How ARCA Seguros is Expediting the Digitization of Insurance in Mexico

In the US (and in much of the developed world), auto insurance is slightly taken for granted. Although estimates vary by states, approximately 85%- 90% of all US drivers have some form of auto insurance. But by and large, InsurTech companies in the US have moved beyond the phase of making it easier to purchase insurance through digital channels. These innovative companies have moved onto more complex parts of the insurance value chain — from better claims processing to more innovative insurance products altogether.

PUTTING THE MEXICO AUTO INSURANCE SECTOR INTO CONTEXT

In Mexico, however, like many other emerging markets, auto insurance is still heavily underpenetrated. Over the last four decades, the number of registered autos in Mexico has exploded. In 2019, there were 44.9 million vehicles in Mexico, a 10X increase from 1980, when there were only 3.8 million registered vehicles. Given this larger base of automobiles, vehicular accidents have also been on the rise, with current estimates suggesting at 50 automobile accidents per hour across the country.

• Auto Insurance is a large addressable market. Despite the explosive growth in automobiles, increasing regulatory mandates to purchase minimum insurance and the high risks involved in driving uninsured, Condusef (Mexico’s insurance regulatory body) estimates that 7 in 10 autos remain uninsured. This means that there are approximately 13 million vehicles that lack protection against accidents or theft.
• To put the size of the business opportunity in perspective, there were nearly $5.5BN auto insurance policies written in 2019 (approximately 20% of the total insurance market in Mexico). However, only about 30% of drivers were insured, so the total potential auto insurance policy market is about $18BN. We expect the insurance penetration could approach a similar ceiling of ~85% as in the US over 10 -15 years. This would result in an addressable market of over $15BN.

On an absolute basis, Mexico is the second-largest market in Latin America in terms of insurance premiums. This is not surprising, as it is both the second-largest economy and second most populated country in the region with nearly 130M residents.

Figure 1. Latin America: Population, 2019 & Total Risk Premiums, 2018

• Risks of driving uninsured are increasingly high. Not having auto insurance poses significant risks, particularly to the underbanked and low-income populations, which simply cannot afford an economic shock brought on by a car accident. According to several surveys, these same groups see the automobile as a key investment (for some it is the largest asset they own). Not having insurance to cover repairs from a car accident or theft could put families at risk, not to mention the legal liabilities that individuals may face due to being responsible for an accident, that can go as high as ~$200K (or $4M Mexican Pesos). We believe that the rise of mobility/delivery marketplaces has increased the importance of protecting the automobile for the millions of workers in the shared economy.

HOW DOES MEXICO’S INSURANCE MARKET COMPARE?

• Relative to OECD. On most relative measures (either relative to Mexico’s size or relative to other regional economies), Mexico’s insurance penetration is below average. According to the OECD, countries should measure the size of their insured sector relative to their GDP in order to see how they compare. This is referred to as the Insurance Penetration Rate. By this measure, Mexico’s insurance sector represented 2.3% of its GDP in 2019, well below the average for OECD countries (8.9%). For reference, in the US and Chile, the insurance sectors represented 11.9% and 4.6% of GDP, respectively.

Figure 2. Country Members OECD: Insurance Penetration

Relative to Latin America. According to MAPFRE, a Spain-based insurance company with large presence in the Latin American region, Mexico also compared relatively low to its Latin American peers by a number of indicators.

• The insurance penetration rate (risk premiums / GDP) of 2.2% was below several of the larger economies in the region, including Chile (4.6%), Brazil (3.1%), Colombia (2.8%), and Argentina (2.7%).
• Measured by insurance density (premiums per capita), Mexico measured towards the middle of the pack, but still trailed Chile, Argentina, and Brazil.

Life Insurance vs. Non-Life Insurance If we were to measure Mexico by life insurance penetration (defined as life insurance premium divided by total risk premiums), the country would be within the Top 3 in the region. We think this measure hides the fact that critical non-life insurance products (including auto, health, home) are highly underpenetrated (i.e. it’s a denominator issue).

Figure 3. Latin America: Risk Premium Index Penetration, insurance density, life insurance penetration 2018 (risk premiums / GDP, %; premiums per capita; USD; Life Insurance premium/ total risk premiums, %)

A more adequate measure perhaps is what is referred to as the Penetration Gap (which compares total Life insurance premiums vs. total Non-life insurance premiums). On this measure, Mexico again is towards the middle of the pack in the region. This suggests that while insurance as a whole has room to grow across all products in Mexico, we believe that Non-life insurance products (particularly auto, health and home) will see accelerated growth rates over the long-term.

Figure 4. Penetration Gap: Life Insurance / Non-Life Insurance

OUR INVESTMENT IN ARCA SEGUROS

ARCA Seguros sees a significant window of opportunity to digitize auto insurance in Mexico due to the low level of insurance penetration, new regulatory changes in auto and a secular shift to digital financial services.

• Regulatory Tailwinds. In 2019, for example, Mexico passed a mandatory insurance regulation, requiring all drivers to carry auto insurance in order to travel on federal highways within Mexico. Lacking minimum insurance that covers damages to third parties will subject drivers to a fine of 20 to 40 days of minimum wage (~$4,000 pesos by some estimates). This fine could prove steep for a large percentage of the population.
• Secular shifts to digital. Mexico’s insurance sector relies heavily on customer call centers/insurance agents as the key distribution channel. According to Ernst and Young, individual agents and brokers generate over 60% of insurance premiums. EY foresees digital distribution channels to gain a larger share of the market over the next 10–15 years as the average age of insurance agents in Mexico is above 50 years old. The insurance sector will need to embrace digital solutions and EY expects that by 2027, over 50% of potential new insurance clients will be digitally native consumers.
• We believe the COVID 19 crisis will accelerate the shift away from these traditional models. Increased regulations/safety standards around restrictions on the number of people per square feet and increased investment in other safety measures could provide positive tailwinds for digital platforms.

Digitally native platforms like ARCA are well-positioned to ride this secular shift to more digital consumption of insurance. ARCA is not the only company tackling this unaddressed market in Latin America. There are other competitors at varying stages and across key regional markets. However, we view ARCA as competitively well positioned in Mexico given the combination of a highly experienced team, technology, and value proposition.

• Deep Domain Expertise. The company was founded by a father (Juan Gironella) and two sons (Juanma Gironella and Javier Gironella). The father, Juan Gironella, serves as the Chairman and Co-Founder of ARCA. He is the former Executive President of MAPFRE in Mexico, and former Executive Vice President of Mapre in Spain for several years. Juanma Gironella, the CEO and Co-Founder, and Javier Gironella, the COO and Co-Founder have held several relevant roles for companies like Seguros Broker, Munich Re, and Zurich. The domain expertise, in-depth knowledge of the gaps/opportunities in the Latin America insurance market, and high-level executive relationships within the Mexico insurance industry are also key differentiators for ARCA.
• Scalable Platform. ARCA automates the process of finding, comparing, purchasing and managing insurance policies online. The company’s digital insurance brokerage platform is distributed via both B2B and B2C models. In our view, this both highlights the flexibility of ARCA’s online platform and the significant need for this type of solution in the Mexican market.

On the B2C side, the company now offers consumers 8 different insurance carriers, including MAPFRE, Qualitas, Chubb, GNP, and other leading local/regional brands. The user experience is streamlined, allowing consumers to compare quotes among top insurance providers in three clicks, without registering, without calls from live agents and with a user experience that is 100% online. Consumers can also check information for their vehicles — from registration renewal dates/due to outstanding citations — and upload all outstanding policies (even those not purchased through ARCA) within the platform. While this user experience is relatively common in the US, this represents a drastic improvement for Mexico.

On the B2B side, some of the largest insurance brokers in Mexico have also partnered with ARCA to increase their digital capabilities. For nimble digital Fintech startups that do not want to disrupt their user experience, ARCA offers API integration. These Fintech startups can offer insurance-related offers in a more agile and efficient way. Notable companies leveraging ARCA’s B2B platform include Albo, General de Seguros, Kavak, MAPFRE and Up Si Vale.

LEAP ultimately invested in ARCA because we share a vision that accessible and cost-effective insurance is key to protect underbanked/low-income communities that can often not bear the economic shock of an accident. Equally important, we believe that the best way to effectively achieve this is to disrupt the status quo in Mexico, through a digital-first approach.

We are excited to welcome ARCA to the LEAP family. We are equally excited to collaborate with Peña Verde SAB (BMV: PV) and Magma Partners.