Suerty Bonds a Strong Growth OpportunityWed, 02/21/2018 - 16:43
Q: What challenges do insurance brokers face after the emergence of new markets in the Mexican economy?
A: There are several issues related to regulations and the lack of knowledge of how the market will work. For instance, the authorities are asking for liability insurance with insured amounts that are stratospheric. We need to understand the new risks that companies such as PEMEX or CFE face when hiring subcontractors. Whenever there is a risk that is too large for any insurance company in Mexico to take on, it is pulverized and falls directly into the reinsurance market where several companies around the world can act on it. Insurance companies are trying to accommodate new risks in policies from American or European companies that have experience managing risk.
When it comes to renewable energies, we are facing the same situation because it is a new market and regulations remain unclear. As brokers, we have developed a specialty for insuring particularities of this new market, such as solar panels. We were responsible for insuring Mexico’s largest solar panel farm. After Hurricane Odile destroyed the farm, the client was reimbursed for the entire insured amount. Murguía has also participated in insuring hydroelectric power plants, wind farms, biomass and thermosolar projects.
Q: How deeply has insurance penetrated the market in Mexico?
A: Insurance penetration in the country accounts for 1.9 percent of Mexico’s GDP. It is a very small percentage, especially when compared with countries having similar characteristics. To the third quarter of 2016, the insurance sector grew 9.3 percent and the estimated growth of the sector for all of 2016 is 11.1 percent. Estimates for 2017 are around 7 percent. When measured as part of the participation of the country’s GDP, Mexico is in the very early stages, which means the country has a major growth opportunity. Insurance companies are always fighting for big corporations and we sometimes forget to target regular citizens. One way the sector can grow is through the microinsurance market. In a country like Mexico, I estimate that an adequate level of insurance penetration needs to be above 5 percent of the country’s GDP.
Not all insurance companies are interested in the microinsurance market because in this segment you need to have a large sales volume to see some profit. We would need to generate more incentives, maybe at a regulatory level, to convince more companies to participate in this business. For instance, the automotive sector has strong growth potential and there are already regulatory efforts to make insurance mandatory. The problem with these regulatory efforts is that, even though they are mandatory, there is no real system of consequences in place, so people can easily ignore the regulation.
There are also growth opportunities on the macro level. The Energy Reform created a new market for insurance companies and it is something we need to tap into. There are other infrastructure projects that could also contribute to the sector’s growth, such as the Mexico City-Toluca Interurban Train. The involved construction companies will need civil liability insurance for this infrastructure. The big infrastructure project on the horizon is the New Mexico City International Airport (NAICM). It will generate growth opportunities but only for those companies that can participate in the project.
Q: What are the challenges and risks of participating in the reinsurance market?
A: The reinsurance market can challenge the stability of the Mexican insurance system. For instance, there is no insurance company in the country that has the necessary funds to insure an oil platform so insurance companies look to the international reinsurance market to take on the risk. The reinsurance markets follow demand cycles. If you try to buy a reinsurance policy for a city after an earthquake, the policy will be considerably more expensive. If you buy the policy 20 years after, its price would have gone down considerably. This situation replicates itself with every event.