Insurers make waves in Mexico

Mexico is rapidly emerging as a key market for global investors, due to its geographic location between the US and the maturing South American markets. As part of this, the Mexican insurance industry has boomed over the past 10 years - last year alone the Mexican Association of Insurance Companies (AMIS) reported a 55% net rise in profits.

The catalyst for the country's insurance development began in 1994 when it joined the North American Free Trade Area, which opened the insurance market to foreign investors. Prior to 1994, the market comprised only 36 private insurance companies, three public insurance companies and two reinsurance companies. Foreign ownership was restricted to 49%. Today it is the second-largest insurance market in Latin America behind Brazil, and generates 25% of the total premiums in the region.

To put these developments into a broader context, Mexico has a free market economy, increasingly dominated by the private sector. More than 90% of trade is now under free trade agreements, with the country's largest trading partners being the US, Canada, UK and Japan. In 2001, foreign direct investment reached $25bn (£14.1bn), of which $12.5bn came from Citigroup's purchase of Banamex, Mexico's second-largest bank. Key growth sectors include oil and gas and the industrial sector - especially motor manufacturing, construction, telecommunications and infrastructure.

EU free trade

Through the NAFTA agreement, US and Canadian insurers began investing in the country as they were then permitted to own 100% of Mexican insurance companies. Europe followed suit in 2001, when the European Union signed a free trade agreement with Mexico. It was the most far-reaching the EU had ever negotiated and the agreement authorised banks and insurance companies to operate and establish businesses in Mexico on the same grounds as their US and Canadian counterparts.

With the doors open to two major foreign investing blocs, the insurance market surged ahead with an increase in growth of 42% between 2000 and 2002.

The leading insurer in Mexico is ING Netherlands, with nearly 25% of the market share. The largest domestic player, after the merging of Aseguradora Hidalgo and Seguros Genesis, is MetLife. MetLife holds the second-largest market share, 15.7%; followed closely by Grupo Nacional Provincial with 15%; Seguros Inbursa 6.1%; and then Seguros Monterrey New York Life, 4.2%.

The six largest insurance companies comprise 62.2% of the total market share and, between them, have invested close to $5bn in local insurers. Notably, all are majority-owned by foreign investment.

Accessing the market

Insurance companies sell their services through certified agents and, to be certified, agents must pass an annual examination offered by the Insurance Boards Commission. Mexico currently has around 3000 certified agents.

Firms usually access agents by placing ads in major newspapers or business magazines. Other common practices include buying time on television or attending local trade shows.

The chief insurance regulatory body is the Comision Nacional de Seguros y Fianzas (CNSF), the federal agency responsible for licensing in the Mexican insurance industry. It covers both domestic and foreign investors and also monitors sector practices. Insurance companies can obtain a licence from the CNSF to operate either in one of Mexico's 32 states or in a specific region. The larger insurance companies tend to operate in all major cities throughout Mexico.

The other important organisation is AMIS, of which 50 of the top insurance companies in Mexico are members.

The regulatory environment is continually improving and, in Standard & Poors' opinion, its focus is on maintaining company solvency at adequate levels. Important changes include: updating interest rates for calculating life reserves to reflect the effects of the lower interest rate environment - the change is not expected to have a material impact on companies' balances as no significant reserve deficiencies existed; regulation of the development of loss-making methodologies for the property and casualty book of business; authorisation for insurers to issue debt at the operating level; and adjusting the regulatory framework for finite reinsurance and alternative risk-transfer schemes, which should enhance the insurers' financial flexibility, opening additional alternatives to fund growth.

Opportunities for foreign insurers

Currently, the best potential growth areas for insurers in Mexico are in health, life, P&C. A number of other areas are also predicted to develop quickly, such as agricultural production, which is set to grow by 12%.

Transportation is expected to increase by 18% and environmental insurance has an estimated growth of 14%.

At present, the life and health segments represent approximately 36% of the insurance market and P&C nearly 44%. There are now more than 80 insurance companies in Mexico, with 11 of these part of larger financial groups; 35 are subject to foreign ownership. At present, banks are the largest sellers of insurance policies.

The potential for further growth is shown by the fact that Mexico has more than 27 million vehicles on its roads, of which only 13% are insured.

Furthermore, only 40% of manufacturing services businesses, including hotels and restaurants, are insured.

A major issue for Mexico is that it is positioned in a particularly unpredictable area. Natural hazards such as volcanoes, earthquakes, hurricanes and tsunamis cost $39m annually. Fortunately, there were no major disasters in 2003, which AMIS cites as one of the main reasons for huge net profits for the year.

In spite of record profits, AMIS reports that total premiums fell by 8% in 2003, the first drop in 10 years. The decline is a result of a number of different factors, including the sale of group life policies being reduced following a treasury department attempt to prevent tax evasion.

Legal background

Mexican law has some distinct parallels with Spanish law, largely due to Mexico being under Spanish rule between the 1500s and the early 1800s.

The legal system in Mexico, for example, is inquisitorial - unlike that of England, where it is adversarial. This means that in Mexico, judges take an active role in the investigation of a claim and the parties have far less input into case timetable and strategy. In insurance disputes, mediation is compulsory prior to issuing proceedings.

Of course, it is vitally important for insurers working in Mexico that their legal advisers have experience of working both in Mexico and in London. Many of the UK reinsurance policies, for example, do not have the same effect when interpreted in Mexican law. There are subtle differences in the way in which the Mexican courts interpret what has become standard wording in the London markets. The solution is rarely as simple as including an English choice of law or jurisdiction clause. Condition precedents and claims control clauses are just two examples that may not operate in the way one would expect.

There are a range of key differences between English and Mexican laws.

For example, there is no formal disclosure process in Mexican litigation - parties only disclose those documents that support their case. Time limits in litigation proceedings are strict and cannot be extended by agreement of the parties - hence, it is crucial to pay close attention to the court timetable.

Furthermore, the principle of 'without prejudice' negotiations is not recognised in Mexico. Therefore, out of necessity, all settlement negotiations are verbal.

There is no common limitation period for actions under Mexican law and each type of action has its own limitation period: insurance contracts, two years; commercial contracts, 10 years; and tort, two years. And there is no equivalent of the 'reservation of rights' concept. An insurer must confirm or deny cover within 30 days of the date it receives all relevant information and documentation from the insured.

Open for business

For an insurer thinking of entering the market it is important to remember that, while Mexico is a rapidly developing and growing market, it is not yet a first-world economy and, while currently politically and economically stable, it still has the inherent risks of any developing country. Nonetheless it is certainly a 'hot' place to consider investment.

The fresh capital and technical know-how of foreign insurers, combined with the market expertise of locally acquired companies, continues to give new shape to Mexican insurance, in terms of products offered and business philosophy. It is certainly an exciting time to be doing business there and, with anticipated growth of 15% annually reaching $3bn by the end of 2004, now is the time to act.

Much of the domestic insurance business now written in Mexico is reinsured outside the country and an increasing amount is being reinsured in the London and European markets.

It is believed in some quarters that the continuing improvement of economic conditions means that Mexico could soon be better placed than Europe to invest in and co-operate with the emerging South American markets.

The preconceptions of a backward country south of the US and the caricatures of men with sombreros and curly moustaches must be discarded. Mexico has become a serious business centre - a land of opportunity, for the insurance industry anyway.

David Hertzell is insurance partner and operations partner, Davies Arnold Cooper.

Last year DAC became the first UK law firm to open an office in Mexico.