Volume 5, Number 19, Page 3

Mexican Insurance Law

by Gloria Leal

The North American Free Trade Agreement (NAFTA) established a free trade area between the countries of Canada, the United States and Mexico. NAFTA is the first international agreement to include financial services within its purview. The agreement defined financial services as a “service of a financial nature, including insurance, and a service incidental or auxiliary to a service of a financial nature."

The Financial Services Chapter of the NAFTA imposes on the Parties general obligations applicable to cross-border providers and to the cross-border provision of financial services. In addition to the obligations to ensure national treatment and most favored nation treatment of providers of the parties, rights of establishment and rights to cross-border trade are recognized. Recent changes to Mexican law serve to illustrate Mexico’s commitment to these principles.

A. Foreign Establishment Provisions

Parallel to Mexico’s accession to the Organization for Economic Cooperation and Development (OECD) in 1994 and the signing of the NAFTA effective January 1994, the Mexican government embarked on a structural reform of the insurance regulatory framework in an effort to attract investment as well as to achieve a more efficient, competitive and financially sound market. Amendments to the Ley General de Instituciones y Sociedades Mutualistas de Seguros (Mexican General Law of Insurance Institutions and Mutual Companies) encouraged broader participation of foreign financial entities in the Mexican market (November 1995), made structural reforms to the Social Security Law of December 1995 (May 1996), and provided a mechanism for regulation of new insurance operations in Mexico such as managed care operations and catastrophic risks (January 1997).

New rules governing establishment of affiliates of foreign financial institutions were also implemented. Generally, affiliates are subject to individual and aggregate market share restrictions. The legal reforms of 1995 accelerated the liberalization process by relaxing the restrictions applicable to the acquisition of domestic controlled intermediaries by “NAFTA based” financial institutions. During the seven-year transition period dictated by NAFTA, U.S. and Canadian financial institutions may acquire any Mexican controlled financial institution (including insurance companies) without applying market share limits. All business must be conducted through subsidiaries or joint ventures that comply with requisite Mexican business law.

The timetable for implementing the agreement includes the following:

U.S. insurers that already have joint ventures in Mexico as of July l992 will be able to take over 100 percent of their Mexican operations by no later than January 1, 1996 or two years after the accord is ratified.

In new joint ventures, U.S. or Canadian firms can own up to 30 percent of the Mexican operation by 1994, 51 percent by January 1, 1998 and 100 percent by January 1, 2000. These firms will not be subject to aggregate or individual market caps.

U.S. and Canadian insurers could form new subsidiaries subject to aggregate limits of six percent of market share with that gradually increasing to 12 percent by 1999. All limits will be eliminated in the year 2,000.

The agreement also allows intermediary and auxiliary insurance services to establish subsidiaries with no limits on ownership or market share.

B. Mandatory Automobile Insurance

Until recently, compulsory auto insurance was not required in Mexico except in the urban region of Monterrey, where third party coverage for private vehicles became obligatory three years ago. However, recent developments are expected to significantly impact the insurance market and operations in Mexico. Recently the federal government issued a decree setting out reforms and other regulations applicable to transportation within the Federal District of Mexico.

One of the amendments provides that, effective July 1, 1998, all vehicles (bearing Mexico City license tags) traveling on public streets within the Federal District of Mexico are required to maintain an insurance policy to cover, at a minimum, civil responsibility for personal injury to third parties. Currently only public transport and cargo vehicles are required to have coverage for third parties, passengers or goods. The insurance, referred to as Seguro por el Uso De Vehículos Automotores (SUVA), will be set at levels to be determined by the Secretaria de Comunicaciones y Transporte, or SCT (Communications and Transportation Secretariat).

According to its provisions, coverage under SUVA is effective if the vehicle is stolen, the driver is under the influence of drugs or alcohol, or, in the case of motor carriers, the cargo being transported causes the injury.

Although compliance and enforcement remains problematic at this date, the adoption of compulsory motor vehicle insurance within the capitol district is a move slated to boost the underdeveloped Mexican market.

According to the Mexican newspaper El Financiero, the insurance market is expected to grow significantly as a result of the addition of approximately 10 million drivers in two years. More than 70 percent of the capital’s three million automobiles are uninsured. If implemented, state governments are expected to adopt Mexico’s City’s lead in this matter.

C. Cross-Border Trade

Other developments worth noting are changes to Mexico’s General Law of Insurance providing that foreign insurers, with previous authorization from the Secretaria de Hacienda (Secretary of the Treasury) and complying with the requirements that it establishes, may enter into insurance contracts in Mexican territory to cover risks that occur in foreign territory. Current law provides that the practice of any insurance operation in Mexican territory is limited to enterprises organized under Mexican law and prohibits its citizens from entering into contracts with foreign enterprises. Amendments to Article 3 of that law grant a limited exception to these requirements.

The reforms also stipulate that when no Mexican authorized company can or deems it convenient to carry out a certain proposed insurance operation, the Secretary of the Treasury has discretion to grant a specific authorization so that the coverage may be contracted out directly with a foreign insurer or via a domestic company. In addition, the Secretary of the Treasury will create a registry of foreign insurance companies of good standing and solvency and a history of stability in their market of operation.

The reforms represent a major development in cross-border trade and reflect Mexico’s commitment to increase the availability of insurance products to its consumers. In these cases, foreign insurers would be exempt from the establishment restrictions for companies selling coverage for Mexican risks and the restrictions related to offering (soliciting) insurance in Mexico. In effect, the provisions, which have not been implemented and are not NAFTA specific, allow for the registration of foreign insurers, including U.S. and Canadian insurers, to sell and appoint agents to sell in Mexico for coverage in the United States and Canada.

Although the law is limited to property and casualty coverage, it represents a positive step in the right direction in providing a structure for the development of an insurance policy valid in the three countries. It is also perceived that the new law will be positive in terms of combating fraud, as truckers in Mexico will now be able to purchase their liability insurance for coverage in the United States and Canada from known brokers, rather than at the border from unknown or unauthorized sources.

Conclusion

Recent developments in Mexican law demonstrate the government’s commitment to liberalization of the insurance market in Mexico. Changes in Mexican law not only increase the availability of insurance products in Mexico, but further the establishment of the tradition of insurance in Mexico, thereby possibly facilitating long-term discussion of harmonization of insurance standards and requirements between the three countries.

The reforms assure greater participation of foreign insurers in areas previously restricted, thereby encouraging the free flow of capital and contributing to the steady growth and modernization of the insurance market in Mexico. Companies in the United States and Europe stand to gain from broad financial market liberalization given their dominance in this sector.

Gloria Leal is with the International Regulatory Counsel at the Texas Department of Insurance.