Mexico: hard market, inflation and growing global programmes

The Mexican insurance market is, like many other markets globally, facing a number of challenges, not least the difficult economic conditions both within the country and globally. The country’s GDP grew in 2022 although a slowdown is predicted for 2023. Inflation has been coming down ­– Swiss Re expects inflation to ease in 2023 to an average of 5.8%, from 7.9% in 2022 but to remain above the central bank’s target of 3% – while interest rates remain high and the government is sticking with its fiscal austerity programme.

Non-life premium growth in Mexico is predicted by Swiss Re to slow down to 2.2% compared to strong growth of 9.3% in 2022. However, Swiss Re said rate hardening should support growth in commercial lines.

AM Best is maintaining a negative outlook on the sector. “On the property and casualty side, rising inflation, a slow economic recovery and the risk of future supply chain disruptions could hamper segment dynamics,” said Best, adding: “We anticipate greater claims pressure due to rising inflation and congested supply chains, especially for auto spare parts and medical equipment.”

Luis Macias, WTW’s facultative reinsurance leader for Mexico, says that the Mexican insurance market is characterised by a combination of exposure, bad results (premium vs claims) and competition. He believes that if a solution (mainly capacity) can be provided by treaty capacity, or the combination of two or three co-insurers, then there will be fierce competition among insurance companies.

But for some specific exposures, facultative solutions/capacity will be required, says Macias. These areas include: ‘beach front cover against hurricane events’ within the P&C line; ‘product liability cover’ for automobile spares or pharmaceutical within the casualty line; off-shore exposures such as oil rigs; D&O cover for companies listed on the stock market; cyber cover for financial institutions or on-line retailers.

In these areas, pricing will be driven according to international guidelines and rates. “We are seeing within the international market an adjustment in rates and capacity looking after exposure aggregates. The main increases are seen on nat cat cover, cargo and marine, and cyber risks. Talking about capacity restrains, we see it mainly on cyber risk for banks. It’s worth mentioning as well that we have seen an increase on other non-traditional products, such as parametric deals and M&A policies,” he says.

Ismael Campos, technical director of global risks, MAPFRE Mexico, says that in general all lines of business, particularly those including natural disasters, are seeing price increases. He says the aviation line has seen yearly rises in prices due to the incremental rise in claims, while for liability insurance there are increases due to a growing claiming culture.

“Finally, and not least, cyber risks coverage, and errors or omissions for directors and officials, have represented a trend to increase their price, not only due to the evolution or complexity that these risks present, it is also the intricacy brought by globalisation and a business model that has migrated from B2B to B2B2C with an increasing tech dependency, generating contexts and real uncertainty, from black swans to green swans, a world post Covid-19, a hard situation in Ukraine and global inflation,” says Campos.

He also points to capacity issues, noting that with the withdrawal of some international reinsurers and the negative results of some others, there has been a flight of alternative capital and “an absence of new players that are willing to assume those empty seats – in general, a group of reinsurers are reducing the volatility by reducing their participation.”

According to WTW, the leading insurers on the non-life side vary by line of business, but the main ones are:

• P&C – Chubb, Mapfre, AIG, GMX, Inbursa and GNP
• Marine – Chubb, HDI, Zurich
• Aviation – Atlas, GMX, Axa
• Financial Lines – Chubb, Zurich, AIG, Axa
• Construction – Axa, Chubb, Allianz.

Global programmes

When it comes to global programmes, the issue of non-admitted insurance is always important. In Mexico the situation hasn’t changed, in that non-admitted programmes are not permitted except in certain situations, as Macias explains: “The only possibility to request to the regulator for an exception is where the protection provided by a specific policy written abroad cannot be granted by any insurance company licensed and domiciled in Mexico. It can be submitted to, and approved by, the Comision Nacional de Seguros y Fianzas, in a process that may take three to four months to get the resolution, which could be either positive or not.”

Armando Montenegro, head of facultative reinsurance for Latin America, WTW, says regulation has not changed and he does not foresee important amendments coming in the near future. “With the internationalisation of Mexican companies, Mexico has become an exporter of global insurance programmes, and what is issued by an insurance company is to cover a) all assets located in-country and b) a master policy that could pay losses suffered abroad but that end up being paid to the client headquarters domiciled in Mexico.”

He adds: “Taxes apply on premiums paid in Mexico. And when foreign companies with global insurance programmes include their operation and assets in Mexico, a fronting scheme is normally the solution, which is an activity permitted in Mexico, regardless of the fact that, according to the law, the Mexican insurance company issuing the policy, and not the reinsurer, is liable for any claim from the insured.”

In common with many other countries, a tougher stance is being taken by the regulatory and tax authorities on compliance. “I consider this is due to Mexico’s larger companies being extremely observant on tax issues,” says Campos. “This has been sought because most global companies follow international agreements such as ESG, and within that compliance is very important for governance.”

As to whether it is getting easier or harder to incorporate Mexican risks into a global insurance programme, Montenegro says: “Our view is it’s getting easier. It’s more often to receive requests from our own network to help them to issue local policies for global placements, although it is possible these clients locally have specific needs according to our own local exposures, and complement the risk necessities. And we have also seen an increase of Mexican companies growing outside Mexico and their need to have global or regional programmes, which requires international carriers with an extensive network.”

Campos says that generally speaking, in coverage, capacity and price there are cycles, and the last few years have been about strengthening. He adds that Mexico is part of the risk appetite for reinsurance markets, “and that is why we don’t have tougher complications, only those that are part of this market placing global insurance programmes for big Mexican companies”.