The Correa government’s view remains that insurance companies, and indeed brokerage houses, are more closely aligned to Ecuador’s corporate and securities sectors than to the conventional financial sector. Subsequent reforms have reflected this stance with mixed consequences.
According to the Center for Economic and Policy Research, “Ecuador’s success shows that a government committed to reform of the financial system, can—with popular support—confront an alliance of powerful, entrenched financial, political, and media interests and win.“ Bold regulatory moves that put an end to bank participation in the insurance sector, ushered in increased foreign involvement in Ecuador’s insurance arena, which today numbers close to 40 players. By 2012 the top-ten insurers together accounted for close to 65% of the total net written premiums. And by 2013 the top three foreign insurers—Pichincha, AIG, and ACE—generated virtually 60% of the sector’s total net profits.
Meanwhile, a cursory glance at local demographics indicates a brighter future for the sector, despite current deceleration. Ecuador’s 75% urbanization rate and rising middle class, in step with the region, spells greater need for coverage as disposable income replaces mere subsistence for more households. What’s more, the tech-savvy younger generation characteristic of the region provides another platform on which creative insurers will prove their underwriting skills in the years ahead by reinforcing their brand equity. Indeed, according to EY’s 2015 Global Insurance Outlook; “Successful insurers in 2015 will increase market penetration by reaching out to consumers underserved by traditional distribution channels such as brokers and banks.“
As of 2013, the local insurance sector was seeing the region’s third fastest growth rate, after Brazil and Peru. Ecuador’s insurance sector registered $1.66 billion in premiums between June 2013 and June 2014, where $774 million was generated in 1H14. According to the Superintendency of Banks and Insurance, this was moderately below the 2H13 print of $775.7 billion. The ratio to GDP remains below 2%, by comparison, around a third of the rate in Colombia.
Dollarization, effective since September 2000 when Ecuador bid farewell to the sucre, has spurred insurance sector growth, such that while in 2000 the sector was worth a paltry $200 million it had reached the $1.6 billion million mark by 2014, albeit off a low base; growth is currently decelerating. Official figures put the vehicle segment in the driver’s seat for the June 2013 to June 2014 period on premiums generated of $426.1 million.
Reinsurance underpins the broader insurance universe, absorbing substantial losses by diversifying risk and investment. And while such branches as auto insurance may readily be reinsured domestically, provision for major catastrophes is less simply achieved. The diversification available, particularly to giant international reinsurers allows, for example, in areas prone to natural disasters, for payment of premiums prior to a catastrophic event—think volcano. This affords both public and private entities protection against an event, as the Global Federation of Insurance Associations (GFIA) explains; “…that may or may not materialize over the course of the contract.“
Ecuador has had two reinsurers, namely the state-owned Seguros Sucre and Seguros Rocafuerte that provide coverage to the vast public sector at large. Reinsurance cessions had surpassed 50% by 2013, just shy of the 55-60% Latin American average. Yet the Correra administration has been keen to retain as many dollars within the dollarized economy, not least as oil exports take a tumble. This has led to a drive to establish a deeper domestic reinsurance business. According to Ecuador’s new financial code, the minimum capital for insurers has increased to $8 million and to $13 million for reinsurers. The GFIA voiced industry concerns to Ecuador’s Monetary and Financial Board earlier this year that; “Limiting ad-hoc retentions could result in unwanted risk concentration in the Ecuadorian economy and a reduction of the risk management capability of the insurers [and even] the nonobservance of several of the Insurance Core Principles of Supervision (ICPs), stated by the International Association of Insurance Supervisors (IAIS).“
REGULATORY CHANGES & CONSEQUENCES
Ecuador’s banking and insurance regulator, the SBS, established in 1927, is mandated with monitoring the regulatory framework, and upholding appropriate risk management controls, as well as safeguarding the rights and security of financial service customers.
The entry into force of the Monetary and Financial Code requires insurers to confirm capital of $8 million, which has attracted much attention. Regulatory changes geared at strengthening Ecuador’s private insurance system also stipulate the minimum capital required for opening shop as a reinsurer at $13 million. The required capital for companies operating in both business lines is proposed at $13 million. Given the number of Ecuadorian companies with capital ranging $1 million to $7 million required to confirm to these stipulations, it follows that the sector is set to witness notable M&A activity going forward, reducing the number of players. Yet to tap into the vast percentage of uninsured Ecuadorians, price will need to remain a sales point, while insurers also rely increasingly on alternative channels such a mobile to foment interest.
In the words of Rodrigo Cevallos Breilh, Executive President of Aseguradora del Sur
“2015 will be a year of changes for the insurance market after the new reforms.“ His firm’s; “…good financial management [over the past 25 years means that] nowadays we have $18.8 million in assets and capital of $8 million.“
Meanwhile, addressing certain factors that have curbed sector performance, Andrés Cordovez Dávalos, General Manager of Seguros Equinoccial, the largest Ecuadorian insurer, told TBY that; “We have experienced an $80 million loss in the insurance sector, which comes from the government’s decision to remove SOAT (victim insurance coverage) at the end of 2014, and render it a tax issue. Ecuador has also imposed certain import restrictions in support of the local economy. This has led, however, to a reduction in the volume of goods to be insured. “There is now a restriction on car sales, as the government has relocated and increased quotas; forecasts say that Ecuador will be selling the same number of cars as in 2006 or 2007. Therefore, I do not foresee sector growth in 2015,“ Cordovez Dávalos added. His concluding warning rings clear, namely that the insurance sector is in decline, the question now is how much shrinkage it can stomach. “If the productive matrix is changed and produces in greater volume in Ecuador, I would be happy, both as an Ecuadorian and an insurer, as insurance demand would by definition rise,“ he asserts. “Yet we remain in the process of changing the productive matrix, and 2015 is not the year in which to expect this change to have a manifest effect.“
Overall then, still limited insurance penetration ultimately bodes well for growth potential. A balance will need to be struck over the mid-term between retaining dollars by reducing business cessions abroad, while making sure that major risk is adequately diversified. Meanwhile, putting matters into perspective, when quizzed on his 2015 expectations, Cordovez Dávalos concluded that; “…our challenge is to grow by 18% in what is essentially a contracting market.“