Mexico Insurance Report Q2 2008

As was the case in Q108, the main focus of this report is BMI's proprietary Insurance Business Environment Rating (IBER). The rating brings together a number of pieces of relevant quantitative data, together with BMI's Country Risk Rating (CRR). The IBER makes it easier for the insurance sector business environment in a particular country to be compared with the business environment for any other BMI-monitored industry in that country. The IBER also allows an objective and meaningful comparison of the insurance sector business environment between countries.

Over the coming months, we will substantially change the format of the BMI insurance reports. In essence, we will focus to a much greater extent on the companies that are active in the non-life and life segments.

Mexico is ranked third in the region, behind Brazil (66.4) and the Bahamas (65.6) in terms of its IBER (64.0). Whilst the life and non-life markets are projected to experience robust growth, the IBER is kept down by the low levels of penetration in both segments. It is also held back by the legal framework and bureaucracy in Mexico. A key positive IBER driver is Mexico's high level of openness to investment by foreign parties.

BMI expects that non-life premiums will grow by 8% annually in local currency terms and by 7% in US dollar terms over the forecast period. Life premiums are anticipated to increase by 13% annually in local currency terms and by 11% in US dollar terms. By regional standards, Mexico has a high level of GDP per capita, although is not expected to rise sharply in the medium term.

Mexico's competitive landscape across the non-life and the life segments is best characterised as being fragmented. The accessibility of the market and the shake-up of the financial industry following the currency crisis has made market entry easier than other regional markets. However, the market is large enough to enable companies to maintain viable operations through specialising in niches where they hold a competitive advantage. Owing in part to the number of Mexican immigrants in the US, we note that the life sector in Mexico is not as strong as the non-life, with life insurance essentially coming under competition from the US domestic market. As such, foreign firms are less disposed to commit to the life sector.

The economy is undergoing extensive economic reform, which should strengthen its insurance business environment, which is already developed by regional standards. However, there is uncertainty as to the government's ability to implement the reform agenda, and the economy is under inflationary pressure. On the plus side, President Felipe Caldern, with his hard-line security stance, has inspired investor confidence in Mexico. But while public safety has improved to a certain extent, lawlessness and drugrelated crime remain key political risks.