AM Best has revised its outlook for Mexico’s insurance and surety industry from stable to negative due to the COVID-19 pandemic and its anticipated impact on the economy and international markets.
The rating agency explained that the pandemic has aggravated the economic fundamentals that its stable outlook had been based on, and will most likely pressure the operating performance of companies in the Mexican market.
The impact on insurers will vary by business line and segment, but analysts are expecting to see broadly lower premiums, higher claims, limited investment income, and pressured solvency.
The Mexican financial markets are facing lower interest rates abroad that could result in lower interest rates domestically, directly pressuring the asset liability management capabilities of companies, particularly in the life segment.
Additionally, the weakening of the Mexican peso will most likely will affect claims in the non-life segment, owing to medical inflation and rising costs in spare parts for the auto segment.
Combined with the slower dynamism of the Mexican economy (particularly in the construction, wholesale trade, and governmental expenditure sectors), AM Best believes that COVID-19 will most likely will impact growth targets of Mexican insurers.
And a flight to quality of capital could be exacerbated during the pandemic, as subsidiaries of global insurers might pay large dividends in an attempt to safeguard capital from the potential spread compression in interest rates and a weaker peso.
AM Best further noted that the political and economic challenges posed by COVID-19 are likely to put Mexico further into recession this year, with a sharp contraction in growth to be triggered by slowing US growth, a depreciating currency, muted consumer demand, and falling oil prices.
