It has been five years since Mexico's legal framework incorporated standards of the EU Solvency II Directive. After a period of uncertainty, the market seems now to have assimilated the legal framework.
The Insurance and Surety Companies Law (LISF), effective since 4 April 2015, and its implementing regulation has proved to be ineffective in improving insurance penetration in Mexico, and the new administration, while recognising the solidity of the insurance industry in Mexico, is looking at ways in which it can improve such penetration, with a special emphasis on financial inclusion, through insuretech and other mechanisms, and is also showing interest in the growth of certain lines of business such as health insurance and evaluating mechanisms to manage catastrophic risks and protecting vulnerable communities.
The Mexican market continues to rely heavily on reinsurance and 'fronting' arrangements to cope with the complexity of new risks and the increase in additional lines of business that are capital-intensive or require added capacity, such as catastrophic insurance. There are no indications that the foregoing scheme will change.
The Mexican market reliance on reinsurance through fronting arrangements creates challenges in the adjustment and settlement of certain claims, as there are natural disagreements between the reinsurance market and the insured due to the inconsistency in the underlying insurance being placed and the terms of the reinsurance arrangement, not only because of the errors in the translation of the reinsurance arrangements into a direct insurance, but also because of the difference in the applicable law to the direct insurance and the practices of the reinsurance market. There have been abusive practices from certain reinsurers and markets and their advisers that have created additional tension and concerns from the Mexican market; there is also raised awareness from the cedents on the enormous risks they are facing by permitting these 'fronting' arrangements that may seem to be profitable but undertake high risks.
i The insurance regulator
Insurance and reinsurance operations in Mexico are regulated by both the Ministry of the Treasury and Public Credit (SHCP) and the CNSF. The SHCP has authority to interpret, implement and execute the provisions of the LISF for administrative purposes. The CNSF has authority to grant and revoke authorisations to incorporate and operate insurance companies in Mexico, and to register reinsurance companies with the General Registry of Foreign Reinsurance Companies to take Reinsurance and Rebonding from Mexico (the Reinsurance Registry), to take reinsurance from Mexican insurance companies. The CNSF is also responsible for supervising the operation of insurance and reinsurance companies and has authority to supervise, investigate and issue regulations applicable to the operations of Mexican insurance and reinsurance companies. All the applicable regulations issued by the CNSF are compiled in a single regulatory circular (the Circular).
ii Position of non-admitted insurers
Article 20 of the LISF provides that only those entities duly licensed by the Mexican federal government through the CNSF to operate as insurance companies may undertake active insurance operations within Mexican territory.2
If a non-licensed insurance company operates in Mexico on a non-admitted basis and carries out active insurance operations in Mexico, it shall be deemed to be breaching Mexican law and the transaction shall be null and void. Furthermore, such conduct would constitute criminal liability on the part of: (1) the non-admitted foreign insurer; (2) the insurance intermediaries (broker or agent); and (3) the officers, managers, directors, representatives and agents of the entities referred to in (1) and (2).
iii Position of brokers
As a general rule, insurance companies may only pay brokerage fees to insurance brokers duly authorised as such by the CNSF. Individual agents and entities require a licence to act as insurance brokers. To obtain the licence to act as an agent or broker, the individual or entity must file an application with the CNSF, which must comply with the requirements set out in the Regulation of Insurance and Surety Brokers (the Brokers Regulation). The legal provisions applicable to insurance brokers are contained in Chapter 32 of the Circular.
Reinsurance intermediaries are entities licensed to provide reinsurance intermediation services (Article 106, LISF). To incorporate and operate a reinsurance intermediary, the prior authorisation of the CNSF is required, and to obtain the authorisation an application must be filed with the CNSF. The application must comply with the requirements set out in the Rules on the Authorisation and Operation of Reinsurance Intermediaries (the Intermediaries Rules). Reinsurance intermediaries must be incorporated as limited liability stock companies and have their corporate domicile in Mexican territory. The legal provisions applicable to reinsurance intermediaries are contained in Chapters 9, 32 and 35 of the Circular.
iv Requirements for authorisation
Pursuant to the LISF, to incorporate and operate an insurance company in Mexico, an application must be filed with the CNSF. The application must comply with the requirements set out in Article 41 of the LISF. The CNSF has discretional authority to grant or deny the authorisation. These authorisations are regulated in Chapter 2 of the Circular.
An insurance company must start operations within three months of receiving the relevant authorisation from the CNSF. Before starting its operations, the CNSF must carry out an inspection visit and confirm that the insurance company has the infrastructure, procedures and systems required to operate according to Article 47 of the LISF.
Under the LISF, Mexican insurance and reinsurance companies and foreign reinsurance companies registered with the Reinsurance Registry may cede or take risks in reinsurance to and from Mexican insurance companies. Pursuant to the Circular, foreign reinsurance companies may not take reinsurance in Mexico when they intend, or when they effectively carry out, on a majority or exclusive basis, reinsurance operations with Mexican insurance companies with whom they have financial or business ties. Although it is not clearly explained in the LISF, the 'majority or exclusive' operations referred to in this provision refer to the global reinsurance activities undertaken by foreign reinsurance companies, and not only their reinsurance activities in Mexico. The reason for this provision is to prevent the proliferation of captive reinsurance companies.
Insurance companies authorised in Mexico are allowed to carry out reinsurance operations in the same lines of business in which they have a licence to take insurance. However, a licence to exclusively operate reinsurance business can also be obtained. There are currently only two Mexican insurance companies authorised to exclusively operate reinsurance: Reaseguradora Patria and Der Neue Horizont Re.
The registration of foreign reinsurance companies with the Reinsurance Registry is governed by the LISF and the Circular. To register with the Reinsurance Registry, foreign reinsurance companies must file an application with the CNSF in the terms set forth in Article 107 of the LISF and Chapter 34.1 of the Circular. The CNSF may grant or deny this registration on a discretionary basis. The registration of foreign reinsurance companies is valid until 31 December of the year of registration and must be renewed every year.
v Regulation of individuals employed by insurers
Title 3, Chapter 1, Section II of the LISF and Chapter 3.7 of the Circular provide basic requirements of experience, expertise and knowledge in finance, law, administration or insurance for the eligibility of directors, officers and statutory examiners within an insurance company, and also prescribe which individuals may not be appointed as such. Insurance companies must give notice to the CNSF on any such appointment and provide sufficient evidence to the CNSF that the individual complies with the requirements under the LISF to serve in the relevant capacity. The insurance company must maintain a file for each individual with supporting documentation and evidence of their qualifications and representations and annually confirm to the CNSF that its directors and officers comply with the requirements set forth in the LISF and the Circular to serve in their respective positions.
vi The distribution of products
Pursuant to the LISF and Chapter 4 of the Circular, standard-form contracts, collective and group contracts and surety insurance must be registered with the CNSF.
Insurance products registration must comply with the following documentation (contractual documentation):
- general conditions and model contracts, containing the general and particular conditions under which the insurance product will be commercialised;
- a technical note, containing the technical and financial hypothesis for the calculation of the premium and the ongoing risk reserve;
- a legal opinion, certifying that the insurance product complies with all applicable legal provisions; and
- a 'congruency opinion' that certifies that both the technical note and the legal opinion are consistent.
Insurance companies may use, sell and distribute insurance products immediately upon their registration. The CNSF may at any time suspend the registration of an insurance product if, in its opinion, the insurance product does not comply with applicable laws and regulations.
The LISF requires that standard-form insurance contracts are filed with the National Commission for the Defence and Protection of Financial Services Consumers (Condusef), for their registration with the Standard-Form Contracts Registry.
vii Compulsory insurance
The main difference between compulsory insurance and other insurance products, other than the fact of the insurance coverage being required by law, is that compulsory insurance contracts shall continue in full force and effect until their termination, and may not be terminated, even when the corresponding premium is not paid when due or within the cure period set forth under the LISF. Compulsory insurance premiums may not be paid in instalments.
Compulsory insurance includes social security (e.g., life, health and disability), which is mandatory for employers with respect to their employees; professional liability insurance to practise certain professions; and automobile insurance to circulate on roads and highways under federal jurisdiction, and in some of the states of Mexico.
viii Taxation of premiums
Insurance companies are subject to income tax and value added tax. Income tax is levied at 30 per cent on insurance companies' accrued income less authorised deductions. The Income Tax Law provides special rules for deductions applicable to insurance companies.
Value added tax is levied at 16 per cent on all insurance services paid for by customers, except for agricultural insurance, mortgage and financial guarantee insurance, and life insurance.
Mexican reinsurance companies receive the same tax treatment as insurance companies. Income tax is applicable to foreign reinsurance companies when they receive premiums from a Mexican resident or from a foreign resident with a permanent establishment in Mexico. The income tax is calculated by applying a 2 per cent withholding rate on the gross amount paid to reinsurers with no deductions.
The person paying the premium to the reinsurers must withhold and pay the income tax at the applicable rate. Depending on the jurisdiction in which the reinsurance company is incorporated, there might be a double taxation treaty that applies to the payment of premiums to foreign reinsurance companies and that supersedes the general provisions referred to herein.
Insurance and reinsurance brokers are subject to the same taxes and to the same rates as insurance companies but are not subject to special deductions applicable to insurance companies.
ix Other notable regulated aspects of the industry
Insurance companies must maintain a minimum paid-in capital stock. That minimum paid-in capital stock is regulated in Chapter 6 of the Circular.
The following are the (approximate) minimum paid-in capital requirements for each line of business applicable for 2020, until new capital requirements are issued by the CNSF, which should be before June 2020:
- Life: 43.62 million pesos.
- Pensions: 179.17 million pesos.
- Accidents and health:
- personal accident or medical expenses: 10.90 million pesos; and
- health, including personal accident or medical expenses: 10.90 million pesos.
- Property and casualty:
- one line: 32.71 million pesos;
- two lines: 43.62 million pesos;
- three or more lines: 54.52 million pesos;
- mortgage insurance: 78.06 million pesos; and
- financial guarantee insurance: 212.44 million pesos.
Insurance companies authorised exclusively for reinsurance operations are required to maintain 50 per cent of the applicable minimum paid-in amount, as listed above.
III INSURANCE AND REINSURANCE LAW
i Sources of law
Mexican insurance and reinsurance companies are governed by the LISF. The LISF was published in the Official Gazette of the Federation (DOF) on 4 April 2013 and entered into effect on 5 April 2015, repealing the General Insurance and Mutual Companies Law, which had been in effect since 1935.
The Insurance Contract Law (LCS), enacted by Decrees dated 29 December 1934 and 1 January 1935, also published in the DOF on 31 August 1935, is applicable to all insurance contracts subject to Mexican law, except for maritime insurance, which is governed by the Navigation and Maritime Commerce Law published in the DOF on 1 June 2006.
Reinsurance contracts are governed by the applicable law expressly agreed by the parties in the contract. Generally, the parties agree on Mexican law as the law governing the reinsurance contract.
ii Making the contract
Article 1 of the LCS defines insurance contracts as agreements in which an insurance company agrees to indemnify or pay for damages, or to pay an amount of money on the occurrence of a risk covered under the terms of the contract, in exchange for the payment of a premium.
The reinsurance contract is not a regulated contract, which generates many disputes in practice. The reinsurance contract is defined in Article 2, Section XXV of the LISF, as the contract in which an insurance company assumes totally or partially a risk that is covered by another insurance company, or the liability exceeding the amount insured by the direct insurer.
Article 25 of the LISF provides a general classification of insurance contracts as follows:
- Accidents and health, including:
- personal accidents;
- medical expenses; and
- Property and casualty, including:
- civil liability and professional;
- maritime and transportation;
- agriculture and livestock;
- automobiles (motor insurance);
- credit insurance;
- surety insurance;
- mortgage insurance;
- financial guarantee insurance;
- earthquake and other catastrophic risk;
- miscellaneous; and
- risks declared by the SHCP as specialty risks.
Essential elements of an insurance contract
Under the LCS, insurance policies must contain:
- the name and address of the contracting parties and the signature of the insurance company;
- a description of the insured asset or person;
- a description of the risks insured;
- the effective date of coverage and its duration;
- the amount insured;
- the insurance fees or premium; and
- any other clauses required by law or agreed by the parties.
It is common to find the following clauses in insurance policies:
- coverage limits and exclusions;
- form and terms under which the premium must be paid;
- insured's right to be informed about commissions paid to intermediaries;
- insured's right to revise the policy if its terms differ from the agreed terms;
- competence of Condusef and choice of jurisdiction clause; and
- special clauses required for specific lines of business.
Utmost good faith, disclosure and representations
The duty of utmost good faith is an implied principle applicable to all insurance contracts. This duty demands diligent and honest conduct from both parties, including the duty of the insured to disclose to the insurer any fact that may help the underwriter to evaluate the risks and determine the premium.
iii Interpreting the contract
General rules of interpretation
To the extent that the terms and conditions of the agreement are clear and there is no question as to what the intent of the parties was, the insurance policy must be interpreted in accordance with its terms:
- if the terms of the insurance policy seem contrary to the evident intent of the parties, the intent of the parties shall prevail over the terms of the insurance policy;
- if the insurance policy is generic in its terms, its interpretation must be limited to the purposes of the insurance policy;
- if the insurance policy permits various interpretations, it must be interpreted in the most convenient manner for the insurance policy to be effective;
- the terms and conditions of an insurance policy, including those terms that are not clear, must be interpreted in a manner that is consistent with the interpretation of the insurance policy as a whole;
- the terms of an insurance policy that may have different meanings must be interpreted in a manner consistent with the nature and purposes of the insurance policy;
- ambiguities of the insurance policy may be interpreted taking into consideration the customs of the country; and
- if it is impossible to construe the insurance policy using the rules set out above, the insurance policy must be construed in favour of the interpretation that provides reciprocity of interests between the parties.
Incorporation of terms
Compliance with the LCS is mandatory, therefore any agreement contrary to the LCS is null and void, unless otherwise permitted under the LCS. Taking this into account, it is implied that insurance contracts are subject to the provisions of the LCS.
iv Intermediaries and the role of the broker
Pursuant to Article 106 of the LISF, only reinsurance intermediaries are authorised to provide reinsurance intermediation services. Authorisation from the CNSF is required to incorporate and operate a reinsurance intermediary. In order to obtain this authorisation, an application must be filed with the CNSF. The Intermediaries Rules set forth the requirements and information that the application for authorisation must contain. A reinsurance intermediary must be incorporated as a limited liability company with a residence in Mexico.
Agencies and contracting
As a general rule, intermediation of insurance products may only be carried out by insurance brokers certified and licensed by the CNSF. Insurance companies may only pay commission arising from the sale of insurance policies to insurance brokers.
How brokers operate in practice
To carry out brokerage services in Mexico, insurance brokers must be authorised by the CNSF. To this end, an application must be filed with the CNSF. The requirements and information that the application must contain is set forth in the Brokers Regulation. The authorisation may be granted to:
- individuals acting as employees of an insurance company or independent individuals operating with a service agreement with an insurance company; and
- limited liability companies incorporated under Mexican law.
The authorisation to act as an insurance broker is granted for three years for individuals (renewable at the request of the insurance broker) and, in the case of legal entities, the CNSF can grant the authorisation for an indefinite period.
Article 12 of the Brokers Regulation lists entities and individuals that cannot participate, directly or indirectly, in the capital stock of an insurance broker legal entity; these include Mexican insurance companies and financial entities subject to approval by the corresponding Mexican authority; foreign governments or authorities; and foreign financial entities.
A claim is triggered on the occurrence of a peril covered by the policy. Insurable interest is required to make a valid claim and demand payment under a policy.
The statute of limitations of claims is two years after the date of the occurrence of the loss, except for life insurance, where it is five years (Article 81, LCS). The statute of limitations can be interrupted for the following reasons:
- on appointment of experts as a result of a loss;
- if a claim is filed with the specialised unit of the corresponding insurance company or Condusef;
- by initiating an action or proceeding before competent courts, on service of process to the insurance company; or
- by the express acknowledgment of the rights of the insured or its beneficiaries by the insurance company.
Good faith and claims
The LCS establishes the obligation of the insured (1) to give timely notice of the occurrence of the casualty; (2) regarding property and casualty insurance, to prevent or reduce the damage; and (3) not to modify the status of the assets. If, when acting in good faith, the insured omits to give timely notice of the occurrence of the casualty or to carry out reasonable actions to prevent or reduce the damage, or modifies the status of the insured asset, the insurance company may reduce the indemnity in proportion to the damage that could have been mitigated or avoided by the insured. If the insured were to act fraudulently, the insurance company would be released from its obligations under the policy.
The consequences of bad faith may:
- trigger the right to terminate the insurance contract;
- allow the parties to recover premiums paid or request payment of damages and loss of profit; and
- release the parties from their obligations under the insurance contract.
Set-off and funding
The parties can set off mutual debts and credit as long as both are due and payable.
The LCS does not regulate reinstatement, but it may be included in the insurance contract. Reinstatement generally operates when the insured pays the outstanding premiums, provided the risk has not changed.
If any risk takes place prior to reinstatement of the insurance contract, the insured is not entitled to obtain any compensation, since he or she was not covered by the insurance.
Dispute resolution clauses
Clauses regarding choice of forum, jurisdiction and applicable law are valid and enforceable in Mexico in insurance and reinsurance contracts. Furthermore, the parties in insurance and reinsurance contracts can convene to solve potential disputes through an arbitration. Mexico is a contracting state of the Hague Convention on Choice of Court Agreements (2005) and of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention 1958).
IV DISPUTE RESOLUTION
i Jurisdiction, choice of law and arbitration clauses
The parties in a reinsurance contract are free to agree the terms and conditions of the contract as long as they do not breach any mandatory legal provision or go against public policy. Arbitration clauses are enforceable in insurance and reinsurance agreements. The terms and conditions of an insurance contract are subject to and shall comply with the LCS, which is mandatory. As a general rule, agreements contravening the LCS shall be null and void.
Insurance and reinsurance disputes are regulated by the Code of Commerce. If one of the parties breaches a contract, the non-defaulting party can initiate ordinary commercial proceedings. This judicial process has four basic stages: filing of the claim by the plaintiff and response from the defendant; submission and presentation of evidence of any kind; pleadings; and award.
The parties can appeal any ruling to a higher tribunal, unless the aggregate amount is less than 682,646.89 pesos.
Each party pays its own litigation costs and the losing party may be required to indemnify the winning party, including for attorneys' fees, subject to certain established thresholds and the decision of the court.
The insured and the respective beneficiaries can file claims with the insurance company, Condusef and Mexican courts.
Claims filed with Condusef or before a competent court interrupt the statute of limitations.
Condusef can act as a mediator in disputes resulting from an insurance contract if the amount in dispute is less than 6 million Mexican investment units (approximately 38.36 million pesos). Condusef can also act as an arbitrator if the dispute is not solved in a mediation process; however, the parties can choose a third party as an arbitrator.
The foregoing does not affect the right of the parties to bring a legal action before Mexican courts.
Mexico is a contracting state of the New York Convention and agreements to submit disputes arising from reinsurance policies to arbitration are valid, and the respective awards can be enforced by Mexican courts.
The Mexican chapter of the International Insurance Law Association, the Mexican Insurance and Bonding Law Association (AMEDESEF), together with the Arbitration Centre of Mexico (CAM), created the Mexican chapter of the Insurance and Reinsurance Arbitration Society (ARIAS Mexico). ARIAS Mexico, managed by the CAM with the technical assistance of AMEDESEF, promotes arbitration to resolve insurance and reinsurance disputes.
Reinsurance claims can be resolved in judicial proceedings through arbitration or through other alternative dispute resolution mechanisms, such as mediation and conciliation.
There is an important increase in mediation as an alternative mechanism for settling international reinsurance disputes and claims involving Mexican cedants and the London market. Mediation has proven to be an efficient alternative.
v Alternative dispute resolution
Even though Article 17 of the Mexican Constitution refers to means of alternative dispute resolution, there is no federal regulation regarding alternative dispute resolution processes. However, several states of Mexico have enacted specific laws on this matter.
The most popular alternative dispute resolution procedures are arbitration and mediation (see subsections iii and iv).
V YEAR IN REVIEW
i The insurance sector
According to the CNSF, as at September 2019, the Mexican insurance sector comprises 103 insurance companies licensed to operate in Mexico, of which 59 are subsidiaries of foreign insurance companies, and more than 238 foreign reinsurance companies registered with the Reinsurance Registry, including Lloyd's of London. Ten atomic pools (nuclear insurance pools) were also registered with the Reinsurance Registry to take reinsurance in Mexico. Direct premiums in the insurance and surety sectors increased had by 8.4 per cent by the end of September 2019 compared to the same period in 2018. The overall annual growth in the Mexican insurance industry from January to September 2019 was 8.7 per cent in real terms. From the total amount of premiums by the end of September 2019, 98.2 per cent came from direct insurance and only 1.8 per cent from reinsurance.
By the end of September 2019, life insurance had increased by 9.1 per cent in real terms compared to the previous year; health insurance increased by 3.5 per cent; and property and casualty increased by 10.7 per cent. By excluding motor insurance, the property and casualty line increased by 20.4 per cent.
The penetration of insurance with respect to Mexico's gross domestic product is 2.2 per cent. The Mexican Association of Insurance Institutions, together with the CNSF, are working on a strategy to increase penetration to 2.8 per cent by 2022.
There was also substantial M&A activity during 2019, driven mostly by international transactions with effects on the Mexican market.
Probitas Syndicate 1492 became in 2018 the first Lloyd's syndicate to open a representative office in Mexico. In July 2019, Newline Group established a local presence in Mexico, joining Lloyd's representative office in Mexico City. Newline will serve its clients in Latin America and the Caribbean through Mexico. Taking into account the constant conflicts arising from inadequate placement of reinsurance policies in Mexico, having a local presence will contribute to a more efficient and transparent operation for the benefit of the Lloyd's market and the local cedants. Two Mexican groups, Grupo Nacional Provincial and Reaseguradora Patria, currently have investments in Lloyd's.
iii Change in government
As a result of the federal elections in July 2018, the National Regeneration Movement (MORENA) took control of Congress and its presidential candidate Andrés Manuel López Obrador won by a landslide, taking office on 1 December 2018. As a result of the changes in government, Ricardo Ernesto Ochoa Rodríguez was appointed president of the CNSF, replacing Norma Alicia Rosas Rodríguez. All vice presidents and certain senior officers of the CNSF resigned from their positions, creating uncertainty and adding pressure on the CNSF, which already had a very heavy workload.
During 2019, the CNSF went through a process of adjustment after appointing new vice presidents and senior officers, which had an impact on the efficiency of the CNSF. As this change of government has wide-reaching implications, the public policies of the CNSF, and consequently the impact on the insurance industry, are yet to be determined. So far, we have experienced both efficiencies and inefficiencies in regulatory authorisations before the CNSF. While in certain areas the process has been streamlined and in certain proceedings the CNSF has become extremely pragmatic and efficient, in others, due to the lack of human resources and the learning curve of the new personnel, combined with an extensive rotation of personnel, there are inefficiencies and delays that affect the market.
Some of the measures adopted by the new administration have also produced mixed effects in the market; for example, while some insurance companies have been affected by the cancellation of private medical insurance for public officers and the reduction of other fringe benefits in public officers' compensation packages, others have benefited from an increase in their portfolio due to the need for individual coverage by those wanting to maintain their insurance coverage.
We have seen a growing interest in the new administration in identifying ways in which it can improve penetration of the insurance industry, financial inclusion and risk management mechanisms to protect vulnerable communities and cover risks stemming from catastrophic risks, including those stemming from climate change.
VI OUTLOOK AND CONCLUSIONS
The changes in public policy will have an important impact on regulatory changes. The current administration has an opportunity to carry out significant changes to the regulation to effectively increase penetration, and in particular we perceive a concern in working on those areas that will improve financial inclusion and on proper risk management for vulnerable groups, maintaining operational costs of insurance companies at reasonable levels to permit growth while improving penetration. While it is a priority of regulators to protect customers and expand insurance protection to the general population, there will be also more intervention of the state in the development of insurance solutions and risk management mechanisms to ensure protection of vulnerable groups, and proper management of catastrophic risks by federal and state governments and state-owned companies.
The regulators are aware of the potential of insuretech to give access to vulnerable groups to the benefits of insurance products. Unfortunately, the regulatory regime in effect has become a hurdle rather than an incentive for the development of insuretech products and projects, therefore, coping with compliance and regulatory challenges, and a strict regime on anti-money laundering regulation, data protection and privacy regulations makes it difficult for start-ups to flourish in a very regulated industry. Notwithstanding the foregoing, we see how new risks continue to demand innovative products, presenting new challenges to the regulators in a country with a solid and well capitalised industry that continues to disappoint in terms of penetration, inclusion and innovation.
We have seen a growth in appetite from funds to work with insurance companies and benefit from insurance companies as institutional investors. The insurance industry has not fully embraced its potential as a key institutional investor, with the exception of a few insurance companies actively investing in private equity, venture capital and other securities, such as development trusts and real estate trusts. There is an interest for regulators to enhance and give incentives to insurance companies and we still expect to see changes in the investment regime of insurance companies, aligned with the interest of the current government in financing long-term infrastructure projects.
ii Case law
We continue to see a growth in insurance and reinsurance related disputes and litigation arising therefrom, resulting in the development of court precedents on insurance and reinsurance related matters. The courts are very active in developing the concept of moral damages (similar to that of punitive damages) – the concept now forms part of most claims, with important consequences for the insurance industry.
The contra proferentem principle in insurance continues to be applied, affecting insurance claims that are being argued before the courts.
Ongoing cases related to violent acts that took place in the context of demonstrations and protests against the government that occurred in January 2018, as a consequence of a substantial rise in the price of petrol, are contributing to the judicial interpretation of the exclusion of the risk of terrorism (terrorism exclusion clause or endorsement) in insurance policies. These cases are relevant to the insurance industry as the Mexican precedents do not reflect international market practices. We have seen regional growth of these claims and the decisions currently pending in Mexican courts will be of relevance to ensure correct wording in terrorism and all risk policies.
Courts have confirmed that insurance and reinsurance are two separate and independent contracts by analysing the concept of litisconsorcio (joinder of parties) and confirmed that the policyholder of the direct insurance has no direct action against the reinsurer.
iii Reinsurance claims
As previously identified, one of the main sources of conflicts in reinsurance stems from fronting arrangements widely used in Mexico in the context of a legal framework where the insurance company maintains its liability before the insured despite the fact that, technically, it is just fronting the risk. This particular state of affairs – where there is a lack of understanding by reinsurers of Mexican law, and no diligence in the underwriting of policies to ensure that the wording takes into consideration the effects that Mexican law has with regard to the English wording of the reinsurance placement used through fronting arrangements – has consistently and continuously raised inconsistencies between insurance and reinsurance policies and Mexican law, and is the origin of a number of disputes between the London and Mexican markets, coupled with abusive practices in the handling of claims by the reinsurance market in prejudice of the insurance company that placed the business through fronting arrangements.
We have seen some interesting developments in Mexican anti-money laundering regulation aligned with international standards that may contribute to harmonise local placements with limitations of liability under international reinsurance programmes.
There is an opportunity to effectively use and promote alternative dispute resolution mechanisms in Mexico specialised in insurance and reinsurance claims, including mediation and arbitration and the use of the Mexican chapter of the Insurance and Reinsurance Arbitration Society (ARIAS Mexico), by including arbitration clauses in insurance and reinsurance agreements to resolve disputes in arbitration, as a consequence of the ongoing conflicts arising in reinsurance contracts, and also to prevent certain situations in global insurance programmes. However, the reinsurance market is still generally reluctant to include mediation and arbitration clauses in reinsurance policies.
In November 2019, the Principles of Reinsurance Contract Law (PRICL) were published by the Project Group (a joint venture set up by several universities and professors, primary insurance companies' representatives, reinsurance companies and reinsurance brokers and special advisers) in cooperation with the International Institute for the Unification of Private Law (UNIDROIT). The PRICL set specific reinsurance rules applicable to contract law, aiming to help such areas where reinsurance practitioners felt the need to improve legal certainty. The PRICL have been drafted as soft law, which means they will work as an optional guide of reinsurance contract law when chosen by the parties, and for these principles to have binding effect, the contracting parties should voluntarily choose to do so. However, there is also the possibility that the PRICL may be applied by courts or arbitral tribunals, as the case may be, even in cases where the parties have not chosen to apply them.
There have been no changes and the distribution channels in Mexico continue to be extremely regulated and limited, resulting in a lack of penetration of insurance within small and medium-sized companies, which contribute around 52 per cent of the national GDP. There is still no effective solution to the ongoing problem of enforcing mandatory automobile insurance and other mandatory insurance products.
Bancassurance is one of the most important areas of growth within the industry. With very few exceptions, most banking groups operating in Mexico have transferred their insurance business and operations to insurance groups and entered into exclusive distribution arrangements.
Insurance distribution through brokers is still the most common channel for distribution; however, there is an interest in developing insuretech products and shifting to online forms of distribution. Various projects aiming to exploit the untapped, and therefore underserved, health insurance market were launched during 2019.
We have seen an active insurance market with various M&A transactions and joint ventures. We expect to see further consolidation, growth or a combination in the current market players in Mexico. In particular, we expect health insurance to be a key driver of growth of the insurance industry in the years to come.
vi Product development
We have been very active working with reinsurance and insurance companies and brokers in the development of parametric insurance products for catastrophic risks that will be launching in 2020. We expect the offer of parametric products to continue growing.
1 Yves Hayaux-du-Tilly is a partner at Nader, Hayaux & Goebel. The author is grateful to Juan Pablo Sainz of Nader, Hayaux & Goebel for his assistance in preparing this chapter.
2 Article 20, Paragraph 2 of the LISF defines 'active insurance operations' as those in which, upon the occurrence of a future and uncertain event agreed upon by the parties, one party agrees to directly or indirectly indemnify or pay an amount of money to the other party, in exchange for a premium.