Peru insurance premium growth steady as middle class grows

The insurance sector in Peru has experienced a decade of strong growth, benefitting from the fact that the country has been one of the fastest-growing economies in Latin America and has seen both a significant reduction in poverty levels and an expansion of the middle class. In the 10 years to 2013, premium income tripled, and according to the Peruvian Insurance Association (Asociación Peruana de Empresas de Seguros, APESEG), net premiums then grew by 5.36% to $3.54bn in 2014. Total premiums in the first 11 months of 2015 hit $3.4bn, up by 7.6% on 2014. If that rate of growth is maintained for the last quarter of the year, the total for 2015 should reach some $3.8bn. In 2013 the largest source of revenue – 40.4% of net premiums – came from general insurance, followed by private pension fund life and accident cover (24.9%), general life (21.2%), and accident and health insurance (13.5%).

The penetration of products remains low, meaning there is still significant room for growth. The latest estimates are that total premium income reached 1.85% of GDP in 2014, up from 1.18% in 2007, but still below levels in neighbouring countries, such as Chile. In dollar terms premium income was estimated at $3.4bn in 2014 – significant, but still only about one-third of the level in Chile. “Market penetration is the primary challenge to tackle today. The ability to build savings is quite low among many Peruvians, even though it has been improving in the last few years,” Juan Carlos Puyo, general manager at ACE Seguros, told OBG. “As savings capacity increases, a savings culture will develop, and this will raise the demand for insurance products, among other financial savings products,” he added.

Industry Structure

According to data from Peru’s main financial regulator, the Superintendencia de Banca, Seguros y Administradoras de Fondos de Pensiones (SBS), as of August 2015 there were 18 active insurance companies in the country, with total assets of PEN37.34bn ($11.9bn). Up to five new entrants are also in the process of setting up operations in Peru. Of the 18 currently active companies, five offer general insurance and life products; six are exclusively general insurance providers, and seven are exclusively life providers.

The biggest insurers, as of August 2015, were Rimac, with 27.8% of total assets; followed by El Pacífico Vida (15.5%); Interseguro (13.4%); and Seguros Sura (11.9%). The top three are linked to different domestic groups, while Seguros Sura is a subsidiary of a Colombian insurer. Together, these four companies dominate, accounting for 68.6% of total assets. The top two – Rimac and Pacífico – have traditionally led the industry and there is still a perception that Peruvian insurance is concentrated around these large players. The reality, however, is that competition has increased significantly in recent years.

Changing Focus

One reason for this is that many players have begun to focus less on market share and more on profitability. Piero Travezán, finance manager at Pacífico, has acknowledged that with the claims rate rising to 48% of premium income in the year to May 2014, up from 45% in the preceding 12-month period, his company has become more selective. He noted that, following a recent change in Pacífico’s top leadership, company policy has shifted to place greater emphasis on profitability, with market share becoming a slightly lower priority.

According to Renzo Calda, general manager at Mapfre, the seventh-largest insurance company by assets, the problem faced by the market leaders has been one of a partial reduction in profitability despite strong growth in premium revenue. “Because insurance has a relatively low penetration rate in Peru, it is pretty easy to grow here: all you need to do is lower premiums and pay greater commissions to brokers selling your policies,” Calda said, but he warns doing so can lead to lower profitability.

A second factor pointing to greater competition has been the arrival of single-line firms specialising, for example, in automotive, annuities, accident, or health lines. Their success has taken some market share away from general insurance providers.

Double-Digit Expansion

Premium growth remains strong. Total net premium growth for the sector as a whole in 2014 was 11.96% in soles terms. Although economic expansion slowed during the course of 2015, net premiums held up well. According to official data, second-quarter 2015 premiums rose by 16.24% year-on-year in soles terms, showing them to be resilient. Eduardo Morón, president of APESEG, told OBG that the industry has been continuing to benefit from Peru’s economic development.

“Insurance is doing well. We need economic stability, and Peru is now on that path” he said. “Our market is made up of the people who are joining the middle class, who have bought their first car, their first house, and are now beginning to think about life insurance and health insurance.” Significantly, higher-income groups have risen from 30% of the population in 2000 to 52% now – a majority. While the capital Lima remains dominant, the expansion of the middle class has also made itself felt in other cities and regions around the country, causing insurance companies to widen their footprint.

In Morón’s view, Peru has overcome some of the major macroeconomic problems that could inhibit the development of the insurance sector, such as a high inflation rate or the distortions caused by major public sector fiscal imbalances. It has also done well on the reduction of poverty. However, he feels more progress is needed in the reduction of informality, the proportion of the labour force that works outside the tax and benefit system.

Financial Inclusion

By most estimates, as much as half of Peru’s labour force is informal. Although they work, these citizens pay no taxes, have no official contract of employment, and lack access to social services and protection of their labour rights. Informality is greatest among the country’s smaller enterprises – those employing less than 10 people. According to a study by the International Labour Organisation, informality as a proportion of the non-agricultural labour force fell from 75.2% in 2004 to 68.6% in 2012.

Despite this improvement, the fact remains that more than half of the nation’s workforce is, in effect, very likely to be excluded from the market for financial products and services in general, as well as from the market for insurance products in particular. Informal workers are unlikely to be aware of insurance products, to understand the benefits they can offer, or to be able to afford them.

Still, Peru does have a significant record of trying to enhance financial inclusion. In banking for example, the country has seen the emergence of a number of cooperatives and non-governmental organisations specialising in providing small loans – known as micro-credits – for a range of enterprises in the informal sector. Through a process of mergers and occasional takeovers, this has led to the emergence of some banks specialised in lending to small and medium-sized enterprises around the country.

Aiming Small

While the banks have spearheaded this process, APESEG believes insurance firms could also make significant headway by selling simple insurance policies at low premiums. The association points out that one of the main obstacles to deepening the country’s insurance penetration rate – the high cost of marketing and distribution channels, particularly where an attempt is being made to reach isolated rural communities – may be on the way to being solved. A low-cost mobile phone-based payments system, known as an electronic wallet, was already being rolled out in late 2015 by at least one major telecoms provider. The system is a collaborative venture between the country’s main telecoms operators and its main banks.

APESEG expects that the system could sharply reduce transactional costs and make the sale of simple, low-premium insurance policies an attractive way to sell to lower-income groups.

Building Trust

One of the challenges the industry faces is increasing trust levels among these segments of the population. “To successfully expand into the middle income segment of the population, it is important to increase trust with the consumer,” Giulio Valz, general manager at Contacto Corredores de Seguros, told OBG. “One way of doing this is by ensuring that contracts are understood by all the parties involved and there are no hidden clauses.”

The SBS recognises the need to improve financial education and general awareness, as a way of increasing knowledge of insurance products and reversing low levels of trust among the population. Rafael Venegas, general manager of Rimac, is also aware of the need to explain the benefits of insurance products to potential customers. “One of our main challenges is developing a culture of insurance in our country, given the enormous potential of the market,” he said, adding that, “We are changing from having a focus centred on products to having an integrated vision of our clients, with a better understanding of their demands and expectations.”

Automotive Insurance

Before 2002 there was no obligatory automobile insurance in Peru. In that year, the government introduced a basic third-party insurance scheme known as the obligatory traffic accident insurance service (Seguro Obligatorio de Accidentes de Tránsito, SOAT). The scheme covers the medical costs of all victims of traffic accidents and pays compensation for disability or loss of life. In the latter case claim payments are capped at up to four indexed tax units of account (unidades impositivas tributarias, UITs); in 2015 four UITs were equivalent to PEN15,400 ($4915).

Many of the main general and mixed-insurance companies sell SOAT cover; 2,383,729 policies were sold in 2015. Despite its 12-year existence, awareness of the benefits of automobile insurance has remained quite low. Many drivers are thought to buy SOAT coverage only for the negative reason that they can be stopped and fined by police if they do not have it; the more positive motivating factor – understanding and valuing the financial protection it affords – is still believed to play only a secondary role in motivating clients.

Insurance companies also offer more comprehensive auto policies. According to industry sources, in mid-2015 around 637,000 vehicles were insured with this wider cover, a number which was expected to rise to 650,000 by the end of the year. However, it was thought that despite the recovery forecast, slow economic growth in 2016 would still hold back the sale of new cars, and therefore also restrain the growth of new automobile insurance.

Health Coverage

Health insurance is another product that has strong growth potential. Existing public and private health schemes do not cover the entire population. According to research by Pacífico Seguros, there are about 9m self-employed workers (formal and informal) in Peru who currently have no health cover. According to a survey, this group is willing to spend up to around 8% of its total income on medical care. The company has developed a health insurance policy that is known as ECOH, designed for self-employed people earning between PEN5000 ($1600) and PEN6000 ($1915) a month. This product will cover hospital costs, certain types of specialist treatment, doctor’s house visits or online consultations, as well as emergency coverage for approximately PEN73 ($23.30) a month.


A number of Peruvian insurance companies have begun to develop online sales and marketing of their products. In principle this is a highly attractive platform as it offers a sharp reduction in transactional costs. Customers can save time and activate a policy very rapidly. But there are also a number of obstacles to taking more of the business online. One of these is that the public is wary of buying insurance in this way, and worried more generally about the security of online transactions. Another is that legislation covering e-commerce is still evolving. To date, the main insurance product offered online is SOAT, the obligatory automobile cover. However, Rimac has invested in developing its online platform. It sells vehicle insurance through a Facebook page and has created apps for tablets and smartphones that can be used by its agents to produce quotes and in some cases to close a sale. EL NIÑO: Peru is exposed to El Niño, a pattern of abnormal weather that takes place on average once every five years, starting with a warming of the Pacific Ocean off its eastern coast and usually leading to heavy rains, flooding and the disruption of agricultural harvests, in addition to severe damage to roads and other transport networks.

One of the most severe El Niño patterns took place in 1997-98 and is estimated to have caused $3.5bn worth of damage to public and private sector property. A new El Niño pattern is under way in 2015-16 and Peru’s multi-sectorial committee for the study of the El Niño phenomenon has said that there is a 55% chance that it could reach similar levels of intensity. While insurance companies offer El Niño catastrophic coverage to companies and individuals, to date the government has not used insurance to cover losses and damage to the public sector.

Disaster Preparation

José Miguel González García, chief executive of the local subsidiary of UK-based reinsurance company Jardine Lloyd Thompson Group notes that the government has already taken precautionary measures, such as boosting its Disaster Management Programme budget, increasing contingency reserves and widening the expected 2016 fiscal deficit. He suggested it should consider insurance cover as used by Mexico and Uruguay. Gonzalez García said a fixed sum could be paid according to pre-agreed parameters, “So for example it could activate for the intensity of an earthquake depending on its strength on the Richter scale, or the volume of rain by cubic millimetre, or by the grade of intensity of that year’s El Niño.” While that option has not yet been taken up, the government has taken out El Niño insurance cover for farmers: the Seguro Agrario Catastrófico covers 550,000 ha of crops for damages of up to PEN300m ($95.8m). Economy and finance minister, Alonso Segura, has also said that Peru is considering the option of purchasing catastrophic cover jointly with its fellow members of the Pacific Alliance (Chile, Colombia, and Mexico). The matter was being considered by a technical committee within the Pacific Alliance; an issue was whether by pooling coverage for the different catastrophic risks affecting the four countries there could be economies of scale.

Effective Regulation

The SBS is widely recognised as providing a prudential and efficient regulatory system for local insurance companies. The Insurance Contract Law of May 2014 widened its regulatory powers, underscoring the protection of the insured’s rights. It has been cautious on the adoption of international regulatory frameworks, such as Comframe or Solvency II. The pattern has been for the regulator to implement local measures on a piecemeal basis as it assesses the appropriateness of international standards for Peru’s specific market conditions. SBS has said that Peru is updating regulations on the reserve provisions required by the European Solvency II standard. SBS officials say local requirements are currently equivalent to Solvency I; they are considering moving to Solvency II, but first want to assess the experience of other Latin American countries, such as Chile and Mexico.

Various players in the life insurance sector have pointed out that the country does not yet have its own mortality tables. Peruvian life insurance companies are currently operating with an adapted version of Chile’s mortality tables, a situation which is less than ideal. Another operational issue is that there are problems with the shared database system that is used central registry of all insurance polices.

Pension Funds

Peru’s private pension funds (Administradoras de Fondos de Pensiones, AFPs) – have a significant impact on the insurance sector. The funds, originally set up in the early 1990s, have now grown to hold around $40bn worth of total assets, making them a significant force on the local capital market. As initially operated, AFP contributors paid 10% of their monthly salaries into their AFP accounts, plus a flat 1.4% commission. Drawing on the commission funds, each AFP then contracted with an insurance company of its choice to provide accident and life insurance cover for each individual contributor. The system has now been changed, and the AFPs are required to arrange insurance for their members through a competitive bidding process. Seven different market segments are offered, defined by age and gender, and each insurance company can bid for up to two of them. The winners must accept the average commission offered by all bidders in the auction, which may be higher or lower than what they actually bid. In addition, commissions are now calculated not as a percentage of the contributor’s monthly salary, but as percentage of the total balance in his or her pension account.


According to a report published by US ratings agency Moody’s in August 2015, the outlook for the Peruvian insurance sector was assessed to be “stable” over the following 12 to 18 months, despite the general economic slowdown experienced by the country. Even at a slower rate, growth would be enough to “stimulate insurance activity”, Moody’s said. However, earnings volatility and the low penetration of insurance products would be restraining factors. The growth of the middle class was a positive factor, but Peru’s insurance industry was still lagging behind some of its Latin American neighbours in terms of penetration. Moody’s also warned that mortality assumptions might be incorrect, and suggested that the probability of large numbers of new players joining the industry was low, given the relatively small size of the Peruvian market.

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The Report: Peru 2016

Insurance chapter from The Report: Peru 2016

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