Growth trends of Latin American markets for 2016
This reports provides a summary of the analysis of the main structural trends in the progress of insurance markets of the Latin American region during the last decade (2005-2015). It seeks to identify not only the traditional patterns that characterize the increased participation of the insurance industry in the economic context, but also the degree of depth of this financial activity in society.
The report provides a general review of the main trends at the regional level. The analysis reviews four aspects. First, an indicator analysis regarding the degree of penetration and depth of the insurance industry. Secondly, an exercise to quantify the insurance protection gap (IPG). Thirdly, the estimation of a Market Development Index (MDI) that offers a general view of the development trends of this industry. And finally, a presentation of growth forecasts for each insurance market in the region for 2016.
Penetration and deepening of insurance in the Latin American economy
Insurance markets progress and grow parallel to the development of societies. That growth, when it entails a simultaneous process of development and maturing, is accompanied by two main characteristics from a macroeconomic standpoint. First, it is accompanied by an increase in the participation of insurance premiums in the gross domestic product (the so-called penetration index), which reflects the growing importance of the use of insurance as a mechanism to financially compensate for risks within a country’s economy. Secondly, it is accompanied by an increased participation of Life insurance (with components of risk and savings) in the total portfolio of the insurance industry (which will be referred to as the deepening index), whose development demonstrates growing awareness among the population of the benefit of using insurance not only as a mechanism for protecting material assets, but also as an alternative way to channel medium- and long-term savings.
Graph 1. Premiums of Latin American insurance markets in 2015
Source: MAPFRE Studies Service (with data from oversight bodies in Latin American countries).
According to the information shown in Graph 1, in December 2015, insurance premiums in Latin America reached $138.7 billion ($ BN). In that amount, the markets of Brazil ($55.2 BN), Mexico ($24.5 BN), Argentina ($19.5 BN), Chile ($11.3 BN) and Colombia ($7.8 BN) stand out due to their participation in the region’s total. The measurement of the market size of Latin American insurance was affected in 2015 by the devaluation of major Latin American currencies with respect to the dollar. That situation meant that premium growth in those currencies compared to 2014 reported a 10.7 percent decrease.
However, the individual analysis of each country that is included in the second part of this report shows that, in general terms, the insurance markets of the region show satisfactory performance when measured in their own currency. This fact is confirmed when the growth of the insurance industry is analyzed in terms relative to other indicators. For that, two measurements are used: the penetration index, which measures the relationship between premiums and gross domestic product (GDP), as well as the deepening index, expressed as the relationship between Life insurance premiums and the total portfolio. In both cases, when these indicators show an upward trend, it can be regarded as a process of quantitative and qualitative progress in the insurance market in question.
Graph 2. Penetration and deepening of insurance in Latin American markets
Source: MAPFRE Studies Service
Using both indicators for the aggregate market of the region, it is observed that, between 2005 and 2015 the penetration index showed a growing upward trend (Graph 2). In 2015, the indicator was located at 2.86 percent, showing a 1.02 percentage point (pp) increase during the decade. That is confirmed upon analyzing the penetration of Life and Non-Life insurance separately, for which the index reached 1.25 percent and 1.61 percent, respectively, with an increase of 0.56 and 0.46 pp in each case during the period analyzed. Meanwhile, the deepening index measured for the region as a whole also shows an upward trend, moving from 37.7 percent in 2005 to 43.8 percent in 2015.
The combined behavior of both indicators reflects a similar trend, which is present in the majority of Latin American countries. The individual analysis of those trends from country to country can be found in the individual reports that make up part of this report.
Measuring the insurance protection gap
The insurance protection gap in a region or country represents the difference between the insurance coverage that is economically necessary and beneficial to society and how much of that coverage that is effectively purchased. Likewise, the potential market for insurance represents the market size that could be achieved if that gap disappeared.
The insurance protection gap (IPG) is not a static concept that entails an unchanging amount across time. On the contrary, that potential insurance coverage gap is constantly changing based on general economic growth, on one hand, and the emergence of new risks, on the other as part of economic and social development.
Graph 3. Progression of the insurance protection gap (IPG) for Latin American insurance markets as a whole
Source: MAPFRE Studies Service
Graph 4. IPG structure in 2005 and 2015 for Latin American insurance markets as a whole
Source: MAPFRE Studies Service
In general terms, the IPG is highly correlated with market growth. First, quantitatively, the IPG decreases as the penetration index increases. Second, from a qualitative standpoint, it also tends to decrease as the market become more sophisticated and mature.
In this way, factors such as sustained economic growth, low inflation, an increase in personal disposable income, the general development of the financial system, an efficient regulatory framework and the application of public policies aimed at increasing financial inclusion and education constitute aspects that stimulate the IPG coverage process.
Moreover, from a methodological standpoint, the IPG can be measured in two ways. Ex post facto, based on observed losses, as the difference between recorded economic losses in a determined period and the portion of those losses that was covered by the insurance compensation mechanism. Or otherwise, ex ante, by analyzing the optimum level of protection, estimated as the difference between the socially and economically appropriate level of risk coverage and the real level of protection.
The second approach was used for the exercise shown in this report, simplifying the measurement of the differential between the optimum level and the real level of protection, as a difference of penetration indices. For this purpose, the average penetration index recorded by advanced economies was adopted as a rough indicator of the optimum level of coverage.
Thus, the IPG in Latin America in 2015 was estimated at $259.4 BN (Graph 3), of which 64.5 percent ($167.3 BN) corresponded to the Life insurance gap, while the remaining 35.5 percent ($92.1 BN) corresponded to the coverage insufficiency of Non-Life insurance (Graph 4). Therefore, considering the actual market in 2015 ($138.7 BN), the potential insurance market of Latin America in that year stood at $398 BN.
An overall analysis of this trend shows that the IPG for Latin American markets tends to decline during periods of economic expansion (2005-2007, 2010-2013) and expand during periods of economic hardship (2008-2009).
One important aspect to note is that from a relative point of view, the IPG as a multiple of the insurance market of Latin America shows a clear downward trend over the analyzed period. So, while in 2005 the IPG represented 3.7 times the actual insurance market in the region, by 2015, that relationship had fallen to 1.9. The same applies to the Life insurance market, where the multiple decreased from 6.5 to 2.8, and the Non-Life insurance market in which the reduction was 2.1 to 1.2 (Graph 5).
An unusual situation occurred in the behavior of the IPG in 2015, which shows a downward trend. However, this is essentially a monetary effect, which is because the measurement of the gap for the entire region required the use of a single monetary unit ($), and virtually all Latin American currencies showed a loss of value against the dollar that year. Therefore, in the individual reports for each country a measurement in their local currency has been made, which shows a more accurate trend of the IPG in each regional market.
Graph 5. Development of the IPG as a multiple of the actual insurance market in Latin America
Source: MAPFRE Studies Service
Market Development Index (MDI)
In order to have a single indicator to summarize the trend in the development and maturity of insurance markets of the region, the Market Development Index (MDI) has been included in this report, and it was calculated for the entire region, and for each of the markets that comprise it throughout the analyzed period (2005-2015).
Graph 6. Market Development Index (MDI) for all insurance markets in Latin America
Source: MAPFRE Studies Service
The MDI is a composite index constructed from four individual indices (based on 2005): The penetration index (premiums/GDP); the deepening index (Life insurance premiums with respect to total premiums of the market); a development index of the IPG (inverse index of the IPG as a multiple of the market); and a development index of IPG Life insurance (inverse index of the IPG Life insurance as a multiple of the market).
Generally, the MDI in Latin America shows a favorable steady development over the last decade (Graph 6). This means that the markets of the region, on average, have advanced in both levels of penetration and depth, as well as in their ability to reduce the IPG relative to the size of their markets. The development of the MDI for each market can be found in the individual reports included in the second section of this report.
Growth forecasts for insurance markets in Latin America
A forecast is an estimate of what is believed will happen with a certain element within the framework of a given set of conditions. In this context, it is not the objective of the forecasts to be a prediction per se, rather to be an instrument to reduce levels of uncertainty when identifying major trends and probable magnitudes of the behavior of a variable.
Due to the characteristics of the economic phenomena being explained, the forecasting models tend become more variable as the analyzed phenomenon moves toward a more microeconomic environment. This is because the most relevant explanatory factors offer greater chances for variation in the short term.
For the insurance industry, the estimation of the likely level of growth is a valuable factor within the market infrastructure that can help both business planning and the design of public policies, which together facilitate and promote the development of this industry.
Image 1. General factors that affect the growth of insurance markets
Forecasts of market growth are based on the consideration of the variables that are deemed most relevant when interpreting their dynamic. A variety of factors influence the growth of insurance markets. Some are temporary in nature, such as overall economic growth, the level of disposable income of the population, unemployment rates, interest rates and observed inflation. Others are structural in nature, such as the dynamics of population growth and the structure of income distribution. And some are situated within the framework of the implementation of public policies by governments, which can range from those related to increase in financial literacy of the population to those that aim for specific stimulation of the expansion of the insurance industry (Image 1).
However, within this set of factors, general economic growth stands out due to its relevance in the statistical explanation of the insurance industry dynamic, which is the most influential short-term variable. This report has not made a growth estimation for the insurance market of Latin America as a whole since this would imply the use of a single monetary unit. This type of estimate would be strongly affected by fluctuations in the value of Latin American currencies, preventing an appropriate interpretation of the underlying growth dynamic. Therefore the forecasts have been prepared exclusively for each of the Latin American insurance markets, using a nominal estimation in local currency, in order to try to better capture the underlying dynamics.
Finally, it is important to stress that the forecast management growth tool needs to be reviewed periodically, to capture the effect of changes that occur in the factors that determine them. These changes come not only from adjustments in the estimates of the main macroeconomic variables, but also of the specific application of any public policy or specific regulatory measure that affects the short-term dynamics of the insurance market in question.