Authored by Javier Alvarez, EMEA Managing Director, RNA Analytics
Growth in the Latin American insurance market has been on a steady upwards trajectory, and the region still has tremendous potential. But, as RNA Analytics’s Javier Alvarez writes, navigating the regulatory environment will be critical for its continued success.
Latin America’s insurance industry is on a growth trajectory, driven for the most part by revenue growth in the life segment, and as countries in the region show signs of economic recovery, the region’s as yet uninsured population makes Latin America an attractive market for insurers looking to expand their market presence and share.
To do so, however, insurance companies must navigate a heavily regulated region with different regulatory frameworks in each country.
As the largest economy in the region, Brazil is an attractive proposition for insurers looking to expand their market presence – but to do so they face a highly complex regulatory environment – particularly for foreign insurers operating in the country. Foreign insurers must set up a local presence to operate in Brazil, which can be time-consuming and involves significant investment; while Brazilian insurance companies must meet stringent capital and solvency requirements, which can limit their ability to expand.
Regulators in the country also have strict rules related to market conduct, which can create additional compliance burdens. Intermediaries, meanwhile, face further regulatory hurdles, making it challenging for insurers to effectively manage distribution channels.
Adapting to complex and constantly evolving regulatory requirements while still maintaining profitability is a significant challenge for the industry. It should also be noted that many insurance companies in Brazil still rely on outdated technology and legacy systems, which can make difficult work of implementing new regulations and compliance requirements.
As the second largest economy in the region at present, Mexico represents a significant opportunity for insurers that are able to tackle a number of unique regulatory barriers to operate successfully in the market, amongst them restrictions on foreign ownership. Insurance companies operating in Mexico must be majority-owned by local stakeholders under the rules there – limiting the ability of foreign insurance companies to establish wholly-owned subsidiaries in the country.
Mexican regulators have implemented a risk-based approach to insurance regulation that places an emphasis on corporate governance, risk management and internal control systems, enforcing enhanced corporate governance structures for insurance entities in the country.
Further, insurance products in Mexico are primarily sold through traditional distribution channels, such as brokers and agents, and are subject to strict regulatory requirements.
Stringent product registration requirements present another major hurdle for carriers, which need to be registered and approved by the National Insurance and Bonding Commission (CNSF)
IFRS 17 and Solvency II
Unsurprisingly, the regulations for IFRS 17 (known as NIIF 17 in the region), and Solvency II in Latin America differ from country to country, and insurers operating within Latin America must understand the regulations and standards that apply in each country they operate in and ensure compliance with them. Whilst Brazil and Mexico have already implemented IFRS 17, Argentina and Chile have delayed their adoption, and Peru is expected to implement it soon.
The levels of innovation and digital transformations seen throughout, and as a result of Covid-19, place those insurers in a better position to make the most of the opportunities in the region by meeting regulatory demands, and serving customers better, but challenges remain for companies adapting to IFRS 17 across the region as far as data management and system updates, and coordinating the efforts of their various subsidiaries are concerned.
Solvency II, on the other hand, is currently not mandatory in many Latin American countries, although some have implemented Solvency II-like regulatory frameworks as part of their efforts to improve risk management across the industry, and Mexican regulators are currently working on developing a system for risk-based supervision that closely aligns with Solvency II principles.
All these regulatory demands, whilst complex, have laudable goals at their heart, with greater emphasis on consumer protection, increased transparency and improved customer trust in the industry a key aim. The impact, however, on product design, data management and pricing transparency is, in some cases, very difficult to navigate.
Several countries in the region have also introduced reforms to their insurance industry infrastructure to promote competition, including the introduction of digital platforms for insurance distribution.
Efforts to ease restrictions on remote insurance sales, encouraging adoption of electronic signatures, and supporting the use of digital identity verification continues the digital transformation that was accelerated globally during the Covid-19 pandemic, with measures introduced by regulators to support these efforts.
And there’s more to come, as the wave of technological innovation – from artificial intelligence to blockchain and analytics – promises to significantly impact insurers in the region, and those insurers that are ready to take on this dual challenge of regulation and digitisation will benefit profoundly.
