According to a recent AM Best report, the rating agency is maintaining its negative outlook on Mexico’s insurance market segment, owing to increased levels of inflation and slow GDP growth.
Best’s new market segment report, titled – Market Segment Outlook: Mexico Insurance, states that premium growth in 2021 was pressured by a 2% reduction in the life business, as well as 1% in the automobile line, which overall accounts for about 55% of industry premiums.
At the same time, unemployment rates have been spiking since 2020, amid economic uncertainty because of the COVID-19 pandemic, which has impacted consumer sentiment for both lines of business.
However, other lines of business did return to growth in 2021, but the increase in premium volume was very limited and flat in the surety business line.
The report also highlights that recovery estimates for the Mexican economy have been adjusted downward, to GDP of approximately 1.7% from up to 3% at the end of 2020, which has led to AM Best to project 2% growth for the country’s insurance industry in 2022.
Moreover, inflation estimates have also almost doubled since the beginning of 2022, and are expected to be around 7% at year-end, according to the report.
Alfonso Novelo, senior director, analytics, AM Best, commented: “The demand for life insurance products could decline if the returns offered by the industry do not keep up with those offered in the market through more liquid investments. On the property/casualty side, rising inflation, a slow economic recovery and the risk of future supply chain disruptions could hamper segment dynamics.”
In addition, insurance industry capital declined by approximately 2% in 2021, which was mainly as a result of dividend payments. However, AM Best noted that it does not see this as a negative in terms of risk-based capitalization, since the insurance industry’s net underwriting leverage did not change materially from previous years.
Furthermore, to mitigate the impact of increased claims on underwriting results, Mexico’s insurance industry implemented stringent cost policies that improved operating expense ratios during 2021. But, since acquisition expenses have remained virtually unchanged from 2020, the combined ratios of some lines of business, such as accident and health, and automobile, rose considerably.
Overall, AM Best stated that it expects Mexico’s insurance market to remain pressured by the challenging economic environment.
The ratings agency said that the outlook may be revised to stable if challenges dissipate or adjustments to underwriting policies and improved efficiency are able to mitigate the impact of headwinds.
Meanwhile, according to analysts at GlobalData, Mexico’s general insurance industry is expected to grow at a CAGR of 7.5%, from $18.2 billion in 2021 to $26.1 billion in 2026.
