Credit rating agency AM Best has revised its outlook on Mexico’s insurance industry to stable from negative.
According to the announcement, this is given the strong recovery in Mexico’s insurance industry amid expected GDP growth in 2023.
In its Best’s Market Segment Report, “Market Segment Outlook: Mexico Insurance,” the rating agency states that, after having been virtually stagnant for three years, the insurance industry in the country has been recovering so far in 2023.
With premiums in the first half of 2023 growing by 8.5% following three years of near-stagnant growth. This was mainly driven by the growth in property and casualty, up 8.9%; and auto lines, up 17.8%.
At the same time, Mexico’s economy continues to recover, with projected GDP growth of 2.6%, and insurers have been able to raise prices amid global inflationary burdens.
Carriers also have transferred a portion of the increase in reinsurance costs on to consumers given hard reinsurance market conditions. AM Best projects premium growth of 6% at year-end for Mexico’s insurance industry.
To contain inflation under control, Mexico’s central bank, Banxico, has adjusted interest rates several occasions from 5.5% at the beginning of 2022, up to 11.25%, with minimal changes since April this year.
Alfonso Novelo, senior director, analytics, AM Best, said: “Improvement in property/casualty lines has driven the premium growth, with a sharp increase in auto insurance demand.
“This is tied mostly to a jump in new car sales during the pandemic recovery, as well as upward adjustments in the average price of car insurance in light of material auto parts inflation, and rising costs owing to the normalisation to claims frequency to pre-pandemic levels.”
Another factor that influenced the outlook revision was a rise in technical results owing to an increase in investment income in first-half 2023. Something that has led to an overall improvement in bottom-line results.
According to the rating agency, underwriters’ margin to further adjust pieces over the next year has almost reached its limit, underscoring the importance of maintaining underwriting discipline and avoiding pricing wars, especially since inflationary pressures have not eased.
Additionally, AM Best views the segment as being well-capitalised. According to the report, in H1 2023, the industry’s capital grew around 3%, based in the insurance market’s improved performance.
Notably, sound liquidity metrics and the absence of deviations in claims allowed the industry to avoid realising losses in their asset portfolio; this despite the impact of the rapid shift in interest rates in 2022 on fixed-income investments.
Catastrophic reserves embedded under Mexico’s regulatory framework account for approximately 4% of overall provisions, which provide an additional buffer to cover any spikes in claims due to catastrophic events.
Despite the operating performance of Mexico’s insurance industry having improved considerably, and insurers having mitigated the impact of headwinds the past two years, AM Best expects that Mexico’s insurance market will remain under pressure owing to slow economic recovery.
Analysts warn that the outlook could be revised to negative if macroeconomic conditions deviate considerably from expectations and adversely affect the industry’s operating performance.
