Mexico insurance outlook negative on COVID-19 pandemic: AM Best

Ratings agency AM Best has revised its market segment outlook on Mexico’s insurance industry and surety segment to negative from stable because of the effects of the COVID-19 pandemic amid a weakening economy and volatile international markets.

Best stated that the stable outlook had been based on the solvency of the industry and its ability to meet weakening economic conditions. The COVID-19 virus outbreak most likely will pressure the operating performance and balance sheet strength of market participants, while testing their enterprise risk management (ERM) capabilities.

"With the weakening of the Mexican peso (MXN), non-life insurers should experience higher claims activity, owing to medical inflation and rising costs in spare parts for the auto segment. Business disruption and lower domestic demand could significantly affect trade credit insurance and the liability segment, depending on the extent of the crisis and the governmental response. Benefits paid by life companies also could increase, particularly for those insurers that have returns tied to USD/MXN performance," it said.

The agency noted that the surety and transport sectors already had felt the ramifications of the slower economy on premium generation. With the COVID-19 pandemic, this negative trend could expand to the whole insurance market, including the "typically resilient" auto segment.

Additionally, AM Best stated that "a flight to quality of capital could be exacerbated during the COVID-19 crisis. Subsidiaries of global insurers may pay large dividends in an attempt to safeguard capital from the potential spread compression in interest rates and a weaker peso. The active participation of regulators and ERM practices of companies will be key to maintaining solid capitalization indicators."

The agency expects companies to control expense increases in claims and to adjust their premium charges. The ones with long positions in the US dollar may benefit from maintaining such positions given the weaker fundamentals of the Mexico’s economy, it said.