Fitch Ratings said recent changes to Mexican insurance law enhancing the regulatory framework may also spur merger and acquisition activity in the segment.

In a recent statement, Fitch said the law changes facilitate a risk-based capital approach to regulation, and provide the regulator and the market with new tools to monitor the different risk exposures of Mexican insurance companies.

The law, which Fitch said is aligned with Solvency II, provides a more detailed framework that the rating agency believes more accurately assesses the risks insurance companies are exposed to, including credit, market, underwriting, and operative risks. It also improves the industry’s transparency and strengthens corporate governance and regulatory supervision, Fitch said.

Going on to explain the potential uptick in M&A activity, Fitch notes, that some market participants may find the newer, more sophisticated models required by the law to assess catastrophic and other risk exposures inaccessible in the short run. Over the longer run, the calibration of the models may also be a challenge.

There will be some increased costs to compliance, and some companies may find it difficult to manage all the new requirements, Fitch said, adding that some mergers and acquisitions may result.

Fitch said that most of the forthcoming changes are related to capital requirements—moving from a “solvency margin” to a new measure that not only incorporates expected capital needs (derived from insurance underwriting), but also considers the actual credit, market, and operative risk exposure of each insurance company.

Other important changes in the law are related to the enhancement of technical reserves and investment rules, Fitch said. In addition, the law requires a new set of regular financial reporting techniques and the use of credit rating agencies to provide independent opinions about the financial strength of the insurance companies, similar to those in other markets in Central America, Chile, and Colombia.

Since 2009, local regulators and the insurance companies have been developing the tools and measuring the impact of many of the changes included in this law, which should result in a relatively smooth application of the new rules, Fitch said. They are expected to be fully implemented in the first quarter of 2014, Fitch reported.

Source: Fitch Ratings