companies are exempt from VAT, meaning that any VAT incurred on the local purchase of goods or services becomes an irrecoverable cost for the insurance company (although deductible for local corporate income tax purposes). For example, the following are exempt:

  • Argentina’s life insurance and workers’ compensation policies
  • Mexico’s life and pension insurance
  • Certain insurance contracts in Chile, including those related to international trade, insurance of assets located outside of Chile and earthquake-related coverage

Brazil deserves a separate analysis because Brazilian insurance companies are subject to Social Integration Program (PIS) and Contribution for the Financing of Social Security (COFINS) taxes on gross revenues, at a combined rate of 4.65%. PIS/COFINS are not a VAT type of tax but, rather, they are paid on a cumulative basis: any PIS/COFINS paid by the local insurance company is not a recoverable cost. Brazil has a state VAT (ICMS) and a federal VAT (IPI), but these taxes do not apply to the sale of insurance products.

Property/casualty, auto insurance, professional liability, environmental and finance solutions are generally subject to VAT in Latin America, so any VAT paid should be fully recoverable for the local insurance company.

In addition to the VAT, some Latin American countries impose additional layers of indirect taxes that should be carefully reviewed by local insurers (e.g., gross revenue taxes, taxes on financial transactions, net worth taxes and stamp taxes, among others).

Insurance Risk in Latin America

Latin America’s compound growth remains attractive and yet, overall, insurance penetration rates still remain low in many countries. Particularly in life insurance, despite continuing economic growth and reduced poverty levels, penetration is low, suggesting there is still significant growth ahead for the insurance sector. We have seen significant reforms across the region from both a fiscal and regulatory standpoint, in everything from capital and exchange controls to consumer protection. We believe a key challenge for insurers over the next decade is navigating this rapid acceleration toward modern regulatory and operational realities.

Around the world, regulators are setting the expectation that insurers will raise their game. The trend is clear, toward better risk management, better governance, more precise measurement of capital in a risk sensitive way and more detailed and transparent reporting to regulators.

We presented our first report for Latin America in 2012, focusing on risk-based capital (RBC) and emerging regulations in four markets: Argentina, Brazil, Chile and Mexico. We have expanded our coverage and also added Colombia, Peru and Uruguay to our new overview.

In the past two years, each Latin American market has faced a different journey to a risk- and economic value-based solvency framework. More open markets in the Pacific Alliance (Chile and Mexico) have enhanced their risk management processes, while Brazil is seeking Solvency II equivalence by 2016. Mexico’s new law, modeled on Solvency II, is likely to be implemented ahead
of the rest of the world. Peru and Uruguay have no immediate plans to pursue a Solvency II approach. Although both countries are attracting foreign investment, the market size and number of players are impeding regulation. With Argentina’s high inflation and economic concerns, adopting an RBC framework in the short term is unlikely.

The challenge to understanding Latin America remains that most insurers in the region are not well-prepared for the expected changes in governance, risk management, capital requirements and reporting. At EY, we believe that effective risk management and the ability to quantify and price risks accurately are a core competence for a successful insurance company. We also observe globally that the leading insurers will typically look to define their own vision for their capabilities in these key areas, rather than simply following the iteration of each piece of regulation. Leading firms will also typically go on to deploy these capabilities more quickly and effectively across their businesses at the point of decision making, and being ahead of competitors in this way is a source of clear commercial advantage.

Argentina

The Argentine insurance market has made minimal progress in its approach to RBC in recent years. As other Latin American countries take steps toward Solvency II equivalence, Argentina is only superficially addressing this issue. In a country experiencing high inflation, tight regulation and fluctuating economic market concerns, RBC is only one in a long list of initiatives on the regulatory agenda of the Superintendencia de Seguros de la Nación (SSN).

Nevertheless, insurance is a fast-growing industry that continues to show resilience in premiums and tolerance for expansion in a challenging environment. Annual growth percentages are measured in Argentine pesos, so the inflation rate has a significant impact on those figures. As of 30 June 2013 (last fiscal year-end), there were 184 companies (108 in property/casualty) writing insurance in Argentina – with 29 new companies added in the past two years. International players continue to make acquisitions to enhance their positions in the industry. Growth has been most prominent in workers’ compensation and motor insurance, producing increases of 42% and 35%, respectively, from June 2012 to June 2013.

Brazil

The Brazilian insurance market continues to achieve double-digit growth. The industry is witnessing a series of mergers and acquisitions and the arrival of multinational insurance and reinsurance companies, mostly from Europe. In addition, the sector experienced the largest initial public offering in the world last year, when BB Seguridade raised approximately US$5.75 billion in the BOVESPA stock exchange.

Although national bancassurance players dominate the Brazilian insurance market, international insurance companies continue to grow at a higher rate through M&A and strategic alliances.

Given the continuous growth in the market, the Brazilian regulator, Superintendência de Seguros Privados (SUSEP), is working with the European Insurance and Occupational Pensions Authority (EIOPA) to achieve Solvency ll equivalence in Brazil. This will facilitate the investment of European insurance companies in Brazil and Brazilian companies in Europe. SUSEP will sign an agreement that will adopt Solvency ll rules partially or fully by 2016, based on a comparative study that EIOPA will perform to measure Brazilian regulation against the Solvency II regime.

Chile

The insurance market in Chile continues to shift from its present regulatory framework to a more sophisticated RBC approach to solvency assessment that better reflects current industry risks. New methodology proposed by the Superintendencia de Valores y Seguros (SVS) is an important step toward building an integral and holistic RBC model.

The Comframe capital framework implementation requires each risk category to be managed individually, with most supervision on a product-by-product basis. Most insurers will need to improve their risk function or implement a holistic approach to risk management. Also, local skilled resources are scarce for the level of technical knowledge imposed by this regulation. Many will need to develop better data analytics, systems and precise risk measurement if they are to increase capital efficiency and profitability.

Chile is one of the more stable markets in the region, primarily because of tight controls over insurance products and asset portfolios. This stability is essential in a market that offers rich growth potential. While the ease of doing business in the country presents an opportunity, product expansion remains an emerging challenge due to a lack of insurance product awareness and consumer perceived value.

Colombia

Colombia enjoys strong economic growth and enormous potential for financial stability over the next three to five years. GDP growth is about 4% a year, ahead of the average for the region. This is driven by stronger activity from foreign investors, a stable macroeconomic environment and a growing middle class. The free trade agreements that Colombia has engineered with major world markets are one example of the tremendous potential the country offers.

Insurance regulation is moving toward a more risk- and economic value-based solvency framework, with tightened capital market regulations. As a result, Colombia is ahead of many global rapid growth markets in reforming regulatory processes, protecting investor rights and cross-border trading to increase the ease of doing business for small companies.

Recent rules that allow foreign insurance companies to establish branches and operate as local insurers have changed the complexion of the Colombian market. Global industry players are entering, buying local insurers or considering start-up companies. This should encourage increased capacity, product diversification and greater competition. Colombia’s premium growth was US$8b in 2013, and rate reductions of as much as 10% were expected for property and life/accident insurance in 2014.

Mexico

The Mexican insurance market is the second largest in Latin America. As of December 2013, gross premiums totaled $334.19 billion Mexican pesos or approximately US$25.6 billion, an increase of 11% over the prior year; this increase includes the effect of a large biannual policy of the government. Despite having one of the lowest proportions of insurance penetration in the region (almost 2% of GDP), Mexico continues to grow above the country’s nominal GDP. New insurance laws and Solvency II regulations are leading to market consolidation, as well as growth in specialty and consumer product lines. The high demand for life insurance is reflected in individual life premiums, which rose 23% in 2013, following a 19% increase in 2012, basically for the success of some savings products.

The regulatory framework in Mexico is evolving toward a more sophisticated risk-based capital approach. A proposed Solvency ll – type insurance law has been under review by the Mexican regulator, Comision Nacional de Seguros y Fianzas (CNSF) and the Mexican association of insurance companies, Asociacion Mexicana de Instituciones de Seguros (AMIS) since the second half of 2008.
The Mexican Congress approved the new regulation in April 2013. Quantitative impact studies and qualitative impact studies are moving forward, and new accounting principles are under discussion. Legislation in the country continues to advance and is likely to be implemented ahead of the rest of the region.

Peru

Peru’s steady economic growth and expanding middle class are attracting new business and opening doors for insurance companies. The Peruvian economy is supported by rapid growth in investment, low inflation, strong economic fundamentals and an annual GDP growth rate of nearly 6%. The country has an investment rating in Latin America that is second only to Chile and offers a favorable legal framework for foreign investors. The financial sector, including insurance, is second only to mining (gold, zinc and copper) in direct foreign investment.

In the last decade, insurance industry sales in Peru have grown more than 200%, from PEN2,700 million (approximately US$776 million) to PEN9.069 million (approximately US$3.36 billion) in 2013. As of December 2013, 40% of total net premiums were from general insurance, 14% from accident and health, 21% from life insurance and 25% from the private pension fund system. It is important to note that only approximately 16% of the urban population has private insurance and 18% has health insurance – and this number has stagnated over the past five years.

The insurance market is highly concentrated in Peru, with 2 of the 15 insurance companies accounting for 60% of total gross written premiums. Overall, insurance penetration rates remain low, as they are in many other Latin American countries.

Uruguay 

Uruguay is a small country with stable economic growth, expanding tourism and rising disposable income. It was one of the few countries in Latin America that was able to avoid recession in 2008, and it continues to grow, with an economy based largely on exports of commodities like milk, beef, rice and wool. Some of world’s largest banks and financial institutions maintain branches there, and it was fortunate not to experience the impact of the global financial crisis or ensuing government intervention.

Although the Uruguayan insurance market is highly competitive, it has no more than 15 companies competing for market share. The largest in the country is Banco de Seguros del Estado (BSE), a government-owned insurer with about 65% of the market share as of December 2013.

Gross written premiums for the insurance industry totaled UYU21.6 billion (US$1.1 billion) in 2012, with a CAGR growth rate of almost 19%. Motor insurance and general liability insurance were leaders in the non-life segment. An increase in demand for pension products contributed to the significant growth in the life segment.

For the full report from which this excerpt is taken, click here.