How realistic are insurance growth prospects in Latin America?

Eduardo Recinos Schonborn at Fitch Ratings compares insurance penetration, risk exposure and multiple economic factors to identify true growth opportunity in the region.

Low insurance penetration is a fact of many markets in Latin America—the average is around 2.5 percent, indicating an opportunity for market growth. But given the myriad regional challenges, how realistic are these growth prospects?

“If we just consider the very low penetration levels, there is potential to grow a lot,” says Eduardo Recinos Schonborn, senior director, LatAm regional group head insurance at Fitch Ratings. “But realistically, the markets won’t grow much, at least not at a fast pace.”

He says it “will require many years” for the majority of LatAm insurance markets to grow, although he singles out Mexico as a country that offers “a huge opportunity to grow at a fast pace”.

This is because while insurance penetration is very low in Mexico—below the regional average at 2.4 percent, according to Organisation for Economic Co-operation and Development (OECD) figures for 2022—the country has the second-largest economy in the region and the second largest insurance market in LatAm, albeit that it’s a distant second to continental giant Brazil.

“If Chile’s economy keeps growing at a fast pace, the insurance industry will accompany that.” Eduardo Recinos Schonborn, Fitch Ratings

Brazil has a larger economy, but its 2022 gross domestic product per capita stood at $8,917.7, which was lower than Mexico’s in the same year of $11,496.5, while Chile’s was $15,355.5, according to the World Bank.

Citing Brazil’s huge economy for reference, Recinos Schonborn says he thinks the gap between insurance penetration in Brazil and Mexico will narrow. He says Brazil’s is a much larger economy than Mexico’s but that the difference between size of the insurance industries in each country is even larger because of the very low penetration in Mexico. OECD figures for insurance penetration in Brazil in 2022 were 3.3 percent.

Another key reason Fitch’s head of LatAm thinks Mexico has serious growth potential is the introduction of a Solvency II-type regulation called S2-MEX in 2016. Market commentary from Fitch in 2023 said that the S2-MEX framework for Mexican insurance “has demonstrated solid value through the COVID-19 pandemic, rising interest rates and financial market volatility”.

“The framework continues to promote strong risk management and solvency of insurance market participants. During the past three years S2-MEX alerted an early warning sign of weakness that fostered quick corrective action before capital level minimums were breached,” Fitch added.

So far, so promising. Recinos Schonborn says that this regulatory change fostered greater trust in the Mexican insurance industry among the country’s population because it brought better regulation and created a more orderly industry.

Before the regulations, he says, potential customers believed insurers “never want to pay their claims, so insurance is a waste of money”.

Now, as the insurance industry has modernised, insurers have issued more products through many different channels. This means they are “more weighted to the profile of the population of Mexico” he adds.

“This kind of market change takes a while to grow with huge corporate accounts. But this is the growth that we have seen gradually through the years in Mexico. The country will continue this growth trend since it is sustainable.”

Most mature market in LatAm

Chile is another interesting market for the insurance industry, says Recinos Schonborn.

“It is a quite mature market, so I don’t expect the same accelerated trajectory as in Mexico,” he says.

“But if Chile’s economy keeps growing at a fast pace, the insurance industry will accompany that. So far this hasn’t happened because economic global problems have affected its economy, which is why I do not expect the Chilean insurance industry to grow quickly in the coming years.”

OECD figures show Chile with a relatively large insurance penetration: 4.3 percent in 2022 compared to the LatAm average. Recinos Schonborn says this is partly because there are well-developed pension-related insurance products as well as compulsory products such as auto insurance and health insurance.

“Chile’s public health insurance system requires complimentary insurance products which has created healthy growth in health insurance there. It is also the case in other countries such as Colombia and the Dominican Republic that have always had public health coverage that requires complimentary coverage from private insurers.”

A warning from Puerto Rico

Recinos Schonborn offers a word of caution, using the example of Hurricane Fiona in 2022 to make his point. The hurricane mainly affected Puerto Rico, which as an unincorporated territory of the US is not part of Fitch’s Latin America insurance grouping. But the Caribbean island’s geographical position combined with its high insurance penetration makes it an interesting use-case for comparisons with LatAm insurance markets.

Recinos Schonborn says that Fiona created many economic and insurance losses. In Puerto Rico alone, the National Centers for Environmental Information estimates that Fiona caused $2.5 billion in damages, making it the third-costliest hurricane on record for that territory, after Maria in 2017 and Georges in 1998.

The country in the region with the highest level of insurance penetration is Chile, which is exposed to various catastrophic events, mainly very intense earthquakes.

“Right now, we are seeing a heatwave that has caused fires in Chile. It is a market that has the highest insurance penetration of Latin America, just like Puerto Rico[RB1] .”

Brazil has the third-highest insurance penetration in LatAm, he adds, although this is because of specific business lines that are significant in the market such as pension insurance or health insurance, while Chile has all business lines.

“There’s a high culture of being insured in Chile, perhaps because it’s what we consider to be the most developed economy and perhaps society in Latin America.”

In contrast, Mexico is the opposite of Chile when it comes to insurance penetration, he says. “Mexico is the second-largest market, but the insurance culture in Mexico is not high. This low insurance penetration is partly because of its culture but also because of the relatively low GDP per capita of the country.”[RB2]

To read more about exposure across LatAm click here for the companion article titled “Reinsurance ‘intensive’ for cat-prone Latin America” 

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