Mexican market
Compared with other markets, proportional reinsurance treaties are
still popular in Mexico, mainly for solvency reasons. “The reinsurance protections (treaty) in respect of multinational insurance companies are normally part of regional programmes or ceded to their headquarters schemes,” Padilla says. “Local insurance companies see mainly non- proportional treaty in respect of non-life portfolios, with some exceptions that prefer to buy proportional capacity due to internal financial decisions or even the legal capability to obtain reserve relief.”
A new regulatory framework, similar to Solvency II, will be introduced
in 2012 at the same time as comprehensive new insurance laws. According to Schneider, this will have a big impact on the capital that insurance companies will need to hold to cover their liabilities.
Phillips adds that local reinsurers may struggle with higher required capital
levels, but these will be less of a problem for international companies. “There are a lot of international companies in the region already, and
we have seen a growth of reinsurers setting up in Miami, where we are,” he says. “Potentially, we could see attractive rates, but right now, there is a lot of competition and the rates are depressed. Whether it is that attractive to enter the market in this part of the cycle, I don’t know.”
But steady growth seems to have kept reinsurers positive. “We have seen
growth in all lines of business,” says Phillips. “There are opportunities in property, life and health. Also, one thing about some emerging markets, which is also applicable to Mexico, is the growing extraction industry, oil and mining, as well as large infrastructure business.”
Opportunities are promising, but competition, especially since the Brazilian reinsurance market opened in 1996, encouraging still more international players into the region, is fierce. “Reinsurance capacity outweighs demand at the moment,” says Schneider. “Reinsurance is a long-term business.”
According to Nick Shymyck, head of research and development at Kiln, long-term prospects for reinsurers in Mexico are looking up. “Mexico is growing rapidly. Reports suggest that the country will have the fifth or sixth-largest economy in 30 years’ time,” he says.
“Demographics are also a bonus. Mexico has a young population; the
working age population is growing at a rate of one million people per year. The country is heavily dependent on the US economy, but despite being hit hard by the recent financial crisis, it is bouncing back.”
Shymyck also believes a strong economic forecast will help the reinsurance industry continue to grow over the next decade. But insurance penetration remains low, at around 2.5 percent of GDP compared with a worldwide average of 6.9 percent. Only around 40 percent of cars in Mexico are insured, for example.
“There is still a lot to be done,” Schneider says. “Micro insurance is
starting to gain importance, mainly for low-sum life insurance. Designing a product for the low-income population that covers against natural catastrophes is a challenge, but has huge potential.
THE TOP FIVE INSURANCE COMPANIES IN MEXICO
COMPANY
Met Life Mexico G.N.P
AXA Seguros Inbursa
BBVA Bancomer Source: Cooper Gay
2009 PREMIUM IN $ MILLIONS
2,554 1,965
1,870 1,525 1,135
SHARE OF THE MARKET
14.88% 11.45%
10.90% 8.88% 6.61%
MULTICAT MEXICO I
“Mexico is an exciting marketplace to be in. It has a growing economy and will always be exposed to natural catastrophes. It has some way to go yet, but it is definitely going in the right direction.”
But Philips urges a note of caution. “We still have a long way to
go,” he says. “One of the key issues is the lack of insurance culture in Latin American. The average person only buys insurance if there is a requirement, not for protection.”
n 2009, Mexico sold $290 million in catastrophe bonds into the capital markets, becoming the first country to use a World
Bank programme that passes the cost of natural disasters into the financial markets in this way.
MultiCat Mexico 2009, a three-year deal that uses a parametric
trigger, was created by Swiss Re, the International Bank for Reconstruction and Development (part of the World Bank) and the Mexican government.
The bond is linked directly to predefined geological triggers such
as the strength of an earthquake or, for a windstorm, its lowest air pressure measurement—acknowledged as the main indicator of hurricane strength.
The transaction comprises four tranches, each covering a
different peril or geographic area. The payouts can range from $140 million for earthquakes to $50 million for hurricanes.
The bonds covering earthquakes cover three seismic zones:
Northwest Cocos, Central Cocos and Mexico City regions. For the hurricane cover, payout is triggered if a storm passes through one of the coastal zones and the pressure at the centre of the storm is the same as or below 944 mb for Pacific coastal regions and 920 mb for Atlantic coastal regions.
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