MEXICO CITY--(BUSINESS WIRE)--A.M. Best has affirmed the financial strength rating of A- (Excellent) and the issuer credit rating of “a-” of Instituto Nacional de Seguros (INS) (San Jose, Costa Rica). The outlook for each of these ratings remains stable.
The ratings reflect INS' strong capitalization, supported by a comprehensive and adequate reinsurance program, good profitability and its position as the main insurer in Costa Rica. The ratings also consider INS’ market characteristics derived from the Insurance Law of 2008. This support, however, only guarantees insurance operations in Costa Rica. Dependency on investment income and high operating expenses are still a drag on the rating.
INS is the largest insurer in Costa Rica with a market share of 80.9% as of December 2015. A decrease in this market share is partially explained by accounting changes adopted for premium recognition, mainly in lines of business in which the company remains the only underwriter. During 2014, these premiums were accounted for as earned instead as paid. The company has exclusivity on underwriting compulsory workers’ compensation premiums and mandatory auto insurance. INS’ compulsory premium segment represents 24% of the total premiums written in the industry. The company reported a loss ratio of 102% on this compulsory segment as of December 2015, which represents 30% of INS' portfolio. As competition rises in the market, important regional players have claimed more premiums in health, property and auto catastrophic coverages. While the company notched improvements in 2014 due to reduced operating expenses and lower claims, performance indicators have shown deterioration in 2015 due to larger employee provisions that increased its expense ratio and higher loss ratios for compulsory products. These negative effects were offset with investment income that the company is able to post by achieving attractive yields. Although the company has remained profitable, A.M. Best expects to see further improvements in underwriting quality that reflect better pricing and less dependency on investment income.
A.M. Best expects INS to maintain strong capitalization, as measured by Best's Capital Adequacy Ratio, due to its good profitability and profit retention policy, as well as adequate reinsurance with highly rated international reinsurers, which provides adequate protection to variations in claim severity and catastrophic events.
As INS anticipates facing more intense competition, particularly in the compulsory auto segment, A.M. Best expects the company to improve its portfolio mix and for this to be reflected in better technical results. Operating and administrative expense controls remain key factors for an improvement in the ratings.
Positive rating movement could occur if INS is able to improve its efficiency and underwriting quality in the medium term in a way that diminishes its dependence on investment income while maintaining its strong capitalization. Negative rating actions could occur if technical results deteriorate or there is a reduction in net income, given any kind of loss, that significantly affects the company’s profitability and capital generation, or if capitalization reaches a level that is non-supportive of the rating.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized:
- Catastrophe Analysis in A.M. Best Ratings
- Evaluating Country Risk
- Risk Management and the Rating Process for Insurance Companies
- Understanding Universal BCAR
View a general description of the policies and procedures used to determine credit ratings. Also in accordance with Mexican regulations, the following is a link to required disclosures – A.M. Best America Latina Supplementary Disclosure.
- Previous Rating Date: March 3, 2015.
- Date of Financial Data Used: December, 31 2015.
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