Insurance & Reinsurance 2020

Last Updated January 20, 2020

Mexico

Law and Practice

Authors



Colin Vega Fletes is a boutique law firm specialised in insurance and reinsurance, bonds, dispute resolution, litigation and arbitration, legal co-operation, crisis and risk management. With over 20 years’ experience, the firm's lawyers have been providing business-oriented legal assistance on a pre-emptive basis, upon complex claim disputes, advising insurance, reinsurance, bonding and brokerage companies, as well as policy holders and beneficiaries, before courts or through arbitration, in Latin America, specifically Mexico. Since its foundation, Colin Vega Fletes has gathered experience in handling high-profile cases involving political, media and social comprehensive approaches, and nurtured the versatility to co-operate with local and international firms, as well as public and private entities, in North American, Latin American, European and Asian jurisdictions. This has powered the establishment of the firm's first overseas office in Madrid.

The sources of the Mexican law are: the Constitution; legislation; regulation; jurisprudence; customs; and doctrine.

The Mexican legal system is mainly composed on a codified basis. Moving towards an insurance and reinsurance field, it is worth pointing out that the civil/commercial legal system is statutorily based, which means cases are decided individually upon what is stated in law.

Unlike a common law legal system, Mexican case law does not have precedential value itself. However, when judgments issued by the Supreme Court and/or the highest federal courts accrue five consecutive and consistent decisions on a point of law, or the former solves opposite determinations, it is then considered jurisprudence. From a legal perspective, this source has the same standing as, or above, standard law, as it could entail a different construction to what the legal text is believed to set forth in the first instance.

Insurance and reinsurance matters in Mexico are supervised and regulated by the National Insurance and Bonding Commission (Comisión Nacional de Seguros y Fianzas -CNSF-), which is an independent agency of the Mexican Ministry of Finance (Secretaría de Hacienda y Crédito Público -SHCP-).

In addition, the National Commission for the Protection and Defence of Financial Services Users (Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros, CONDUSEF) is the agency responsible for receiving complaints from financial services consumers, including policyholders.

The performance of Mexican insurance and reinsurance companies is governed by the Insurance Contract Act (Ley sobre el Contrato de Seguro -LCS-), which has been in effect since 1935 and amended progressively, and the Insurance and Bonding Companies Act (Ley de Instituciones de Seguros y de Fianzas - LISF), issued in 2015, which the SHCP has authority to construe for administrative aims.

Furthermore, there is a secondary regulation enacted by the CNSF, consolidated in the Unique Circular on Insurance and Bonds (Circular Única de Seguros y Fianzas - CUSF). An exception is made regarding marine insurance, which is regulated by the Navigation and Maritime Commerce Act. Additionally, specific regulation has been set forth by the SHCP to regulate insurance and reinsurance intermediaries or brokers.

Although specialised legislation exists, no express provisions are set forth regarding the material and specific content reinsurance contracts in Mexico ought to contain and comply with; hence they are considered to be governed mainly by general principles and commercial Mexican law.

To address these topics properly, they are divided as follows.

Underwriting

In order to underwrite insurance and reinsurance business in Mexico, companies shall procure authorisation by the CNSF. Additionally, domestic and foreign reinsurance companies have to comply with been listed on the General Registry of Foreign Reinsurers, which is conducted by the CNSF in light of Article 34 of the CUSF and it shall be renewed on a yearly basis, to be able to undertake business from Mexican cedants.

Notwithstanding, insurance companies that are already authorised to carry out insurance can also underwrite reinsurance in the same lines of business for which they are cleared. Hence, no further approval from the CNSF is needed with this regard.

Pursuant to the LISF and Chapter 4 of the CUSF, standard-form, collective and group contracts, as well as surety insurance, must be registered before the CNSF. The LISF requires standard-form insurance contracts to also be filed before the CONDUSEF for their registration before the Standard-Form Contracts Registry.

Further, every insurance product registration must comply with the following contractual documentation:

  • general conditions and model contracts, encompassing 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, endorsing that the insurance product complies with all applicable legal provisions; and
  • a congruency opinion, stating that both the technical note and the legal opinion are consistent on one another.

Any authorised insurance product (consumer, SME and corporate) can be offered and sold immediately upon filing. However, the CNSF will have a 30 business days’ term as of the filing date to order its commercialisation suspension should the filed documentation is found to be non-compliant, which will remain halted until the exhibited shortcomings are remedied through a re-filing process.

Upon re-filing, the CNSF shall have a renewed 30 business days’ business term to confirm that observations are dully fulfilled, otherwise the suspension would be upheld. Should the insurer fail to make the product compliant within a 60 business days’ lapse, which are tolled with the re-filing of the revised documentation, the product’s registration will be revoked.

There is an exception to the registration rule described above which applies to insurance covers that can be freely negotiated and the terms and pricing of which are dictated by the reinsurer.

The LISF provides a general classification of insurance contracts which must comply with the registration process before receiving authorisation to be sold, which along with the minimum paid-in capital that the insurance companies shall comply for each branch/type pursuant Annex 6.1.2. CUSF, are encompassed below:

Life Operations

These are insurance contracts that cover risks affecting the insured's life (minimum paid-in capital requirements MXP42 million).

Accidents and Health Operations

  • Personal accidents: cover injuries or disabilities affecting the insured's personal integrity or health (minimum paid-in capital requirements MXP10.5 million).
  • Medical expenses: cover medical, hospital and other expenses considered necessary for the recovery of the insured's health (minimum paid-in capital requirements MXP10.5 million).
  • Health: cover services to prevent and restore the insured's health (minimum paid-in capital requirements MXP10.5 million).

Property and Casualty Operations

  • Civil liability and professional risks: cover indemnity payments that an insured must advance in favour of third parties when held accountable.
  • Maritime and transportation: cover indemnity payments for damages and losses suffered on cargo, vessels and other maritime assets.
  • Fire: cover damages and losses caused by fire, explosion, fulmination or related accidents.
  • Agriculture and animal: cover damages and losses suffered by the insured due to the partial or total loss of expected profits from land or by death, loss or damages to animals.
  • Automobiles or motor: cover damages and losses caused as a consequence of the use of automobiles.
  • Surety insurance: cover damages caused by breach of the insured to its obligations under an agreement entered into with the beneficiary. This insurance does not include coverage of financial obligations of any kind whatsoever.
  • Credit insurance: cover the insured's losses suffered by total or partial insolvency of commercial loan debtors.
  • Mortgage insurance: cover damages caused by breach of a mortgage loan debtor.
  • Financial guaranty insurance: cover damages caused by breach of issuers of securities.
  • Miscellaneous: cover damages and losses suffered by individuals or in property, caused by any risk not contemplated in other lines of business.
  • Earthquake and catastrophic risks: cover damages and losses caused to individuals or property as a consequence of a non-predictable event.

Except for the financial guaranty insurance, whose minimum paid-in capital requirements is of MXP205 million, the others will hinge on the number of authorisations, incepting from MXP31.5 million for one line of business through MXP53 million for three lines of business clearance granted by the CNSF.

Insurance companies authorised exclusively for reinsurance operations are required to maintain a 50% of the applicable minimum paid-in amount, as listed above.

Extended guarantees are considered insurance operations. However, non-regulated entities can offer them, should they retain a stop-loss or reimbursement insurance covering such risks with a licensed Mexican insurance company.

Ownership

Recent changes in the foreign investment law currently allows any foreign party to invest up to 100% in a Mexican insurance company, subject to the applicable provisions of the LISF (insurance affiliates).

In addition to the requirements to obtain authorisation to incorporate and operate an insurance company, insurance affiliates must comply with the requirements set out in the Rules for the Establishment of Affiliates of Foreign Financial Entities (Reglas para el Establecimiento de Filiales de Instituciones Financieras del Exterior).

Foreign entities which entail any authority performance, are hindered to participate in any way in the capital of Mexican insurance companies. Even though the domestic regulation does not define what does the term "authority" should stand for, it can be defined as an individual or governmental agency with legal powers to issue binding orders and regulations within the scope of such entitlement.

Additionally, the following cannot participate, directly or indirectly, in the capital stock of an insurance company, unless its involvement results due to shareholding in a financial holding company established under the Financial Groups Regulation Act (Ley para Regular las Agrupaciones Financieras):

  • Mexican credit institutions;
  • mutual and insurance companies;
  • brokerage firms;
  • ancillary credit organisations;
  • investment funds managers;
  • savings and loans entities; and
  • money exchange companies.

Solvency

The LISF has encompassed regulation gearing towards a mandatory Solvency II-like regulatory regime for all insurance companies that do underwrite business in Mexico. Mexico’s insurance regulatory framework set forth a three-pillar risk management approach: Pillar one is a new technical reserve and capital requirement regime; Pillar two covers governance guidelines; and Pillar three outlines new disclosure requirements.

Reinsurance

No different rules apply to the underwriting of excess layers in a reinsurance contract, only retention limits would apply with this regard.

Insurance Companies

Insurance companies are subject to the following taxes in Mexico:

  • income tax (Impuesto sobre la Renta) at a 30% rate, which is levied on the insurance companies' accrued income, less authorised deductions set out in the Income Tax Act (Ley del Impuesto sobre la Renta); and
  • value added tax (Impuesto al Valor Agregado) at a 16% rate, which is levied on all insurance services paid by customers, except for agricultural insurance, mortgage and financial guaranty insurance and life insurance, pursuant to Article 15, section IX, of the Value Added Tax Act (Ley del Impuesto al Valor Agregado).

Reinsurance Companies

Mexican reinsurance companies have the same tax treatment as described for insurance companies, whilst foreign reinsurers are subject to income tax when the paid or assigned premiums are outlaid by a Mexican resident or a foreign resident with a permanent establishment in Mexico, which is calculated by applying a withholding rate of 2% on the gross amount paid, without any deductions.

Cedants must withhold and advance the income tax at the applicable rate regarding reinsurance premium payments. It is important underscore that, depending on the jurisdiction in which the reinsurance company is incorporated, there might be a double taxation treaty that applies and hence supersedes the general provisions referred to herein.

Insurance Brokers and Reinsurance Intermediaries

Insurance and reinsurance intermediaries are also subject to the taxes and rates described for insurance companies, yet not held to any special tax regime for deductions.

Under the LISF, Mexican insurance and reinsurance companies, as well as foreign or overseas reinsurance entities dully registered before the General Registry of Foreign Reinsurers conducted by the CNSF, may place or underwrite reinsurance to and from domestic insurance companies. Currently, there are more than 240 different reinsurance, underwriters and representative offices registered before such authority.

Considering that an Solvency II-like regulatory regime is mandatory for all insurance companies that do business in Mexico, there is a self-explained necessity for them to procure reinsurance capacity for underwritten risks.

Furthermore, foreign reinsurance companies are banned to underwrite reinsurance when they intend, or effectively carry out, on a majority or exclusive basis, reinsurance operations with specific Mexican insurance companies with whom they have financial or business ties.

As mentioned, insurance companies incorporated and authorised to operate in Mexico can carry out reinsurance operations in the same lines of business for which they are licensed, waiving their need for additional clearance; however, insurance companies can be authorised to operate exclusively in the reinsurance line of business.

As it was encompassed, the registration of foreign reinsurance companies on the General Registry of Foreign Reinsurers is governed by Article 34 of the CUSF, for which such entities must submit the application before the CNSF on a yearly basis.

Further, within the context of the domestic insurance and reinsurance markets, no specific consequences are deemed to occur in Mexico due to Brexit.

The first mandatory approach to this topic is given by Article 18 of the LCS, which sets forth that the only entity linked before the insured is the insurance company, regardless of any further reinsurance placement of the risk.

Thus, express law prohibition is in effect so as to hinder any direct legal relationship between reinsurers and insureds, ie, cut-through clauses. By way of such ban, fronting schemes are not only permitted but fostered under Mexican jurisdiction.

However, for the life insurance business, insurance companies must submit to the CNSF, on an annual basis, a proposal of the retention of risk limit with which they intend to comply. Such authority will have a 30 business days’ to advance observations on the retention limit proposed, if any, otherwise it will be deemed accepted.

For non-life policies, the retention of risk shall in no case exceed, with respect to any single risk, 5% of the sum resulting from the balance of the reserve calculated vis-à-vis the relevant line of insurance business, plus the minimum guarantee capital upheld. Insurance companies may request a waiver from the CNSF to exceed the retention of risk limits determined in accordance with the foregoing.

In an exception to the above paragraph, there are no minimum retention regulations in place with respect to Mexican insurance companies. However, the proportion of risk retained must be analysed on a case-by-case basis so that it is consistent with the technical features of the relevant line of business and that it complies with the companies’ annual reinsurance program.

This kind of information is often classified and confidential until the deals are concluded. Currently, there is no disclosure on any outstanding M&A activity that can be mentioned.

Moreover, the only relevant insurance operations of this kind are often executed abroad between holding companies although, they eventually impact the domestic market.

As mentioned before, under Mexican jurisdiction, standard-form, collective and group contracts, as well as surety insurance, must be registered before the CNSF. The LISF requires standard-form insurance contracts to also be filed before the CONDUSEF for their registration before the Standard-Form Contracts Registry.

The LISF sets out that entities without a license to act as insurance agents may receive compensation for the commercialisation of non-negotiable insurance contracts on behalf of Mexican insurance companies, except for pension insurance products under Mexican social security laws. Distributors may be compensated for the aforementioned services under the terms and bounded to the conditions of service agreements registered before the CNSF.

Financial intermediaries are subject to the inspection and surveillance of Mexican regulatory authorities that distribute insurance products for one or more Mexican insurance companies of the same financial group or that operate different lines of business, will be required to comply with the following:

  • in case the insurance products offered publicly contain a saving or investment component, the Mexican insurance company responsible for developing such products must register with the CNSF a specialised training program for the employees, representatives and attorneys-in-fact of the respective distributor; and
  • for insurance products different to those referred to above, the Mexican insurance company must approve in the service agreement entered into with the distributors the training programs for their employees, representatives and attorneys-in-fact.

Distributors that are not financial intermediaries and/or subject to the inspection and surveillance of Mexican financial regulatory authorities will be required to comply with the following requirements that will be specified by the CNSF through general rules:

  • the insurance companies must provide such cases in which due to the complexity or characteristics of the insurance products, the employees, representatives or attorneys-in-fact of the distributor must be trained by the former or evaluated and certified by the CNSF; and
  • the specific requirements and measures to be taken to avoid conflicts of interest which may arise when distributors are under the financial or administrative control of a company or a group of companies, and commercialise products for more than one Mexican insurance company.

The distributors are subject to the surveillance and regulation of the CNSF and Mexican insurance companies will be liable for the damages and loss of profit caused to insureds or beneficiaries due to services provided by them.

Nowadays, individual agents and brokers make up Mexico’s most significant distribution channel, generating more than 60% of insurance premiums. Over the past decade, however, this channel has shifted in three key areas:

  • bancassurance has observed continued double-digit growth and new companies are emerging. This has been driven by banking sector penetration where products are tied to loans and more brick-and-mortar banking outlets have been established. Additionally, the legal framework governing the distribution of insurance products allows their distribution principally through banks, which continue to develop insurance products, limiting the growth of the sector as a whole. Banks have therefore begun divesting their insurance operations and establishing joint ventures with insurers to distribute their products to their client base;
  • the use of telemarketing and sponsors has created direct channels. A number of companies are distributing relatively straightforward products or policies that cover specific sponsor needs. Although this has been successful for certain companies, it is not perceived as fundamental in revenue generation; and
  • digital solutions are being developed (primarily to distribute auto policies using simulators, purchase platforms and flexible products) to attract customers who prefer technological interactions. As an emerging distribution channel, digital is growing at a slower pace in Mexico than in developed countries or those where agents are less prominent.

We foresee digital transformation and solutions playing a bigger role in the country’s insurance market over the next ten to 15 years, among other sectors, due to the high average age of agents (above 50) and the limited interest of younger generations in becoming joining the sector. It is estimated that, by 2027, most potential insurance customers will be digital natives, with insurance companies that have deep roots in the traditional channel (agents and brokers) in a position to develop digital capabilities or complement them through joint ventures or buy-outs of insurtech firms, so as to stay competitive and ably respond to customers’ needs.

In the wake of entering an insurance contract, both, insureds and insurers must comply and meet with several obligations, mainly gearing towards transparency, allowing a conscious risk assessment, and an utmost good faith due.

Regarding the insureds, in light of the Mexican regulation, specifically the LCS, upon them is set forth the burden of disclosing all material information about the risk in two specific moments: during the negotiation of the contract; and once the contract is in force and validity due to a peril aggravation. Consequences when failing to comply in each case vary dramatically. Notwithstanding we are focusing on the first aspect, it is worth bearing in mind this distinction for practical aims.

Hence, insureds (or any third party on their behalf) are compelled by law to reveal - as acknowledged at that time - all material facts that may allow insurers to produce a proper risk assessment and which the latter could impact any negotiated covenants between the parties.

Although in first instance this commitment is perhaps deemed to fall completely on the insureds side, it is critical to underscore that under Mexican regulation, this disclosure process shall be performed pursuant or walking through the submission forms (questionnaires) provided by insurance companies, for which law and court precedents impose upon them the onus in meeting high clarity and comprehensive standards to avoid any confusion or misunderstanding by the former.

This set of rules ought to apply to insurance policies on a general basis, either for consumer or commercial contracts.

Once the contract is concluded between the parties, should any non-disclosure or misrepresentation in the provided information by the insured be discovered, the insurance company will be able to avoid the contract, withholding the already advanced premiums, unless the insurers themselves caused, should have known or consented to those shortcomings, as well as if they waive their right for termination.

The insurance company is allowed to produce this avoidance, without judicial declaration, by serving the insured within 30 days after acknowledging such pitfalls.

However, the insurance companies are hindered by law from terminating the contract, should they cause the insureds to incur in non-disclosures or misrepresentations, which could happen mostly in case of breaching the above-mentioned clarity and comprehensive duties within the submission forms or questionnaires.

Therefore, if the insurer fails to provide information during the negotiation of an insurance contract, the insured is entitled to ask for amendment according to the original insurance offer.

As a general rule, insurance companies may only pay brokerage fees to insurance brokers duly authorised as such by the CNSF. In light of the Insurance and Bonds Agents Regulation (Reglamento de Agentes de Seguros y de Fianzas -RASF-) there are two kinds of licenses: for individual agents and for entities to act as insurance brokers.

The authorisation may be granted to either:

  • individuals acting as employees of an insurance company (agents);
  • independent individuals operating under a service and commission agreement with one or various insurance companies; and
  • limited liability companies incorporated under Mexican law.

The authorisation to act as an insurance broker is granted for three years with regards for individuals (renewable at request) and, in the case of legal entities, the CNSF can grant it for an indefinite term.

Article 12 of the RASF set out a list of entities and individuals that are hindered to 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 authorities or governments and foreign financial entities.

However, in light of the RASF, intermediaries are considered to advise insureds during the negotiation and submission phase towards executing a contract, even though they are directly appointed or hired by an insurance company.

Deeming that insurance brokers are experts into this field, they must deliver proper advisory to their clients, who are presumed ignore technicalities, mainly by endorsing that the insureds’ needs and expectations are accurately meet within the four corners of the contract or policy. Court precedents are building with this regard, holding accountable intermediaries when failing to deliver such professional counselling.

It is worth noting that, under Mexican law, insurance contracts are deemed as consensual; they are finalised or fully entered once the insured acknowledges the acceptance of the risk placement by insurers. Henceforth, the policy issuance in writing plays an ancillary role for evidence purposes.

Thus, the essential elements that should be encompassed in an insurance contract to be considered validly concluded (which differs from the formalities that must comply any policy referred below) are: risk, premium payment and warranty obligation upon insurers.

Among those elements, perhaps the one which merits specific consideration to understand its full entity, is the risk, which has to entail a very specific condition: an insurable interest. This component is of utmost importance, for which its absence hinders the conclusion of the entire contract.

Although the insurable interest concept has not been expressly defined in law, by constructing it and, through court precedents, it could be identified as the essential worth linkage between the insured and the risk, for which, in case the latter accrues to a loss, the former experience a patrimonial erosion.

In a nutshell, this thwarts the possibility of disrupting a pivotal principle in insurance relationships, bonding the financial diminishment (which will not exist should the insurance interest not be fulfilled) to an equivalent indemnification, curtailing any enrichment or compensation beyond the patrimonial reduction due to the occurrence of a loss.

On the other hand, under the LCS insurance policies must contain the following formalities:

  • name and address of the parties and 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 sum insured;
  • insurance fees or premium; and
  • any other clauses required by law or agreed by the parties.

Almost every kind of insurance contract allows for the simultaneous coexistence of insureds and/or beneficiaries, whose joint indemnification threshold is given by the sum insured, the latter being entitled under Mexican law to a direct action against insurers, ie, in liability policies.

Hence, there is no differing of positions on the addressed topics where multiple insureds and beneficiaries meet under the same and single policy.

Set forth in the Mexican Constitution and law, consumer contracts are granted with a special protective regime, aiming to level the playing field before the insurance companies, for which insurers shall refrain incurring in any abuse against insureds. Several controls (registrations) have been put in place with this regard, prior and during its commercialisation. Any abusive covenant should be voided and ambiguities construed in favour of insureds.

On the other hand, reinsurance contracts are deemed to be entered into by parties which are both presumed to have insurance expertise, therefore, interacting in a balanced position. Thus, such shall be construed in a more rigid and equitable manner, in light of general principles of commercial law.

From a financial standpoint, risk-linked securities or risk-linked financial instruments provide investors with short or long-term profits in exchange for transferring the risk from the sponsor to the investor itself. The most commonly known insurance-linked securities are divided into two major categories: life and non-life.1 Cat Bonds.

Perhaps the most iconic case of alternative risk transfer transactions within the Mexican insurance industry belongs to the implemented to address the natural catastrophes (Nat-Cat) national programme named FONDEN (Fondo de Desastres Naturales). Since 2016, through the issuance of securities, insurers and reinsurers have gradually diverted a part of their assumed risk to the capital markets.

However, there is plenty of room to develop and regulate ART schemes within the Mexican market, which is still deemed too immature in these aspects.

ART transactions written in other jurisdictions are not regulated in alignment with Mexico law and, therefore, cannot be registered as reinsurance or deemed for solvency purposes.

As a general premise, compliance with the LCS is mandatory and, therefore, any agreement attempting it is null and void, unless otherwise is permitted under such law.

To the extent that the terms and conditions of any insurance contract must be clear and there is no controversy as to what the intention of the parties was, the insurance policy must be interpreted in accordance with the following:

  • if the terms of the insurance policy seem contrary to the evident will of the parties, the latter shall prevail;
  • 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 allows various interpretations, it must be construed in the most convenient manner for the insurance policy to be effective;
  • the terms and conditions of an insurance policy, including those that are unclear, 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 construed 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, yet always in favour of the insureds’; and
  • if it is impossible to construe the insurance policy using the rules set out above, it must be construed to favour reciprocity of interests between the parties.

However, consumers/insureds are, broadly speaking, by law and court precedents, subject to a privileged regulation which provides them with protection over the insurance companies, ie, by construing any ambiguities in their favour, reducing the scope of exclusions to the express provisions agreed within the policies or imposing mandatory clarity and comprehensive standards in communication issued by insurers.

Hence, under Mexican jurisdiction, consumer contracts are granted with a special protective regime geared towards balancing the natural gap between insureds and insurance companies, allowing the placing of the former in a more favourable stance, whilst a particular expectation of utmost good faith performance, due to their particular expertise in this field, is always placed upon insurers.

To that extent, there is no evidence limitation set out to construe insurance policies, other than being unlawful.

Mexican law does not contain the legal concept of warranties, unlike other jurisdictions including the United Kingdom and even other countries in Latin America.

The concept of conditions precedent does not have a direct comparison in Mexican law. However, some contractual covenants could encompass similar consequences by way of a mandatory condition to be fulfilled in order to trigger coverage under a policy, or even an exclusion that declines it.

Hence, should the insured fail to meet such conditions or fall under the scope of the exclusion, insurers would be entitled to avoid coverage due to that specific loss, yet would not be able to terminate the contract itself.

As mentioned before, the Mexican jurisdiction grants special protection for insureds before insurance companies. Once a dispute is triggered due to a coverage declination (deeming all kinds of insurance policies, including consumer contracts), insureds are entitled to conduct a claim, mainly, in three different ways:

  • through the user's special attention unit (Unidad Especializada de Atención a Usuarios - UNE), which mandatorily must have put in place every insurance company;
  • through CONDUSEF, which may foster negotiations or in some cases perform as an arbitrator; and
  • through litigation at courts.

Although there is no constitutional or legal provision that imposes insureds to previously exhaust the non-judicial ways (identified in bullet points one and two, above), once a claim is advanced at courts, the former would be excluded for further attempt.

Henceforth, in light of the LCS, all insurance claims are bounded by a two years’ time bar period under every kind of policy, except for life insurances, for which a five years’ term is applicable. As a general rule, those lapses are calculated as of the date of the loss occurrence and nuances are embedded in law for liability policies, which shall commence upon acknowledgement of the beneficiaries of the existence of their right to seek relief under a third-party policy, raising legal uncertainty with this regard.

Unlike insurance policies, reinsurance contracts disputes could be solved before judicial courts or through arbitration, which is often agreed in reinsurance slips.

Under Mexican law, regarding insurance claims, there is not much room to power disputes over jurisdiction and choice of law, perhaps, due to the following facts:

  • by law, insurance contracts shall mandatorily be entered before Mexican entities, binding exclusively the insureds vis-à-vis the insurance companies, regardless any further reinsurance placement of the risk;
  • the jurisdiction to file a claim is given, by general rule, due to the address of the defendant insurance company; and
  • the mandatory applicable law is the LCS.

Nevertheless, regarding reinsurance disputes, cedants and reinsurers have no limitation whatsoever to agree a specific jurisdiction and law under which disputes shall be solved, although it is suggested to prefer Mexican legislation for consistency purposes.

The process of an insurance claim is composed of two phases: non-contentious, which plays a key role, allowing both parties to exchange information towards the issuance of a first formal stance of insurers, which must be driven by upmost good faith due, and upon which the rest of the process would bear; and contentious, triggered when insureds expectations are not fully met within the first stage.

Dispute resolutions through litigation is, broadly, also divided into two phases: non-judicial, before the users special attention unit (UNE) that each insurance company must have put in place or the CONDUSEF; and in-court, which is composed by one or two instances, depending on the case worth, and a final constitutional appeal. Both alternatives begin by filing a formal claim writ, to be responded to by the defendant insurance company, encompassing the possibility for evidence production and a final ruling.

As mentioned before, the non-judicial alternatives may precede the in-court actions, but not vice versa.

Judgment enforcement is a matter of public order, for which they are deemed of utmost importance. Relevant regulation has been moving towards enabling an easy execution regarding insurance matters. Indeed, in the vast majority of cases in which insurance companies are sentenced to advance any indemnification, they comply with it voluntarily, since the judge is entitled to execute security titles that should mandatorily have in place or reserved.

Likewise, execution of foreign judgments can be done throughout Mexican courts, which are enabled to use coercive measures towards fulfilment, subject to a recognition process in which compliance to several requirements shall be analysed, and often advanced by defendants. Among others, due process, confirmation of its final effectiveness, absence of any simultaneous action before domestic courts, abuse of law and, moreover, reciprocity with the issuing country are required to enforce rulings.

Thus, the specifics to execute foreign judgments would rely upon the conventions and international treaties entered into with the courts’ issuing country, if any, for which a more accurate analysis of this situation must be performed on a case-by-case basis.

Quite often, parties (insureds vis-à-vis insurers and cedants vis-à-vis reinsurers) include arbitration clauses to divert any dispute resolution that may arise between them. These are enforceable under Mexican jurisdiction; although, compromise clauses agreement are regarded with a high legal standard approach by courts, as to ensure the parties’ will (ie, a special signature devoted to this covenant).

Every award has to be submitted at court for its recognition and further enforcement (exequatur), even when issued domestically. However, since Mexico is a signatory of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, foreign determinations enjoy the presumption of validity, and hence enforceability, when issued by a state-party.

Regardless of the jurisdiction where the arbitration award is issued, there is, unfortunately, a fashion within the Mexican legal backdrop of raising objections aiming to render them void, even though the grounds set forth by the domestic regulation are limited. Among others, grounds include unlawfulness of the arbitration agreement, abuse of law where the award was issued, failure to comply with proper service of arbitration acts, failure to properly appoint the arbitration panel, breach of the scope of the arbitration agreement and unenforceability of the award under the issuance jurisdiction, whose determination allows a further constitutional appeal.

Once it is recognised, any award is deemed to have equal effectiveness and enforceability as if a judgment.

Alternative dispute resolution (ADR) mechanisms have been fostered within the Mexican jurisdiction through the incorporation of legislative and specialised entities which, in both state and federal levels, deliver professional advisory in mediation and/or conciliation, in both non-judicial and in-court phases.

Although these mechanisms (excluding arbitration) are likely applicable to every commercial dispute, including insurance consumer contracts and reinsurance, they are not used to have high consideration, moreover, regarding the latter.

In light of Mexican legislation, default interests due to indemnification payment delay under an insurance contract are, perhaps, among the most severe, not only because of the rate itself, but also in the particular mechanism set forth to accrue them since the date of the loss.

Further, a situation arising in the Mexican legal framework is worth mentioning. Recent court precedents are aiming to impose on insurance companies, in addition to default interests, the provision of punitive or compensatory damages when refusing coverage, failing to timely meet indemnifications or not handling claims in a proactively fashion.

Digital solutions are being developed primarily to distribute auto-motor policies by way of simulators, purchase platforms and flexible products, in order to attract customers who are more acquainted with technological interactions. Although, as an emerging distribution channel, is growing at a slower pace compared to developed countries or those where agents or brokers are less prominent.

As mentioned, we foresee digital transformation and solutions playing a bigger role in the country’s insurance market over the next ten to 15 years, incorporating features such as blockchain, smart contracts, automation, artificial intelligence, among others, which will force insurers to become tuned-in to these changes.

The CNSF is considering the implementation of new regulation in order to increase the sophistication of the selling and distribution of insurance products in Mexico, encompassing a clear and effective supervisory scenario to protect both the consumers and the market environment.

Currently, however, no specific regulation has been issued in this regard.

Regarding global emerging risks, Mexico is not an exception, even if no relevant regulation has been issued to date.

Digitalisation has a well stamped a footprint in the insurance market, triggering interest that is expected to increase in coming years. Although they are already part of the market ecosystem, awareness of its disrupting capabilities and consequences (across the insurance process from risk assessment, to underwriting and claims) have not been fully taken into consideration.

Due to its geography, Mexico is a vulnerable target regarding natural catastrophes, including earthquakes and a variety of storms along both of its coastlines. Moreover, these “new” risks entail an increased possibility of devastation.

Extended longevity is powering several conversations, in both the public and governmental spheres, considering the impacts that may arise in the Mexican social security structure regarding retirement and health costs.

Healthcare insurance has suffered shortcomings due to the increase in life expectancy and the continuous rise in the medical costs, which has, in turn, been raising premiums over the last few years.

Despite the above, cyber risks areat the forefront of emerging risk, which has kicked started a myriad of discussions amid considerable digital attacks deployed in the last few years, and even days, eg, against the Mexican bank wire transfers system and Petróleos Mexicanos (Pemex) IT infrastructure. On the one hand, public and private entities are increasingly becoming aware of these threats regarding cyber insurance, whilst, on the other hand, insurers are discovering the existence of “cyber silent risks” embedded in other kinds of policies. The outcome of this tandem is expected to impact several aspects of insurance, worldwide, not only those related to premium assessments.

In an effort to keep pace with other jurisdictions, new and innovative products continue to surface in order to cover risks such as cyber, health and medical, professional liability, D&O, E&O, among others.

The appetite of the Mexican insurance market to underwrite the new energy-related risks has increased due to the amendments of the energy sector in Mexico. New wordings related to environmental risks, exploration and production of oil and gas, upstream, midstream and downstream have been introduced to the domestic market.

Growth has also been experienced in asset management-related products and services, as well as representations and warranties policies to cover and M&A transactions.

In our opinion, as mentioned before, Mexican courts have recently been relying on the new performance burdens imposed upon insurance companies, for which reasonable behaviour is expected to be met in a proper and timely manner. Insurers shall take into serious consideration this new potential exposure in case of breaching such expectations, as the outcome entails being sentenced to outlay indemnifications over the sum insured under the relevant policy, for instance, by way of punitive or compensatory damages.

Consumer protection bodies are certainly gaining traction and relevance, aiming to enforce policyholders’ human rights. These efforts had been coupled with the court precedents mentioned before.

The Solvency II-like regulatory scheme implemented in Mexico in 2015 has moved forward. Currently, Pillar 1 entailing new technical reserves and capital requirement regimes, has been completed in almost all required entities.

Regarding fulfilment of Pillars 2 and 3, insurance companies are currently working on compliance with their control requirements as they develop internal audit plans that include different levels of specialisations including risk management, actuarial activities and anti-money laundering. Mexico’s insurance regulator requires insurance companies to file nine regulatory reports. So far, insurers have invested significant resources in improving the quality of their information, data governance, reporting automation systems and incorporating statutory accounting principles for insurance companies. Hence, the implementation of these aspects are underway.

Colin Vega Fletes

Boulevard Manuel Ávila Camacho 76 – Piso 2
Lomas de Chapultepec
11000 Ciudad de México

+(5255) 5540 2932

contacto@colinvegafletes.com www.colinvegafletes.com
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Trends and Developments


Authors



Santamarina y Steta has more than 70 years of experience and has evolved alongside clients and international markets to enhance the firm's presence in Mexico. The firm has in-depth knowledge and understanding of local authorities, practices and laws, and offers a one-stop-shop ensuring reliable, multidisciplinary, integrated and comprehensive approaches.

Mexico’s current insurance and surety industries are formed by 103 insurance companies and 11 surety companies, for an aggregate of 114 licensed insurance and surety companies. The surety market is also comprised by six insurers specialized in surety insurance. Out of the 114 insurance and surety companies, 51 are entities fully controlled by foreign insurers (named under the Mexican regulation as Foreign Financial Institutions (FFI) – Instituciones Financieras del Exterior) from countries with whom Mexico has a commercial or similar treaty in effect allowing foreign capital to invest in Mexican financial institutions.

With a participation of 41% in the portfolio of premiums written, life insurance is certainly the most relevant line of business in the Mexican insurance industry, followed by car insurance, with a market participation of 18.8%, and medical insurance (accidentes y enfermedades) representing 14.8% of the premium written. The top five insurers by written premium (of which four are FFI) hold 42% of the total premium.

Mexico’s regulation is open for first-tier foreign reinsurers. Preliminary information at hand shows that there are 238 foreign reinsurers enrolled in the Mexican General Registry of Foreign Reinsurers (Registro General de Reaseguradoras Extranjeras) to reinsure risks underwritten by Mexican domestic carriers. In addition, there are ten atomic pools enrolled in the aforesaid registry, formed by various foreign reinsurers.

In terms of developments in the Mexican insurance and surety markets, the following are the most relevant matters.

Adoption of the United States-Mexico-Canada Agreement to Substitute the Current North America Free Trade Agreement in Effect Since 1994

Before the North America Free Trade Agreement (NAFTA), effective since January 1994 in North America (United States, Mexico and Canada), Mexico’s insurance regulation was of a far more constricting nature than what is today due to a policy to protect domestic market maintained by the Mexican government that, with respect to insurance and other regulated and non-regulated activities, prevented foreign investment from having a majority, or even an interest, in certain economic activities in Mexico.

Along with the adoption of the NAFTA, Mexico’s insurance and surety regulation, among others, was amended to provide for a specific regulation of foreign investment (the FFI's) in Mexican-domestic insurance and surety carriers. Under such new basis, eligible investors from countries with whom Mexico entered into a treaty or a similar agreement allowing foreign investment to have an interest in Mexican financial institutions (subject to prior regulatory approval) are allowed to hold controlling stake in Mexican financial institutions vis-à-vis the investment coming from other countries with no treaty with Mexico.

The opportunity to be allowed to hold a majority position has since changed as of early 2014. It is now standard that foreign investment, whether from a country with a treaty with Mexico or not, is welcome to hold a controlling stake in insurance and surety carriers, subject to a prior regulatory approval from the Mexican National Insurance and Surety Commission (Comisión Nacional de Seguros y Fianzas).

Due to certain remarks from NAFTA countries, a new United States-Mexico-Canada Agreement (UMSCA) was drafted and agreed to on 30 November 2018, in order to substitute the NAFTA, but the corresponding ratification of such agreement under the rules of each jurisdiction which is required in order for it to be binding on the parties remains pending. As this participation is being prepared, new revisions have been agreed upon by the three USMCA countries, with only the corresponding ratification by each country, in accordance with their respective regulation, remaining.

The perspective towards the investment by USMCA’s countries in financial institutions in Mexico does not change vis-à-vis the provisions of the NAFTA. Moreover, the treaty maintains critical provisions that already exist in the NAFTA, such as those allowing foreign governments to adopt prudential measures to safe-keep their respective financial market, which proved to be of the utmost importance in light of the 2008 financial crisis, during which some foreign financial institutions received economic support from their governments in exchange for equity, resulting in the foreign government holding an indirect participation in Mexican carriers - a situation at that time prohibited under Mexican law had it not been for the NAFTA and other similar treaties.

Due to such crisis and its indirect effects in Mexico, the domestic regulation was amended in early 2014 to permit foreign governments to hold indirect participation in Mexican carriers as a temporary measure for prudential reasons to safe-keep the financial conditions of the respective country, among other justified reasons set forth in Mexican law.

Brexit

Since October 2000, Mexico has been part of the “Economic Partnership, Political Coordination and Co-operation Agreement between the European Community and its Member States, of the one part, and the United Mexican States, of the other part” (“EU-Mexico Trade Agreement”) of which the United Kingdom is a part. This agreement forms a series of international trade agreements that followed the NAFTA, entered into by Mexico with other countries to foster trade and fair competition among them.

Similarly to the NAFTA and the USMCA, the EU-Mexico Trade Agreement, in Chapter III (Financial Services), contains a series of provisions allowing investments in Mexican financial institutions from the countries of the European Union (EU), such as insurance and surety carriers, pursuant to which financial entities from the United Kingdom acquired interest in Mexican insurers and other financial entities of Mexico. As it is widely known, the United Kingdom's departure from the EU, also known as Brexit, is on its way and, as a result, investments from the United Kingdom would no longer be eligible to be considered as falling under the umbrella of the EU-Mexico Trade Agreement once Brexit is effective and in the absence of a substituting agreement between Mexico and the United Kingdom.

Anticipating this situation, certain institutions of the United Kingdom with interest in Mexican insurers and other financial institutions have undergone a process, or are assessing the possibility, to change the nationality of the entity holding equity in the Mexican carrier for that of another country of the EU, in order to maintain the status of the investment. While there are other ways to address the situation considering that, as previously mentioned, since January 2014, foreign investment, whether or not from a country with whom Mexico has a trade agreement, can now hold majority interest in Mexican insurers and surety companies.

Coverage Contracted by PEMEX for the Period 2019-21

In 2019, perhaps the largest policyholder and insured in Mexico, Petroleos Mexicanos (PEMEX, for its Spanish acronym), a Mexican state company, (empresa productiva del estado), renewed its two-year comprehensive insurance coverage policy from the same insurance carrier for a third consecutive period in a row to cover the years 2019 through 2021. While it is known that the premium written exceeds the amount of USD500 million dollars, the actual figure is currently unknown. As a reference, the premium written by the same insurer for the period 2017-19 was USD546 million dollars.

The Mexican regulator has been cautious to allocate the premium written from PEMEX through the whole two-year period, as its large amount may distort the statistics with which the evolution of the Mexican insurance market is evaluated.

Human Rights and Insurance

In recent years, the Supreme Court of Justice in Mexico has issued judicial criteria emphasising the insured's right to be fully informed prior to contracting an insurance policy, but without limiting contractual freedom in regards to insurance and surety.

To understand this, it is important to emphasise that the Mexican Insurance Contract Law (Ley sobre el Contrato de Seguro) grants the insured a 30-day period to review and make comments to the form of insurance policy delivered by the carrier as well as to request adjustments in the event that the terms of the policy do not correspond to those requested by the insured. With this, the law aims to provide a framework of protection for the insured in order to guarantee the issuance of an insurance policy on the terms and for the specific purposes requested. However, prior to the Supreme Court's interpretation, the 30-day period indicated above was considered "fatal", so once the period expired, the insured forfeited any opportunity to modify the respective insurance policy.

The Supreme Court of Justice in Mexico has now established that the insured's right to request the correction of the policy will expire in 30 days, but only with respect to information that is known to the policyholder/insured at the time of contracting the policy. This means that if the policyholder fulfilled their obligation to provide the insurer with all the information the insurer requested and yet the policy has an inconsistency with the offer made by the insurer (for example, that the insurance offered is not compatible with the insured as a result of the insurer's failure to advise the insured properly), this matter can be claimed before the correspondent authorities even after the 30-day period indicated above. Conversely, should the policy be in conformity with the offer made and information provided by the insured, then the latter will only have the aforementioned 30-day period to request corrections to the policy issued.

Note that while the criteria of the Mexican Supreme Court of Justice above outlined is currently non-binding for lower judges, it certainly sets forth the basis for the resolution of similar cases which may lead to the creation of binding jurisprudence.

Santamarina y Steta, S.C.

Campos Elíseos 345
2nd and 3rd Floors
Chapultepec Polanco
11560
Mexico City

+52 55 5279 5400

gfinkel@s-s.mx www.s-s.mx
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Law and Practice

Authors



Colin Vega Fletes is a boutique law firm specialised in insurance and reinsurance, bonds, dispute resolution, litigation and arbitration, legal co-operation, crisis and risk management. With over 20 years’ experience, the firm's lawyers have been providing business-oriented legal assistance on a pre-emptive basis, upon complex claim disputes, advising insurance, reinsurance, bonding and brokerage companies, as well as policy holders and beneficiaries, before courts or through arbitration, in Latin America, specifically Mexico. Since its foundation, Colin Vega Fletes has gathered experience in handling high-profile cases involving political, media and social comprehensive approaches, and nurtured the versatility to co-operate with local and international firms, as well as public and private entities, in North American, Latin American, European and Asian jurisdictions. This has powered the establishment of the firm's first overseas office in Madrid.

Trends and Development

Authors



Santamarina y Steta has more than 70 years of experience and has evolved alongside clients and international markets to enhance the firm's presence in Mexico. The firm has in-depth knowledge and understanding of local authorities, practices and laws, and offers a one-stop-shop ensuring reliable, multidisciplinary, integrated and comprehensive approaches.

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