Mexico VAT reform to pressure insurer earnings in 2026, AM Best says
- Mexico's 2026 VAT reform eliminates credits on 16% tax paid for claim settlements
- Underwriting income rose 12% to MXN 243 billion in 2025, but claims grew 15%
- Half of insurers with >25% auto premium concentration reported losses in 2025
- 40% of insurers with <MXN 1 billion in premiums posted losses last year
- Rising reinsurance demand may tighten capacity amid a soft market cycle
*this image is generated using AI for illustrative purposes only.
AM Best warns that Mexico’s 2026 Federal Revenue Law will erode insurer net income by eliminating VAT credits on claim settlements.
The regulation prevents carriers from recovering the 16% value-added tax paid to third-party providers such as hospitals and repair shops. This treatment turns the tax into an added expense rather than a recoverable cost.
Sector Impact
The report identifies heightened risk for insurers with significant exposure to auto and medical lines. Underwriting income in Mexico rose 12% to top MXN 243 billion in 2025. However, incurred claims grew faster at 15%, marking the third time in four years that claims outpaced premium growth.
Smaller carriers face disproportionate strain. Companies with more than 25% of premiums in the auto segment are generally smaller, with about half reporting a net loss in 2025. Overall, 40% of companies with less than one billion pesos in premiums reported losses last year.
What the Numbers Show
The divergence between premium growth and claims inflation highlights underlying profitability pressure before the VAT change takes effect. While underwriting income expanded by 12%, the 15% rise in incurred claims indicates that operational costs are already outstripping revenue growth. This existing margin squeeze means the new non-creditable VAT expense will likely hit already thin or negative margins for smaller players harder than for larger, diversified groups.
Market Response
Insurers are responding with price increases and adjustments to policy limits and characteristics. AM Best analysts note that these measures could reduce insurance take-up rates as premiums become less affordable for consumers.
Sebastian del Rio, associate financial analyst at AM Best, noted that the potential strain from the VAT treatment could increase demand for reinsurance. This demand may influence prices and conditions if capacity does not increase at the same rate, particularly given the current soft cycle in the reinsurance market.
Alfonso Novelo, senior director of analytics at AM Best, emphasized that the inability to credit VAT on direct payments for goods and services used to settle claims is a structural cost increase that carriers must absorb or pass on.
How might the anticipated reduction in insurance take-up rates due to premium hikes impact Mexico's overall insurance penetration and regulatory compliance goals?
Will the increased demand for reinsurance from Mexican carriers trigger a hardening of terms or pricing in the global reinsurance market, given current capacity constraints?
Could smaller insurers facing net losses accelerate consolidation efforts or seek strategic partnerships to mitigate the disproportionate strain of the new VAT regulations?
20
Access 50+ Readymade Screeners 
Use 200+ Custom Filters 
Get Full Market Insights 
