Industry Attractiveness
Fuelled by economic expansion and growth in key end-user sectors such as infrastructure, oil, gas and mining and foreign investment, the Colombian insurance industry grew at a CAGR of 11.2% from 2008 to 2012. Many companies diversified and expanded their businesses, which led to a greater exposure to risk and eventually increased the demand for a range of insurance products.
Industry growth was supported by regulatory changes imposed in 2010, which amended shareholders’ surplus and institutional investor limits. This encouraged institutional investors to increase their stakes in domestic insurance companies. Moreover, the government signed a free-trade agreement with the US, which came into effect in May 2012. This agreement allows US insurers to establish branch offices and market insurance products in Colombia under the supervision of the regulatory authorities. Such initiatives are expected to generate more competition in the industry. As a result, domestic insurers are expected to develop more flexible and cost-effective insurance products, which will encourage more customers to purchase policies. Consequently, the demand for insurance services is expected to improve further.
In its latest amendment to financial legislation in June 2013, the government allowed domestic companies to purchase insurance from, and make reinsurance arrangements with, international companies not operating or established within Colombia itself. This is likely to make the Colombian insurance industry more competitive as it will provide firms with more options. It is also likely to support domestic brokers as potential buyers seek advice on benefits, costs, and terms and conditions.
The industry’s solvency position has been strengthened through better risk-based and capital laws. Additionally, new mortality tables for life insurance have been established and a new set of provisions with regards to consumer protection have been passed. Such steps are expected to improve consumer confidence and protect the industry in times of financial crisis.
The projected public expenditure on infrastructure and transportation development is expected to be the catalyst for industry growth, especially in the non-life segment. The new cabinet, which took office in 2010, re-examined the key economic growth stimulators and is projected to invest heavily in the country’s transport and infrastructure development projects as part of its economic development scheme. The government plans to triple the amount invested in road network infrastructure, from 1% of GDP in 2012 to 3% GDP by 2014. The government invested approximately COP6.0 trillion (US$3.6 billion) in 2011 and approximately COP9.3 trillion (US$5.2 billion) in 2012. The government plans to finance two-thirds of infrastructure investment in the private sector. Government initiatives towards infrastructure and transport are likely to generate demand for group-life, engineering and property insurance.
Despite growth potential and a strong regulatory framework, there are several challenges that could constrain industry development. For example, low interest rates are likely to adversely impact the earnings of insurers, especially in terms of income from investments. The interest rates were last recorded at 3.25% in Colombia in May 2013, the lowest in Latin America. Moreover, life insurance providers are expected to remain under pressure due to high incurred losses and expenses, resulting in underwriting losses. Any form of underwriting loss will present financial difficulties for life insurers.
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Segment Outlook
Despite low investment returns and a deceleration in economic development in 2009, the Colombian life insurance segment posted a CAGR of 10.2% between 2008 and 2012. The growth was largely attributed to regulatory changes and infrastructure developments. These factors, coupled with the industry’s growing group-life business, are expected to generate substantial revenues for the segment. Life insurance written premium is therefore expected to increase from COP6.8 trillion (US$3.8 billion) in 2012 to COP11.5 trillion (US$6.1 billion) in 2017, at a CAGR of 11.1%.
Sustainable growth in the segment is expected as economic growth is projected to remain stable. This will be further strengthened by the country’s considerable foreign direct investment (FDI) inflows and a rise in public spending. Colombian life insurance penetration remains low compared to other Latin American countries, offering positive growth potential.
The life segment expanded significantly between 2008 and 2012 despite the weak performance of pension insurance products, which struggled to post growth in line with the country’s GDP. The group life insurance category grew at a CAGR of 18.3%. Furthermore, regulatory changes relating to institutional investors and a revision of the technical surplus in 2010 are likely to positively impact the segment.
The Colombian government signed a free-trade agreement with the US, which came into effect in May 2012. This agreement will allow US insurers to establish branch offices and market insurance products under the supervision of Colombian regulatory authorities. These initiatives are expected to increase competition. In June 2013, the government also passed a law permitting insurers to underwrite insurance from overseas markets.
The segment’s financial outlook is expected to remain stable due to the conservative investment approaches adopted by life insurers. Colombian life insurers tend to invest in government securities such as bonds and saving schemes. These classes of investment are considered very low risk, which will ensure the financial stability of life insurers.
Despite these growth opportunities, Colombia’s life insurance segment still faces numerous challenges. For example, insurance fraud and an increase in loss ratios are expected to present themselves as key challenges. Colombian policymakers are considering implementing Solvency II legislation, which will increase the initial capital requirements for insurance companies looking to establish a market presence. Such regulatory changes are expected to discourage new businesses from seeking Colombian investment.
Distribution Channels
Colombia is the third-largest populated country in Latin America after Brazil and Mexico. In 2012, the country had a population of 47.7 million. To cater to such a large population and provide extensive service to semi-urban and rural customers, Colombian life insurers employ a variety of alternative distribution channels such as insurance brokers, direct selling agents, bancassurance, grocery stores, shopping centers, government agencies and the internet.
Direct marketing is the traditional method of marketing insurance products in Colombia and represented a market share of 12.8% in 2012. Direct marketing channel includes sales forces, telemarketing and mail distribution. However, alternative distribution channels such as bancassurance, insurance brokers and agencies are gaining in popularity.
Bancassurance is emerging as the most popular and trusted distribution channel and is expected to play a vital role in the growth of the insurance industry as a whole. Bancassurance penetration in Colombia remained at 20.0%, while it is significantly higher in other Latin American counties such as Brazil (55.5%) and Mexico (62.6%) in 2012. Large listed entities such as Seguros Bolivar and BBVA Seguros SA have expanded their tie-ups with domestic banks in order to cross-sell insurance products. The number of policies sold through bancassurance, grew at a CAGR of 6.9%, reaching 646,120 in 2012 and accounting for a 20.0% share of the total revenue.
The number of policies sold through brokers reached 752,020 in 2012, accounting for a market share of 23.3%. The number of policies sold through agencies reached 744,270, comprising a market share of 23.0% in the same year.
E-commerce was the fastest-growing distribution channel in the period between 2008 and 2012. The number of policies sold through the internet rose from 271,500 in 2008 to 379,570 in 2012, at a CAGR of 8.7%. Considerable underwriting losses have encouraged Colombian life insurers to adopt cost-effective means of distributing life insurance such as e-commerce. The e-commerce channel is expected to gain popularity, registering 11.9% CAGR growth between 2013 and 2017.
The number of policies sold through other distribution channels, such as convenience stores and multi-level marketing, reached 295,580 in 2012. This is expected to reach 397,660 in 2017.
Various distribution channels are expected to drive growth in the life segment as domestic insurers focus on expanding their distribution channels to facilitate rural and semi-urban customers. Such a step is likely to increase insurance penetration.
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By GlobalDataMarket Drivers
Conservative investment approach suggests financial stability
Colombian life insurance providers tend to invest in government bonds, corporate bonds and investment funds, however, their investment approaches have been somewhat conservative. A large proportion of life insurers’ investment goes into government securities, which provide a modest return upon maturity. The total investment in government securities by Colombian life insurance providers stood at COP6.3 trillion (US$3.5 billion) in 2012, equivalent to 65% of the total investment in 2012. Government securities such as treasury bills, savings bonds and notes are considered a low-risk investment as they are supported by government taxes. Such a conservative investment approach guarantees a modest return, suggesting a degree of financial stability in the segment.
Underwriting losses coupled with low interest rate offsets life insurers’ earning
Colombian life insurance providers’ earnings were impacted by underwriting losses as a result of an increase in incurred losses, commissions and expenses. Underwriting losses in the life segment increased from COP-303.5billion (US$-154.2m) in 2008 to COP-674.2billion (US$-375.2m) in 2012, and is projected to reach COP-1.2trillion (US$-622.5m) in 2017. Insurers’ earnings have been further impacted by the nation’s low interest rates which are among the lowest in Latin America. Low interest rates adversely impact investment incomes, especially investment in government bonds and other fixed deposits such as domestic bank term deposits. Despite improving economic conditions, interest rates are expected to remain low for the next couple of years, which is likely to negatively impact earnings from investments. However, the rising premium growth and expansion of key sectors such as infrastructure, oil, gas and mining will support the growth of the segment.
Expansion of key end-user sectors promotes group-life insurance
The group life insurance category registered a CAGR of 15.6% from 2008 to 2012 and demonstrated a strong resilience to the global financial crisis. The growth was partly derived from the rapid expansion of key-end user sectors such as mining, infrastructure, oil and gas and the strong marketing strategies adopted by insurers to encourage this trend, especially among corporate clients. The stability of this category ensured the growth of the life insurance segment.
Low penetration levels provide a unique opportunity for new businesses
Penetration rates in the Colombian life insurance segment grew from 2008 to 2012. This was primarily due to improving economic conditions. The country’s life insurance penetration rose from 0.96% in 2008 to 1.04% in 2012 and is expected to increase to 1.23% in 2017. However, this figure is comparatively low compared to other Latin American countries, such as Brazil and Chile, where penetration measured 2.0% and 2.55% respectively. In 2017, this figure is expected to reach 1.23% in Colombia, 2.4% in Brazil and 2.79% in Chile. Such a low penetration level does, however, provide the segment with positive growth potential.
Improved economic development supports insurance industry
The success of the life insurance segment is directly related to the country’s economic growth. For example, in 2010, the segment posted a CAGR of 3.5%, in line with the country’s GDP growth of 4%. Despite the global financial crisis Colombia’s economic growth remained resilient in 2009, which positively impacted the country’s insurance industry. Colombian GDP at constant prices increased from US$136.1 billion in 2007 to US$157.8 billion in 2011, at a CAGR of 3.8% during 2007-2011. This trend is expected to continue, which should lead to an increase in per capita disposable income which is likely to encourage the people of Colombia to invest in life insurance products, especially unit-linked products.
