AM Best said it is maintaining its negative outlook on Mexico’s insurance market segment due to increased levels of inflation and slow GDP growth.
AM Best’s analysts project 2% growth for the country’s insurance industry in 2022.
The country’s premium growth in 2021 saw a 2% reduction in the life business and 1% in the automobile line, which accounts for about 55% of industry premiums, according to the new Best’s Market Segment Report, titled, “Market Segment Outlook: Mexico Insurance.” Also, the report adds, unemployment rates have spiked since 2020 amid economic uncertainty because of the COVID-19 pandemic, which affected consumer sentiment for both lines of business.
Other lines of business returned to growth in 2021, but the increase in premium volume was very limited, and flat in the surety business line.
AM Best said 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, leading its analysts to project 2% growth for the country’s insurance industry in 2022. Inflation estimates have almost doubled since the beginning of 2022 and are expected to be around 7% at year-end.
“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,” said Alfonso Novelo, senior director, analytics, AM Best. “On the property/casualty side, rising inflation, a slow economic recovery and the risk of future supply chain disruptions could hamper segment dynamics.”
Insurance industry capital i Mexico declined by approximately 2% in 2021, mainly as a result of dividend payments. However, AM Best said 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.
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, the report notes. However, since acquisition expenses remained virtually unchanged from 2020, the combined ratios of some lines of business (i.e., accident and health, automobile) rose considerably. Financial income rose 15%, supporting bottom-line results in 2021.
AM Best said it Mexico’s economic environment to remain challenging, which could be a hurdle to insurance industry growth prospects and may continue to negatively impact the industry’s operating performance in 2022.
The analysts said 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.
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