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Fitch: New regulations may knock Mexican insurers' balance sheets

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Fitch: New regulations may knock Mexican insurers' balance sheets

The implementation of new regulatory requirements couldaffect Mexican insurers' balance sheets, particularly in their reserves andequity, Fitch Ratings said.

However, the rating agency noted that the degree to which banksare affected will depend on companies' focus and/or business concentration.

Mexican insurers have tried implementing risk-based SolvencyII type regulations, following the introduction of the Insurance and SuretyInstitutions Law and Unique Insurance and Surety Circular in 2013, according toFitch.

Fitch noted that some efforts to implement new regulationswere costly, pointing to a 17% drop in net income in 2015 despite a 9% rise inwritten premiums for the year. Fitch attributed this to a 22% annual increasein operational and management costs, coming from increased regulatoryrequirements.

The rating agency said it expects material changes in 2016,based on quantitative studies implementation, despite the sector's stablefinancial profile as of December 2015.

Under new regulations, there will be a migration fromaccounting to economic balance sheets. Movement on assets will be seen usingmark-to-market evaluation. For liabilities, technical reserves will seesignificant changes due to a new model that will calculate reserves by line ofbusiness.

For company equity, new rules will require insurancecompanies to quantify at least technical, operational and counterparty risks byusing stochastic models. Written and earned premiums in income statements maychange due to registering annualized and anticipated premiums.