Overview of the Insurance Industry in Latin America
Before we start the conversation about the digital disruption and the InsurTech landscape in Latin America, it is important to understand the characteristics of the insurance industry in the region. I used the research from Mapfre Foundation in 2017 to get the following numbers that will help us understand the size and features of the market:
Annual premiums in 2017: $158.5 US billion (54% corresponds to Non-Life businesses, and 46% corresponds to Life businesses)
Annual growth rate: 9.3% in the last year, (This number is partly influenced by the appreciation of some currencies against the dollar in 2017, mainly the Brazilian real)
Penetration Index: The penetration Index is on average 2.17%. This index is well below developed countries that usually have indexes above 5%.
Deepening Index: The deepening index is 20.1%, also below the average of developed countries that is above 40%.
Main Players in the region:
It is important to mention that the insurance industry in Latin America is not considered a highly concentrated industry, the 25 most important companies barely concentrate 64.1% of the total premiums. If we analyze the market by Life and Non-Life premiums, the same trend continues. However, the Life market has a level of concentration higher than the Non-Life. In the Life market, the top 25 companies represent 82.9% of the total market, while in Non-Life, the participation of the top 25 companies is 60%.
The main companies in the industry by market share are BRADESCO from Brazil with 8.2% of the market, BRASILPREV from Brazil with 7.6%, MAPFRE from Spain with 5.8%, ITAU from Brazil 4. 8% and ZURICH from Switzerland with 4.3 %. (table 1)
For Non-Life market, the top 5 companies per market share are the following: MAPFRE from Spain with 7.8 %, Porto Seguro from Brazil with 4.2 %, Suramericana from Colombia with 3.8%, ZURICH from Switzerland with 3.8 and Triple-S from Puerto Rico with 3.6 %. (table 2)
For Life Market, the top 5 companies by market share are the following BRASILPREV from Brazil with 16.6%, BRADESCO from Brazil with 15%, ITAU from Brazil with 9.7 %, CNP Assurances from France with 6.1%, and MetLife from USA with 5.5%. (table 3)
Challenges and opportunities of the Latin American insurance market
- Low penetration compared to other regions makes the growth of the insurance market in Latin America slow, and product innovation is expensive.The main factors that have made penetration low are the low income of the population and the lack of confidence in the financial system. However, this low penetration means that the opportunities for growth in the sector are large since the average income of the region has been growing steadily in recent years and there is an unattended market.
- Other factors that affect the growth of the industry have to do with the political and economic instability of some countries in the region. In recent years, we have seen oil prices fluctuate and some cases of corruption that have affected the economy and stability of countries such as Argentina, Venezuela and mainly Brazil.
- Investments in technology development to improve the efficiency of processes and develop new distribution channels will impact the insurance industry in the following years, which will contribute to deepen the consumption of insurance and attract new users.The penetration of internet and smartphones in the region is much higher than that of the financial sector, and through these digital media there is an important growth opportunity for the insurance sector. There are also several infrastructure development projects that will help with the growth of premiums of the commercial insurance policies.
- Regarding regulation, the region is very diverse and is at different levels.However, all countries are on the same track looking to achieve good international practices, following the guidelines of the framework created by Solvency II. The region is also concerned about creating regulation for cybersecurity and new players like InsurTechs. An example is Mexico with the law for financial technology institutions.
Overview of the Insurtech Industry in Latin America
Digital technologies are transforming the world, and with it, the people and companies that interact daily with each other. These changes have created disruptions in many different industries, and to adjust to these changes the companies must find new and better ways to generate value for the customers. These disruptions create changes in the way people use their services and products, and these new behaviors have evolved the companies’ business models, and the services have changed to a new more personalized offer of services that add greater value to the users. Industries like the financial and insurance services have been affected in recent years. New technologies allowed new players to challenge the status quo of the industry by changing the way of interacting with the customer and by developing new business models that offer new ways to deliver value to the client.
These innovations and disruptions of the financial industry started in developed regions, such as North American and Europe, but it has been leaking rapidly to developing regions like Latin America. In the past few years, Latin America has seen significant growth in the formation of startups related to the financial and insurance industries (known as Fintech and Insurtech, respectively). This growth is estimated to be close to 50% in the last 12 months, as reported by Finnovista in its Fintech Radar Report of 2018. The growth has occurred mostly in countries such as Argentina, Brazil, Chile, Colombia, Mexico, and Peru.
Brazil, Mexico, and Colombia are the leaders of the region regarding the number of Fintech and Insurtechs created as of June 2018. (Brazil 377, Mexico 334 and Colombia with 124, according to the Finnovista report 2018). Insurtechs barely represent about 6% of the total of the startups in this segment.
Brazil Fintech Overview
- The leader in the Fintech and Insurtech segment with more than 370 companies created.
- The most representative segments are payments and financial management with 23% and 17% respectively (87 and 63 companies)
- The fastest growing segments are digital banks 147%, trading platforms 95% and loans 77%.
- Regarding development, 31% of startups are ready to grow, and 35% are in the stage of growth and expansion.Only 30% of Fintechs have expanded outside of Brazil.
- InsurTech represent only 6% (23 companies) and are growing at a rate of 73%.
Mexico Fintech Overview
- Mexico is the second most important ecosystem in Latin America for the Fintech space with 334 ventures.
- The most representative segments are payments and loans with 21% and 15% respectively (70 and 49 companies).
- The segment with the highest growth is payments and loans with close to 45% of the total number of companies.
- InsurTech only represents 6% of the total startups in the segment, with a growth of 27% in the last 12 months.This growth is slower than other segments.
- Regarding development, 47% of the startups are ready to grow, and 31% are in the stage of growth and expansion. Only 17% of Fintechs have expanded outside of Mexico.
Colombia Fintech Overview
- Colombia ranks third in the Fintech and InsurTech segment with more than 124 companies created.
- The most representative segments are payments and financial management with 30% and 14% respectively (37 and 18 companies)
- The fastest growing segments are wealth management 200%, payments 118% and financial administration 100%, in a 12 months period.
- Regarding development, 32% of the startups are ready to grow and40% are in the stage of growth and expansion. Only 32 % of Fintechs have expanded outside of Colombia.
- The InsurTech represent barely 6% (7companies), and they are growing at a 75% rate in a 12-month period.
Regarding regulation, Mexico is the pioneer in the region with a Fintech law approved in March 2018. This law seeks to regulate technology-based entities in the financial sector to provide greater legal stability to market players. In other countries such as Colombia and Brazil, there are similar bills that are in the process of approval. Also, they have created sandboxes that allow and encourage innovation within a framework of safe test for users and regulator. These Sandboxes help regulators track new business models without imposing strong regulations on new players that may discourage the innovation.
The development of a regulatory framework is central to the expansion of a healthy innovation ecosystem because it regulates the relationships among new players, incumbent companies, and users. It creates the set of rules that give assurance to users, rules to the companies and generates clarity for the industry. However, it is important to be cautious of how, when and what is regulated. An excess of regulations or measures that creates barriers to entry into the market may hold back the innovation of the industry.
Governments in the region are also helping with initiatives that are supporting the development of Insurtech and Fintech ventures. An example is the initiative of electronic invoicing imposed in countries like Mexico, Chile, and Brazil among others, which demand both buyers and sellers to record the invoices of each transaction electronically. This process is encouraging the digitization of the financial sector.
The regulatory environment in the region has not only generated a vigorous environment for local startups to grow but has also made the region an attractive destination for the arrival of several startups from the other countries, mainly from North America and Europe. There are about 85 foreign Fintech in Latin America today, according to the Finnovista. Most of companies are in the segments of payments and loans (51% of the total). Insurtechs only account for 2% of total foreign startups in the region. But not only foreign ventures are arriving. More international investors are looking at the region searching for investment opportunities. These new resources have contributed to the progress and expansion of the ecosystems and the entrepreneurship in the region.
Although the region has seen significant growth and development in the creation of InsurTech and Fintech in recent years, Latin America is still far from reaching the levels of disruption and innovation of other regions. When we talk about the insurance industry and InsurTech segment, it is the one with the slowest growth rate in comparison with the other segments. The slow growth may be a consequence of the conservative nature of the insurance industry, and its risk adverse nature. Another factor that may be impacting the innovation in the industry is related to the skills and expertise of staff that may not be familiar with new technologies and digital transformation.
Moreover, the low penetration of the financial sector in Latin America contributes to the segment’s challenge to expand and grow faster. The low penetration also explains why most of the startups in the segment focused on solutions to increase financial inclusion and democratization of the financial services. In the case of the InsurTechs, most of the companies are looking to develop new distribution channels and product comparisons to improve the customer experience.
These solutions are using technologies that in general are summarized in three main trends: Big data and analytics, APIs and open platforms, and Mobile applications. As I mentioned before, these solutions are looking to improve the user experience by adding and comparing different financial products in one place (loans, credit cards or insurance), giving the option to acquire the products online, and using data to personalize the offering.
These new services that are looking to improve the user experience, along with the higher penetration of technology in the region, are a big opportunity for the industry to increase its penetration. It is expected that about 76% of the population will have at least a smartphone by 2020, according to the Mobile Economy 2017 study. This number is much higher than the penetration of the financial sector, which will be around 49%. This situation is a very interesting opportunity for the Fintechs and Insurtechs to become a more important player reaching out to the unattended population in Latin America.
Other critical factors in the region that opens an opportunity to promote and accelerate the growth of the Fintechs and InsurTechs are the regulatory frameworks that are building trust and stability among all the players, and the increase of the average income of the population that allows people to increase their purchasing power.
However, there are also challenges that can negatively affect the growth and development of innovation ecosystems. The most critical is the political and economic instability of some countries in the region, and the lack of trust in the financial sector from part of the population. Overall, most of the startups are in early stages, with less than five years of operation. This makes the InsurTech and Fintech ecosystem in Latin America a very fragile system that requires the right incentives and regulation to grow strong.
 The Association of Insurance Supervisors in Latin America (ASSAL) for 2015, from a sample of 19 Latin American countries.