At a Premium
Panama’s insurance sector grew by a slight 0.5% in 2016 to a total value of USD1.4 billion according to the data disclosed by the industry watchdog, the Seguros y Reaseguros de Panamá, or Superintendency of Insurance and Reinsurance. Amid slowing economic growth in Latin America, this was significantly weaker than the country’s 5.2% GDP growth in the same year. However, this figure was not a reflection of a stagnation of insurance activities in the country, but rather a change in the weight of various insurance categories. In fact, the total amount of policies increased by 13.9% to 1.36 million during the same period, with the highest growth rate observed within the categories of life, collective insurance for accidents and life, car insurance, and finance. Combined, these accounted for 73% of the additional number of policies. While the finance category included 20,000 new policies, displaying a 142% annual growth, it also reflected the biggest decline in dollar terms, plunging by 16% to USD116 million worth of insurance premiums, suggesting declining premium rates in the sector.
This year auto insurance was again the largest insurance line of the industry, with total premiums rising by 6.1% to USD283 million, representing 20% of the total industry. This was followed by health insurance, with collected premiums rising 10.5% annually to USD262 million, accounting for 18.8% of total premiums’ value. Although the growth in auto insurance premiums seems to have decelerated, it is expected to rise again as a result of the compulsory auto insurance that was enacted in 2016. However, the profitability of this category is currently under pressure due to a 21% rise in accident claims. Overall, total claims paid in the industry were 2.3% higher at USD577 million. The highest value of claims were realized in the health category at USD197 million and automobile at USD174 million.
Panama’s comparative advantages lying in its geographical location, connectivity, and its dollarized economy justify its vision of becoming a regional insurance and reinsurance hub. But in order to realize this potential, regulators need to modernize Law 63, which has been governing the industry for more than 20 years and fails to meet international standards, while at the same time limiting the regulator’s supervisory capacity.
This need has gained even more importance after the inauguration of the extension of the Panama Canal in July 2016, which doubled the canal’s capacity and is expected to raise insurance activities related to maritime cargo as well as reinsurance premiums in the country. Maritime casco insurance, which increased by 7% in 2016 to USD12.5 million, is expected to benefit from the new inflow of bigger Panamax ships expected to traverse the canal from the Atlantic to the Pacific, whereby major users are American and Chinese companies. General Manager of Panamerican Network Sulcelt Pitty told TBY about its strategy regarding this new developments; “Cargo and logistics companies, in particular, hold appeal for us. Companies that offer maintenance for the shipping industry are important players that we would like to work with. The number of vessels that cross the canal is steadily increasing, which implies a great potential for the logistics sectors in general, and we are ready to offer our insurance services to all the companies operating in this rapidly growing segment.“ She also signaled Panama’s growing role as a regional energy hub, a segment Panamerican Network also intends to capitalize on.
The energy sector, especially renewable energy, is also the focus area of Marsh Semusa, as explained by Country Head and Managing Director Emanuel Abadia: “We currently focus on energy. Panama is growing not only in terms of the size of its economy, but also in terms of population. We have many immigrants, such as Venezuelans and Colombians. As a result, there are many new companies and developments taking place and all these need energy.“
Important Developments in 2016 Solidification of the equity base
In the last two years the sector has been subject to the takeover and liquidation of three companies by the regulator: Seguros Constitucion in August 2015, Seguros Confianza in September 2016, and finally Istmo Reinsurance Company in December 2016. Istmo’s equity base was ruled to be insufficient according to the law as the company had incurred losses of USD5.8 million in 2015 and USD28.8 million in the first nine months of 2016 after an aggressive expansion of its activities beyond Panama.
The industry watchdog’s objective is to raise the equity requirements for the granting of licenses to insurance companies in line with international standards to ultimately safeguard the best interests of the insured. In this regard, a series of important reforms have been implemented to solidify the sector’s equity base as well as to boost growth in the sector. The major legal developments that were introduced in 2016 were the new law of compulsory auto insurance, the introduction of corporate governance rules, and the obligation to have positive results in all branches that an insurance company operates.
New law for compulsory car insurance
At the end of 2016, there were 629,000 active auto policies in the country. The new law for compulsory car insurance was ratified by the president in 2016 and will be implemented within 2017. The new regulation is also designed to make the system faster and more efficient introducing new tools such as a call center. The industry watchdog estimates that around 100,000 cars circulate without an insurance policy, suggesting important potential for the industry.
Corporate governance laws
The banking sector had already adopted its corporate governance rules back in 2004. After a long delay, the Superintendency of Insurance and Reinsurance finally introduced a corporate governance framework in June 2016, which aims to introduce a greater involvement of the board in the management of the insurers’ more sensitive businesses, and has an exclusive chapter on sureties. Lessons were learned as almost all insurers that have failed in Panama did so as a result of the mishandling of bonds.
There are currently 26 players in the sector, and the industry has been subject to aggressive competition that has kept premiums under pressure, eroding the equity reserves and threatening long-term sustainability and capacity of insurance companies to withstand risk. In order to avoid bankruptcies and establish trust in the sector, in September 2016 the Superintendency of Insurance and Reinsurance approved two new regulations for the sector. Agreement 4 requires insurers to establish reserves in the event that branches are not profitable on an individual basis. Companies are now under obligation to manage the profitability of each business line (health, cars, life) and provide the necessary reserves in case any single one of these should make a loss. If a branch should make a loss over two consecutive years, apart from providing a reserve, the company has to present the regulator an analysis of the loss and its strategy to tackle it. Once the business returns to a profit, the reserve is released.
The other regulation that was introduced, Agreement 3, brings a more up-to-date technical note base, with more information for all new products.
Expectations for 2017
The Ministry of Economy and Finance has established a working group for the execution of a comprehensive assessment of Panama’s legal and financial services sector. The working group is made up of representatives of sector supervisors, private sector executives, and a groups of consultants some with prior experience working in international organizations such as the FATF, the OECD, and the IMF. The group is expected to present its conclusions and proposals in the second half of 2017 in order to modify the sector’s legal framework.
Another reform expected to come online in 2017 relates to health insurance and aims to bring more transparency to the policies and to the prices used as reference in the medical services.
Overall, as large infrastructure projects conclude, the sector is less dominated by reinsurance premiums and is shifting more toward collective employee benefits as the country gets ready to host an increasing number of foreign companies and immigrating work force that will need private coverage, as explained by Marsh Semusa’s Abadia: “The collective side, which is employees’ health and benefits cover, will grow considerably because the public health system in Panama is not fantastic. Therefore, providing employees with private insurance covered by the company is one of the best incentives an employer can give its staff here.“