Emerging markets offer huge growth potential for insurers given underserved populations, combined with the desire to improve financial security and mitigate financial risk – which is crucial in the development of businesses and entrepreneurship. The insurance sector in Central America posted significant growth between June 2013 and June 2014, reporting 10.3% growth, with full year 2014 growth expected to be 5%. According to the Daily Latin American Insurance Bulletin (Boletín Diario de Seguros América Latina ‘BDSAL’), income from insurance premiums for the 140 insurers in Central America and the Dominican Republic total USD2.6bn, an increase of USD104m on the prior year. In the region, growth has been managed prudently, and ongoing strengthening in underwriting conditions, ample reinsurance protection and liquidity ensures the sector remains resilient and able to access funding to underwrite future growth.
According to Fitch, Central America will remain as the seventh largest insurance market in Latin America. Its credit profile remains solid compared to other insurance markets in the region, and nominal growth in premiums is an estimated 10.2% in 2014 and 9.5% in 2015, lower than 11% in 2013. On a regional level, Panama is the largest aggregate insurance market, underpinned by trade – excluding Panama, Costa Rica will remain as the largest market of the region (40% of total premiums written and 2% of the country’s GDP), while Nicaragua will remain as the fastest growing market in the region.
Growth in the insurance industry is typically associated with wider economic growth and increased bankarization – even though Guatemala has one of the lower levels of bankarization in the region, 10% growth for the sector is expected in 2015.
A high level overview of regional insurance shows some key numbers and rankings by premium income. Whilst medical, life and car insurance account for the bulk of insurance products, given increased investment in the region and its susceptibility to natural disasters, there has also been increased uptake in related products. Increased take up of life insurance products also represents a trend towards improved household savings.
Figure 1. Overview of regional insurers (source: Prensa Libre, 9 December 2015)
Insurers attempting to expand into the region, combined with an improving economic outlook and a well capitalised sector, helped fuel modest M&A activity in 2014. By virtue of its size, Panama was the focus of M&A – Optima Compania de Seguros was purchased by Capital One in September 2014 for USD20 million, Marsh acquired a majority interest in SEMUSA and Panamanian based Venezuelan Seguros BBA expanded further into Panama following the acquisition of several subsidiaries in the region.
Growing investment in Panama has stimulated demand for insurance products, and similarly, El Salvador is expected to witness increased demand for insurance products on the back of improved offshore investment, particularly driven by investment in roads (+29.6% YoY to 3Q2014 per Reserve Bank of El Salvador). Costa Rica ranks as the second biggest insurance market, and was deregulated in 2008, albeit the government affiliated insurer still ranks as the largest insurer with a market share of 84%. This market is expected to expand 135% over the next six years and post the highest premium growth in Central America, reaching USD2.77bn in premiums by 2020 according to local daily El Financiero, citing a study by analyst Enrique López Peña. Due to a lower dependency on the reinsurance sector than other markets, Costa Rica’s insurance industry is better positioned to retain more risk and generate greater reserves, investment and profits.
BANKARIZATION AND INSURANCE
There is a plethora of financial access statistics available – and as much debate over which are the best proxies for bankarization. This is a complex issue and in the interests of simplicity, the proxy for bankarization is the aggregate outstanding deposits with commercial banks as percent of GDP (i.e. retail and business deposits), sourced from IMF statistics. The IMF statistics for the region are shown as follows:
Figure 2. Bankarization indicator – Outstanding deposits with commercial banks as percent of GDP (source: Financial Access Survey, IMF)
Interestingly – all economies except for Panama and El Salvador show an increasing level of bankarization as a percentage of GDP. Arguably, Panama’s strong economic turnaround during the decade has meant that the level of deposits has declined on a relative basis, with funds being deployed into investment activities and the wider economy. On average, El Salvador’s potential economic growth is estimated at 2% for the period 1999–2015, compared with an average of about 4% in the region, excluding Panama – combined with a high level of employment in the informal economy (estimated at 66.7%) and comparatively low investment rates, the level of deposits as a percentage of GDP has declined over time.
Gross premiums data have been sourced where available from individual country banking and insurance supervisory bodies, all expressed in base currency – to alleviate distortions from assumptions on currency conversion into a common base currency, growth in premiums has been indexed. Data for Honduras has not been included due to sourcing difficulties.
Figure 3. Growth in insurance premiums, indexed (source: Supervisory bodies, respective countries)
Growth for all markets from 1998-2013 (except for El Salvador), indexed – showing Nicaragua as the fastest growing market, albeit small and off a low base.
Figure 4. Growth in insurance premiums, indexed (source: Supervisory bodies, respective countries)
Based on all available data for each country, growth in premiums is correlated to the level of bankarization as shown:
Figure 5. Correlation matrix – premiums and bankarization (source: Supervisory bodies, respective countries and IMF)
The above matrix indicates a high correlation between countries with increasing bankarization levels and growth in insurance premiums – this implies that with a growing formal economy, and with improved access to financial services there is also significant organic growth in the insurance industry.
The outlook for Central American insurance is fairly positive albeit each market is growing at very different rates, reflecting wider economic growth and the gradual integration of populations into the formal economy and banking systems.
With innovation around product offerings to attract lower income communities into the wider financial system, micro insurance in particular is expected to be a growth avenue – and improved investment and trade activity will only provide more solid foundations for these trends…