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The financial impact of the implementation of Solvency II on the Mexican insurance sector

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Abstract

This paper examines the effects of the regulatory changes implemented in the Mexican insurance sector in adjustment to the international regulations of Solvency II imposed by the International Association of Insurance Supervisors. The effect of regulatory changes on the risk and performance levels of foreign entities was analysed and compared with their domestic counterparts. Using a difference-in-difference estimator, significant evidence that foreign insurance companies enhanced their default risk after complying with the law was found. The findings showed that the stability levels of domestic entities were negatively affected. No effect on the performance level for both types of entities was found. This study provides evidence that foreign entities were already prepared for the change in regulation, as opposed to domestic ones, due to their association with their foreign holdings.

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Notes

  1. This information is available at https://www.iaisweb.org/home.

  2. Höring shows that an insurance company with a rating grade of A has 68% more capital for market risk compared to the standard model of Solvency II with a comparable confidence level.

  3. Banks were obligated to set preventive reserves depending on which of the following was higher: 60% of their past-due credits or 4% of their total credits.

  4. Average annual inflation for this period is 3.9% (it ranges from 2.13% to 6.53%, the highest value due to the financial crisis of 2007–2008); the average short-term free risk rate (CETES 28) is 4.9% (2.43% to 8.21%); the average long-term free risk rate (10-year bonds) is 6.8% (4.64% to 8.82%); and the average exchange rate MXN/USD is MXN 13.21 = USD 1 (MXN 9.91 to 21.05). Data obtained from The Central Bank of Mexico website: https://www.banxico.org.mx.

  5. In the LCS Act., reserves are determined by technical reserves, which comprise ongoing reserves, reserves for pending obligation to fulfill and forecast reserves. Meanwhile, the gross solvency requirement, or gross solvency margin, is calculated as a capital requirement for probable deviations in retained losses and/or adverse fluctuations in asset prices in which the technical reserves are invested.

  6. Data source: https://www.cnsf.gob.mx/EntidadesSupervisadas/InstitucionesSociedadesMutualistas/Paginas/informacionfinanciera.aspx, last accessed 14 February 2020.

  7. This classification is also provided by the CNSF, in which domestic entities are insurance companies with majority local ownership and foreign entities have majority foreign ownership. Data source: http://www.cnsf.gob.mx/Difusion/SintesisCoyuntura/Paginas/Sector_Asegurador.aspx#ReportesSectorAsegurador, last accessed 16 February 2020.

  8. The designation is provided by the CNSF through its website.

  9. Data source: Central Bank of México (Banco de México). https://www.banxico.org.mx/Indicadores/consulta/Instrumentos.action, last accessed 16 February 2020.

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Authors and Affiliations

  1. Universidad de las Americas Puebla (UDLAP), Puebla, Mexico

    Nora Gavira-Durón, Daniel Mayorga-Serna & Alberto Bagatella-Osorio

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  1. Nora Gavira-Durón
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  2. Daniel Mayorga-Serna
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  3. Alberto Bagatella-Osorio
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Correspondence to Nora Gavira-Durón.

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Appendix 1: List of insurance companies grouped by holding from 2003–2019 Q3

Appendix 1: List of insurance companies grouped by holding from 2003–2019 Q3

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Gavira-Durón, N., Mayorga-Serna, D. & Bagatella-Osorio, A. The financial impact of the implementation of Solvency II on the Mexican insurance sector. Geneva Pap Risk Insur Issues Pract 47, 349–374 (2022). https://doi.org/10.1057/s41288-020-00196-1

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