The Mexican Insurance Market
September 2000
With a new government, an increasingly stable
and growing economy, and about 100 million inhabitants, Mexico is truly a market
of significance. Learn about the current economic situation, insurance regulatory
environment, and the different coverage concepts facing those in -- and those
contemplating entering -- the Mexican insurance market.
by George
R. Keller
Winterthur International
America Insurance Company
and
Michael Schittek
Winterthur International
Mexico
The population of Mexico, with about 100 million inhabitants and 18.2 million
in Mexico City alone, makes Mexico a market of significance. In July of this
year, after 71 years of practically one-party rule by Partido Revolucionario
Institucional (PRI), the national elections voted in a new governmental party
Partido Accion Nacional (PAN) with its candidate Vicente Fox. PAN brings a democratic
platform with promises of a stable economy to Mexico.
It is for these reasons that Mexico continues to be a country attractive
to foreign investment. The insurance sector has been one of the areas with the
largest foreign and local investments during 1999. This article examines the
Mexican Insurance market, including the economic and regulatory environments,
the natural hazards endemic to the area, and the current status of insurance
coverage there.
Facts and Figures of the Insurance Market
Purchase of insurance in Mexico remains low compared to other more developed
economies and, as a result, consumes only a small part of the gross domestic
product (GDP). Less than 10 percent of the population purchases life insurance,
less than 5 percent of Mexican homes are insured for fire and theft, and approximately
75 percent of the vehicles on the road are uninsured.
Throughout the last 10 years, the Mexican insurance market has demonstrated
steady growth and development. Presently, there are 64 companies registered
and doing business in Mexico, of which 3 are reinsurers, 3 are mutual companies,
and 7 companies specialize in pensions. Of the 51 direct insurers, 26 are wholly
owned subsidiaries of foreign companies and 15 are joint ventures with local
Mexican companies.
In 1999 the insurance market had premiums of 77,566 million pesos, which
is about $8.3 billion (U.S. dollars). During the last 10 years, the growth of
the insurance market has always been greater than the development of the economy/GDP
of the country. The only exception to this rule were the years 1995 and 1996
following the so-called Tequila economic crisis of 1994, which affected the
general growth of the country and especially the insurance industry.
During the last 10 years, the total market grew approximately 76 percent.
The growth in the last 3 years was particularly pronounced with growth rates
of 9.2, 21.5, and 9.96 percent, respectively. The relation between written premium
and GDP has also increased steadily and now amounts to a small but growing 1.5
percent as of yearend 1999.
At yearend 1999, the market premiums written were split as follows: 36.12
percent life, 12.7 percent pension, 9.41 percent personal accident and health,
and 41.77 percent general insurance.
Graph
1
In 1999 the market growth was especially strong in life (25.54 percent) and
accident and health (16.07 percent); general insurance grew only 0.04 percent,
more or less in line with the world market. Pension has been offered only since
the second half of 1997 and has experienced a high and, based on statistics
through the first 3 months of this year, sustained rate of growth.
In 1999 the premium split within general insurance amounted to auto (56.95
percent), marine (10.10 percent), other (9.84 percent), fire (9.18 percent),
earthquake (6.41 percent), liability (5.06 percent), and agricultural (2.11
percent).
Graph
2
In 1999 the top 5 companies in Mexico wrote 65.25 percent of the written
premium. Foreign-owned interests are fighting every day for market share and,
as a result, during the first 3 months of 2000, the market penetration of the
leading companies has been reduced to 60.13 percent.
During the first 3 quarters of 2000, the market share of the big 5 is as
follows.
- Commercial America (23.33 percent)
- Grupo Nacional Provincial (18.52 percent)
- Inbursa (6.11 percent)
- Monterrey New York Life (5.73 percent)
- Tepeyac (3.34 percent)
The major international companies with their own subsidiaries in Mexico command
the following market shares.
- AIG Mexico (2.21 percent)
- Atlas Winterthur International (2.04 percent)
- Allianz Mexico (1.84 percent)
- Zurich (1.72 percent)
- Generali, ACE, Gerling, and St. Paul (minor shares)
Operating results have been negative for the last 10 years. In fact, 1999
was an exceptional year with a posted combined ratio of 98.70 percent. The main
reasons for the good result in 1999 were: (1) success in the continuous fight
to reduce the cost of acquisition (12.63 percent) and operation (11.45 percent),
and (2) better selection of risks which were rewarded by an improved loss ratio
(74.62 percent). For 1999, good results in general insurance supported life,
accident and health, and pension. The insurance results have been driven, similar
to the rest of the world, by investment income rather than operating results.
For the first 3 months of 2000, the general insurance combined ratio has
already grown to 106.56 percent, mainly as a result of an increase in claims
incurred. There are presently 21,448 people employed in the insurance sector.
Economic Situation
The Mexican economy continues to grow. Economic growth as measured by growth
in GDP shows an impressive strength in the Mexican economy when compared to
either the world economic powers or the world economy as a whole.
Table
1
Mexican exports today exceed exports from first tier economy countries such
as Germany, Spain, and Korea. Free-trade agreements have been concluded within
the North American Free Trade Agreement (NAFTA) Economic Zone with the United
States and Canada, and most recently also with the European Community and some
countries of Asia. During the last 5 years, the largest 100 industrial companies
invested about $104.6 billion (U.S.) in Mexico. In 1999 alone there have been
$28.2 billion (U.S.) in investments made in the economy. Last year most mergers
and acquisitions have been done in the insurance sector and are valued at approximately
$1.9 billion (U.S.).
Graph
3
Inflation is also trending downward, and in 1999 it was at 12.32 percent
and is expected to be at 9.80 percent by yearend. The change in the political
parties should give an additional positive push toward investments, increased
employment, and a stable currency. The first months following the election show
a stable exchange rate and stock exchange.
Insurance Issues
Following are several issues facing both those who sell and buy insurance
products.
Regulatory Environment of Insurance. All insurance
companies are required to register with the Secretary of the Hacienda and Credito
Publico and with the national commission of insurance and bonds (Comision Nacional
de Seguros y Fianzas-CNSF), the major insurance supervisory authority. The CNSF
board is composed of representatives of the central bank, the national banking
commission, and the national securities commission.
The CNSF-established minimum capitalization requirement is a function of
the lines of business written, with the more volatile lines having a higher
requirement. Insurers are free to establish their own forms and rates, but they
must file these forms and rates with the CNSF. The CNSF has the authority to
disallow a filing if it believes the product or pricing may adversely affect
the insurer's solvency. One national license is valid for operational authority
within all states in of Mexico.
As previously mentioned, all general conditions and tariffs must be filed
with the authorities. These tariffs and conditions differ for each company.
The only exception is the earthquake tariff, which is the one tariff applicable
for all companies. This tariff applies for all risks, with fire and business
interruption values below $50 million (U.S.) at one location or $100 million
(U.S.) or less at more than one location.
Premium Payment. Premiums must be paid 30 days
after inception of the risk. In the event that an insured does not pay the premium,
insurance companies have 15 additional days to effect cancellation of the policy.
In certain cases, insurance companies may only require payment 30 days after
policy issuance. Premiums must be paid to the Mexican insurance company. This
can be done by the insured in Mexico or also by the foreign parent company from
any place in the world. Premium payments will be accounted for as an expense
and are, as a result, tax deductible.
Taxes. As a general rule all Mexican premiums
are subject to a 15 percent value-added tax (VAT) (premium tax) on general insurance.
The Mexican states bordering the United States enjoy a reduced premium tax of
10 percent. Life and pension insurance are not subject to a premium tax. Premium
tax is payable by the client in addition to the premium.
Currencies. Mexican policies can be written
in Mexican pesos as well as in foreign currencies. There is no rule as to which
currency has to be selected to pay the premium. In the industrial business,
most business is written in U.S. dollars. Writing policies in pesos has in the
past created problems because of the devaluation of the currency. Currently,
inflation is less than 10 percent and, as a result, Mexican currency can be
used without the risk of underinsurance.
Language. Policy wordings are currently written
in Spanish; however, policies may also be issued in English. English wordings
have to be approved and, in case of a claim, the Mexican courts and lawyers
will have problems interpreting and evaluating the coverage. The Mexican law
stipulates that Spanish shall prevail in any case.
Non-Admitted Coverage. Non-admitted coverage
is not permitted. It is for this reason that most international insurers operate
in Mexico, and all companies are insured on a local basis.
Compulsory Insurance. There is no compulsory
insurance coverage in Mexico except in certain states for automobile. It was
planned that in Mexico City, liability coverage for automobiles would also be
made mandatory, but this proposal has not been realized. In the area of employment,
there is a compulsory social insurance.
Reinsurance. Presently, there are only three
reinsurers with their own operations in Mexico: Swiss Re, Reaseguro Patria,
and Reaseguro Istmo. The remaining reinsurers, e.g., Munich Re and Hannover
Re, operate with only representative offices in Mexico. The reinsurers are active
in all lines of business and in both treaty and facultative capacities.
Export of reinsurance out of Mexico is generally possible. Reinsurers must
be registered and admitted as foreign reinsurers by the authorities. This procedure
avoids any non-admitted taxes. Local retention of the insurance companies should
be at a minimum 1 percent, but limited to a maximum retention for each company
based on their capital and surplus. There is a significant use of reinsurance
in the Mexican market.
All major brokers have their own reinsurance brokers. Reinsurance commission
generally amounts to 5-7 percent in excess of the original commission.
Brokers. Typically, brokers manage industrial
insurance. All of the major international insurance brokers are represented
in Mexico. Direct business on some lines is possible but very unusual. Generally,
brokers are compensated via commissions. The average commission in the market
was about 10 percent in 1999.
Natural Hazards
Because of the geographical position of Mexico between the Atlantic and Pacific
Oceans, as well as the distance to the San Andreas fault, there are a variety
of natural hazards. The most significant exposures are earthquake and windstorm.
Earthquake. The last big earthquake that hit
Mexico was on September 19, 1985. At least 10,000 people died, and 7,400 houses
were damaged. The total loss amounted to $4 billion (U.S.); insurance companies
paid insured damages of $275 million (U.S.).
Mexico is heavily exposed to the earthquake risk. The county is divided into
different zones, and the largest exposure is in the areas E, F, G and H, which
are the zones of the City of Mexico, Puebla, and Acapulco. Below you will find
a map detailing the various zones.
Mexican
Republic Graph
The following charts outline the mandatory tariff rates for earthquake, which
differ from zone to zone and considers the type of construction, number of floors
of the building and the exposure insured (building or contents).
Zones/Rates
Per Mile Tables
In addition, the insured is subject to mandatory earthquake deductibles and
coinsurance, which again differ from zone to zone and are based on the type
of coverage (property damage or business interruption).
Mandatory
Minimum Deductibles Table
Mandatory
Coinsurance
As previously mentioned, there is no mandatory tariff for large industrial
risks, defined as those with values in excess of $50 million (U.S.) per location
or those with over $100 million (U.S.) total insured values property damage
(PD) and business interruption (BI). The Large Risk Rule allows insurers the
freedom to fix a rate based on the merits of the risk.
Earthquake reserves must be established in accordance with procedures established
by the local authorities. As of 2000, there has been a more stringent rule passed
as respects the establishment of earthquake reserves, which mandates that insurers
will eventually increase their rates in order to accumulate the required reserves.
Windstorm: Similar to earthquake the country
of Mexico is also divided into different windstorm zones to enable the underwriter
to better evaluate the exposure. The chart below provides a listing of the main
cities, with each city classified as respects its exposure to earthquake, Cresta
Zone, and windstorm.
Windstorm
Table/Graph
Insurance Coverage
Below is a short description of the different coverage concepts and problems
in Mexico.
Property. Industrial risks are insured on an
all-risk basis. Many insurers still tend to issue a separate policy for each
line of business as compared to the U.S package policy approach. Similar to
the United States, premiums are coded by line of business for regulatory and
management control purposes. In addition to earthquake and windstorm, theft
is a difficult risk in Mexico. During the last few years, theft was hardly insurable.
In particular, consumer products and electrical products were particularly susceptible
to theft. Recent risk management and loss prevention improvements have resulted
in better security, and these products are now more insurable. Flood coverage
is available, and normally is written with a 1 percent deductible with a minimum
of approximately $2,500 (U.S.) and a 20 percent coinsurance provision.
Crime. Fidelity coverage is available. Rates
and forms are governed by the CNSF. There are two types of bonds: the Modified
Commercial Blanket is subject to a per-loss limit and schedules employees by
name and position; the Schedule Position Bond is subject to amounts per individual
employee.
Marine. All typical coverage is available.
It should be noted that while international property programs often include
inland marine cargo as part of the program and part of the master wording, in
Mexico a separate marine policy would normally be issued. The peril of theft
also heavily impacts the marine results in Mexico. Due to the high loss exposure,
marine theft deductibles between 10 and 30 percent are the rule.
Engineering/Construction. This line also is
subject to the typical exposures of earthquake and windstorm. Major international
reinsurance companies dominate the market for this line of coverage, and rates
and premiums are quite competitive. The policy wordings follow the European
coverage models.
Liability. Liability coverage is still not
as developed as in the United States and Canada. This risk is often left uninsured.
Sometimes it is very difficult to define or establish liabilities in Mexico
as companies have only recently established a policy of putting business contracts
in writing. The law of contracts is not very clear, and case law does not exist,
which makes it very difficult to learn from past litigation.
Due to some recent large losses, insureds are now more sensitive to the liability
risk. Pollution liability and coverage are not highly developed in Mexico. Pollution
coverage, however, is compulsory for the transportation of designated dangerous
commodities. The cost of defense is usually included in most policies with its
own separate limit apart from damages. Policies can be extended to cover both
products and contractual liability. The occurrence coverage form is most often
used in the market; the U.S claims-made form is not often used.
Auto. With the exception of few states, generally
there is no compulsory insurance. For this reason, it is recommended that local
comprehensive liability and physical damage coverage be purchased. Premiums
are based on the type of car. There is a discount for good loss history of fleets
and individual driving experience. The major exposure is again theft - 45 percent
of all losses are related to theft.
Workers Compensation/Employers Liability. The
Mexican Institute of Social Security provides workers compensation insurance
in Mexico. The number of workers must be reported to the Institute, and the
corresponding premium paid monthly based on the salaries and the risk rate of
each individual employee.
Accident and Health. Basic coverage is granted
through the above-mentioned Mexican Institute of Social Security, which covers
all employees including dependants (spouse, children, and exceptionally parents).
This coverage allows treatment in a state-owned hospital; however, most of the
companies supplement this insurance with the following private policies.
Private accident and health insurance is offered through insurance companies,
which includes much broader coverage and provides special treatments in private
hospitals. Insurance applies regardless of cause, be it by accident or sickness.
Health benefits are basically unlimited, and the range of treatment is extremely
broad.
Life. The Mexican Institute of Social Security
also grants the basic coverage, which covers all employees. This coverage provides
a lifetime pension for the insured in the case of disability and a pension for
the beneficiaries in case of death. The maximum salary basis is limited to 25
times minimum salary, which is approximately $2,500 per month and provides a
maximum pension of $1,600.
Additional private life insurance is offered through insurance companies,
which offer, aside from the basic death coverage, additional death coverage,
anticipated or daily payments for total and permanent disability, marital clause,
funeral expenses, and loss of limb coverage. Dividend plans are available and
provide dividends based on an above-average claims experience.
Pension/Retirement Benefits. As of 1997, the
new pension schemes in Mexico have shifted from a state-run scheme to private
management with programs called "afores." Banks, private institutions, and insurance
companies are running these funds. It is expected that this line of business
will continue to rapidly grow in Mexico.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.