Chapter 4. Barriers to Integration in the Insurance Sector
  • 1 0000000404811396 Monetary Fund


In the countries that make up the LA-7 (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay), insurance penetration (measured by premiums in percent of GDP) remains low, ranging from 1 to 4 percentage points of GDP, although the sector has expanded at a significant rate over the past decade. In 2014, assets totaled almost 10 percent of regional GDP, influenced in many cases by changes in the domestic regulatory frameworks. Broadening of formal sectors and larger nominal losses from natural disasters are likely to fuel the non-life segment, whereas purchases of life and retirement products have been growing the life portion of the insurance sector for some time now. The sector’s growth is partly stymied by the limited availability of long-term financial instruments denominated in the domestic currency, given that their demand is often crowded out by pension funds.

In the countries that make up the LA-7 (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay), insurance penetration (measured by premiums in percent of GDP) remains low, ranging from 1 to 4 percentage points of GDP, although the sector has expanded at a significant rate over the past decade. In 2014, assets totaled almost 10 percent of regional GDP, influenced in many cases by changes in the domestic regulatory frameworks. Broadening of formal sectors and larger nominal losses from natural disasters are likely to fuel the non-life segment, whereas purchases of life and retirement products have been growing the life portion of the insurance sector for some time now. The sector’s growth is partly stymied by the limited availability of long-term financial instruments denominated in the domestic currency, given that their demand is often crowded out by pension funds.


The insurance sector in Latin America has grown significantly over the past decade. Insurance premiums quadrupled between 2003 and 2013, reaching almost $160 billion by 2013 (Figure 4.1), owing largely to resilient economic performance and strong employment growth but also supported by the entrance of vigorously expanding foreign firms, regulatory reform implementation, and improvements to the business environment in the region. Robust vehicle sales have contributed to expansion of the non-life insurance sector, while sales of pension-related products have fueled life insurance segments in many countries (Figure 4.2). Market maturity varies greatly by country, with Chile and Brazil having the longest maturities, as indicated by larger contributions of life premiums. In Latin America, compulsory insurance has played a number of roles; for example, life insurance in Chile is strongly driven by mandatory products, while the absence of compulsory federal auto insurance in Mexico has limited non-life insurance sector penetration.1 The size and growth of the insurance sector is often shaped by a number of characteristics, including those related to market competition, business specification, and regulatory environment. Thus, in the LA-7 countries the main insurance distribution channels often include agents, brokers, and banks, which vary by type of insurance sold. Many companies specializing in life insurance, for example, create their own networks of agents, who sell only the home company’s products. This distribution channel can be very costly owing to the large resource requirements for agent management, remuneration, training, and supervision.

Figure 4.1
Figure 4.1

Insurance Market Size, Penetration, and Density

(Premiums in U.S. dollars and percent of GDP, 2013)

Source: SIGMA Swiss Re.
Figure 4.2
Figure 4.2

Premium Distribution

(Share of total, 2013)

Sources: Fundacion MAPFRE; and IMF staff estimates and calculations.

Insurance market concentration varies by country but remains elevated on average. In Uruguay, for example, the large state-owned insurance company controls 80 percent of the market, while the two largest companies in Peru manage about 60 percent of total premiums. Colombia’s 10 largest companies account for almost 80 percent of the market share. In Brazil, although there are more than 110 companies, the largest 10 companies account for about 65 percent of the sector premiums. Chile’s market concentration also appears to be somewhat lower: the 10 largest companies account for about 60 percent of market share.

The size of the market and the rate of market growth are also influenced by the regulatory environment, which is at different stages of development across the region. Some countries are setting the stage for implementing risk-based capital models, with Brazil and Mexico at the forefront in meeting Solvency II equivalent standards (Box 4.1). Chile is also expected to adopt frameworks similar to Solvency II in the coming years. Other countries, however, continue to operate under regimes similar to Solvency I, with Colombia and Peru considering comprehensive regulatory reforms as they continue to implement risk capital requirements.

Insurance companies’ growth patterns are also shaped in part by investment opportunities and regulatory investment limits. Thus, given the relatively small size of the equity markets, LA-7 insurers largely choose to invest in debt securities. In Colombia, Mexico, Peru, and Uruguay, about three-quarters of investment portfolio allocations of life insurers are held in bonds. In Panama, on the other hand, only about a quarter of the portfolio is allocated toward bonds. While companies in Mexico and Uruguay tend to hold mostly government bonds, in Chile, Colombia, Panama, and Peru, companies appear to favor private debt securities. The rest of the portfolio usually includes equity shares, real estate investments, and other instruments. Real estate investments are typically small, with the largest share (about 10 percent) observed for Chile. Equity shares are also relatively low, except in the case of Panama, where the majority of the portfolio is invested in equities.

In general, the prospects for future growth of the insurance sector are promising. The low insurance penetration of the LA-7 market in comparison with penetration in advanced and other emerging markets suggests a sizable unrealized potential. The relatively young population across the region provides an expectation of future purchases of life and retirement products, while rising income levels are likely to stimulate automobile sales and drive non-life insurance growth. Regional susceptibility to natural disasters is likely to feed property and casualty market expansion, while the authorities’ efforts to increase the level of formalization of the economies of the LA-7 countries are also likely to contribute to future growth.

What Is Solvency II and What Is Its Impact on Insurance Regulation in Latin America?

Solvency II is a comprehensive insurance sector regulatory framework introduced by the European Commission in 2009. It introduces risk-sensitive capital requirements (similar to the principles in Basel banking agreements) and establishes rules for risk management and governance, including the categorization of assets and liabilities. Solvency II also strives to improve transparency in reporting to the public and to supervisors. Although Solvency II is not a global mandate, many emerging market countries are embracing its tenets as best practices for their own regulatory reforms.

The Latin American insurance industry has been undergoing significant regulatory reforms designed to strengthen stability, improve transparency, generate efficiency, and align with the worldwide trend of more rigorous rules. While most countries continue to strive to improve insurance industry regulation, the pace and extent of development varies across the region. Brazil, Chile, and Mexico are leading the way in the introduction of Solvency II-type frameworks in Latin America, with regulations set to be implemented by 2017.

Regulatory changes are expected to tighten prudential requirements, encourage product diversification, promote transparency, and strengthen linkages with foreign countries through higher reinsurance. The impact of the regulatory changes is expected to vary by country, but some general effects are likely. More advanced regulatory frameworks that incorporate risk-based charges will likely generate higher overall capital requirements, in particular under Solvency II-type regimes. This may encourage insurers to diversify their business and product portfolios. Efforts to decrease capital requirements may also translate into higher demand for reinsurance, essentially strengthening links with other countries—including the European Union (EU), as a large portion of reinsurance is done through European companies. New regulations will also impose tougher rules governing the process of risk identification and monitoring, and will set strict disclosure standards.

Stricter regulatory frameworks may generate mergers and acquisitions in the region, as smaller companies may face difficulties complying with tougher guidelines. Smaller single-line insurers may find it hard to operate under new guidelines that include changes in governance, risk management, capital requirements, and reporting. This situation could lead to mergers and acquisitions and higher industry concentration. In Chile, Colombia, and Mexico, more stringent regulatory frameworks are increasing transparency and efficiency, and making the insurance companies more streamlined.

Further convergence of Latin American and European regulation via the implementation of Solvency II-type regimes will even the playing field for foreign subsidiaries and empower Latin American insurers to access EU markets. For large multinational insurance groups that have their home offices in the European Union (such as MAPFRE, for example), Solvency II-type regulation largely extends to their subsidiaries in Latin America and Asia-Pacific. Thus, while the subsidiary structure of foreign companies operating in Latin America compels them to comply with host country regulations, they may also be required to conform to the tougher Solvency II regulations of the parent country in the European Union, including higher capital reserves. Domestic insurers in Latin America—those without operations in the European Union but who compete with EU rivals in their home markets—could retain some competitive advantage as long as the Solvency II-type rules are still being implemented. Once implemented, these rules are likely to even the playing field for domestic and foreign insurance market players, making some Latin American markets—particularly in Brazil, Chile, and Mexico—more attractive to foreign entities.

State of Play

Cross-border financial integration, both regional and global, has been primarily observed in the form of cross-border company ownership and more relationships with large international reinsurance firms (Figure 4.3) rather than investments in foreign assets. Latin America has seen a notable shift in the ownership structure of the 10 largest insurance groups, which account for almost half of the market share (Figure 4.4). Among these 10 groups, the market share of regional companies has increased from 32 percent to 54 percent since 2003.2 This upsurge is mainly driven by the life insurance segment: the share of regional companies in this segment more than doubled over the past decade, rising from 32 percent to 68 percent of the market (see Table 4.1). This reordering was brought on by the fast expansion of Brazilian giants Bradesco, Itaú/Unibanco, and Brasilprev, as well as the Colombian conglomerate Suramericana. Bradesco has been the leading insurance group in the region since 2004, largely fueled by domestic market growth. But the region has also witnessed a number of mergers and acquisitions that have pushed up the size and ranking of the largest regional companies. In the non-life segment, the growth of regional insurance groups (while still exceeding the segment of companies operated by managers from elsewhere in the world) has been less pronounced, with both regional and global companies doubling in size.

Figure 4.3
Figure 4.3

Insurance Firm Ownership, 2014

(Insurance sector assets in percent of GDP)

Sources: Bureau van Dijk; national authorities; and IMF staff calculations.Note: Data are as at year-end 2014 or latest available. LA-7 = Brazil (BRA), Chile (CHL), Colombia (COL), Mexico (MEX), Panama (PAN), Peru (PER), and Uruguay (URY).
Figure 4.4
Figure 4.4

Insurance Market Premiums

Sources: Fundacion MAPFRE; and IMF staff estimates and calculations.
Table 4.1

Ranking of Top 10 Insurance Groups in Latin America (2003 and 2012)

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Sources: Fundación MAPFRE; and IMF staff estimates and calculations.1 In percent of top 10 premiums.

Reinsurance has become particularly important in the property and casualty segment of non-life insurance, particularly as rapid economic development has increased the value of losses from natural disasters such as earthquakes and hurricanes, which are all too common in the region. However, reinsurance strategies are not widely pursued, as the proportion of ceded premiums often reported to remain relatively low. The majority of the reinsurance activity is provided by foreign (primarily European) companies.


Regional integration is more likely to occur through merger and acquisition activity than through greenfield investment and organic growth, which reflects characteristics of the LA-7 insurance market rather than regulatory regimes. Growth potential and market stability make LA-7 countries appealing for new entrants. The insurance sectors are still comparatively small and, in some cases, populated by many small underwriters and brokers, so firm valuations are modest enough that firms can find opportunities to grow market shares by mergers and acquisitions. Organic growth could take much longer, especially in the more competitive markets of Brazil, Chile, and Mexico. Yet the market power of the larger firms is often cited as a key deterrent to cross-border expansion—much more so than regulatory barriers. Among the companies specializing in life insurance, the distribution channel is a potential obstacle to greenfield investment: setting up a network of agents can translate into a sizable up-front fixed cost, and developing a sound agent base can take several years. Relative product complexity in many markets (usually in the form of bundled products to attract a larger customer base) is another obstacle to entry. Market deepening is also depressed by slow progress in building trust in insurance companies and their products, as well as by limited product awareness. Insurance products remain unaffordable for a large fraction of the population of the region, and the lack of products for these segments contributes to low insurance penetration.

Financial integration through investments in regional assets is currently quite limited and unlikely to expand in any meaningful way. Demand for foreign currency assets is most often driven by shortages of domestic securities, forcing some firms to maintain persistent maturity and currency mismatches. Investment portfolio allocation decisions are largely directed by regulatory limits and insurance product specialization. Portfolio allocations of life and non-life insurance companies differ on the basis of the currency and maturity composition of their liabilities. The composition of country portfolios continues to shift toward life insurance, driven largely by the flow of funds from people who are retiring and converting their pensions into annuities. Within the LA-7, Chile, Peru, and Uruguay have the largest contributions of private pensions to life insurance growth,3 some of which is driven by legal and regulatory frameworks. In Chile, for example, life annuities are growing at low double-digit rates owing to the participation of life insurance companies in the social security system. An insurance company selling annuities generally must be able to begin paying out a stream of payments denominated in domestic currency soon after the annuities are purchased and over an extended period, thus requiring currency and maturity hedging of its assets and liabilities. Some insurance companies find it difficult to match the currency and maturity of their assets and liabilities, primarily because of the limited supply of liquid domestic securities and a shortage of long-term assets in the domestic markets. Tapping foreign markets is also complicated by the scarcity of foreign exchange derivatives of sufficiently long duration in all countries. Thus, firms often elect to live with maturity mismatches as large as three or even five years. Chilean life insurers with annuity liabilities, for example, show a systematic maturity mismatch of assets and liabilities owing to the shortage of assets with durations similar to those of liabilities.

As insurers strive to minimize maturity and currency mismatches, holdings of foreign securities remain well below the regulatory limits in many countries. In Mexico, for example, the share of foreign securities remains below 3 percent, even though the regulatory limit is 10 percent. Mexican companies that do offer insurance products denominated in foreign currency tend to have slightly higher shares of foreign securities holdings.

Policy Recommendations

Binding regulatory restrictions on pension funds’ foreign investment decisions often have an indirect impact on investment opportunities of insurance companies in the LA-7 region, and this effect can be exacerbated by the limited availability of financial instruments in domestic capital markets. Pension funds, unable to invest a larger share of their assets abroad, often adhere to buy-and-hold practices of domestic securities, crowding out domestic investment opportunities for the insurance companies. This in turn generates balance sheet mismatches between the assets and liabilities of many insurance companies. A number of policies could address these constraints and improve portfolio diversification and risk coverage of insurance companies, including these:

  • Harmonize financial infrastructure and operational practices across the LA-7 countries. Maintaining widely disparate regulatory frameworks increases the burden of compliance, which acts as a disincentive to movement across borders. Converging on the best practices suggested in Solvency II would ease this burden and promote greater integration, although it might require legal changes in a number of countries.

  • Relaxing regulatory foreign asset limits for pension funds would also ease the burden of optimal portfolio allocation for insurance companies. Limited domestic investment opportunities have led to a number of challenges for the insurance companies in the region. The short supply of domestic securities is magnified by the overwhelming presence of pension funds, which increasingly hold securities to maturity and crowd out investment opportunities for the insurance sector. Insurance companies are in need of better domestic options in local currency and of long-term maturity. Relaxing foreign investment limits for pension funds would not only ease the difficulty of optimal pension fund portfolio allocation but would also provide additional investment opportunities for the insurance sector.

  • Simplifying new product development policies would foster capital market expansion and increase investment opportunities. Authorities should also review regulatory requirements to ease the process of creating new products in the domestic capital markets. Infrastructure product development, for example, could provide a valuable instrument for portfolio diversification for pension funds and insurance companies alike.

  • Data quality and provisions need further improvements to support industry monitoring and diagnosis of vulnerabilities. The availability of high-quality data on insurance companies varies by country, and the heterogeneity of publicly available information on insurance companies in many cases prevents proper comparison of industry performance across countries. Harmonization and improved quality and availability of data would not only support monitoring by the authorities but also increase transparency in the sector.


Compulsory auto insurance in Mexico is being phased in; it began to apply to certain cars in September 2014.


Based on estimates by Fundacion MAPFRE and IMF staff calculations.


In Brazil, the fastest-growing market has been the life free benefits generator, a product with all the characteristics of a pension but classified as life insurance. It is currently the largest segment in Brazil.

A New Strategy for a New Normal