Mexico: Amendments to the Mexican Insurance Law and Insurance Contract Law

By : Yves Hayaux-du-Tilly L. and Henri Capin Gally

On March 7, 2006 the Senate (Senado) of Mexico approved a Bill ("Bill") amending the General Law of Insurance and Mutual Companies (Ley General de Instituciones y Sociedades Mutualistas de Seguros) ("Insurance Law") and the Insurance Contract Law (Ley del Contrato de Seguro) ("Insurance Contract Law") that had previously been approved by the House of Representatives (Cámara de Diputados). The Bill will become effective the day following its publication in the Official Gazette of the Federation.

The main purpose of the Bill is to (i) regulate mortgage credit insurance (seguro de crédito a la vivienda) and financial guarantee insurance (seguro de garantía financiera); (ii) transform the legal framework currently applicable to the participation of foreign governments and foreign official entities in the capital stock of Mexican insurance companies; (iii) strengthen the legal regime applicable to the distribution of insurance products through non-insurance agents; (iv) modify the legal framework applicable to capital reserves; and (v) establish additional fines. The Bill also amends certain provisions of the Insurance Contract Law, mostly related to claims-made in civil liability insurance.

This Article focuses on the most relevant aspects of the Bill with amendments to the Insurance Law and Insurance Contract Law.

The Insurance Law will create the mortgage credit and financial guarantee insurance lines of business. In order to operate one of said lines of business, Mexican insurance companies must be expressly authorized by the Ministry of the Treasury and Public Credit (Secretaría de Hacienda y Crédito Público) (the "SHCP") to carry-out damages insurance operations in one of the credit insurance, mortgage credit insurance or financial guarantee insurance line of business.¹ Mortgage credit insurance and financial guarantee insurance will be regulated by general rules issued by the SHCP.²

Mexican insurance companies authorized by the SHCP to operate the credit insurance³, mortgage credit insurance or financial guarantee insurance line of business will not be authorized to carry-out insurance operations in any other line of business.⁴

The Amendments define mortgage credit insurance and financial guarantee insurance, as follows: (i) mortgage insurance is the insurance covering payments for breaches of borrowers under credits to acquire housing granted by financial intermediaries or entities dedicated to finance housing; and (ii) financial guarantee insurance is the insurance covering payments for breaches of issuers of securities, negotiable instruments or documents subject to public offerings or intermediation in the securities market.⁵

The Amendments also contain an express prohibition to contract credit insurance, mortgage credit insurance or financial guarantee insurance with foreign insurance companies when the insured is subject to Mexican law. The foregoing will require that all credit, mortgage credit and financial guarantee insurance covering individuals subject to Mexican law must be contracted with Mexican insurance companies incorporated under Mexican law and licensed to operate in Mexico the credit, mortgage credit or financial guarantee insurance line of business, respectively.

This prohibition does not apply to individuals or corporate entities that contract financial guarantee insurance with a foreign insurance company, vis-à-vis, investments in securities, negotiable instruments or notes that are only offered in foreign markets. In this regard, it will be of outmost importance to carefully review the structure of all financings that include a public offer of securities and a corporate or other guarantee from non-Mexican insurance companies to avoid having guarantees that may be deemed to be financial guarantee insurance under Mexican law.

The Amendments also prohibit that Mexican insurance companies that carry-out operations in the mortgage credit insurance and financial guarantee insurance lines of business enter into insurance agreements with financial intermediaries if: (i) the financial intermediary and the Mexican insurance company are members of the same financial group, (ii) the financial intermediary has participation in the capital stock of the Mexican insurance company, (iii) the Mexican insurance company has participation in the capital stock of the financial intermediary, or (iv) the Mexican insurance company and the financial intermediary are controlled by the same holding company.⁶

Article 29, Section I Bis, has been revised to provide that foreign entities that act as "authorities" may not participate in any manner whatsoever in the capital of Mexican insurance companies.⁷ The Insurance Law fails to define what must be understood by "authorities" and the cases in which it may be considered that a foreign authority "participates" in the capital of a Mexican insurance company. In our opinion (a) an "authority" is an entity that may issue binding resolutions and the compliance with said resolutions may be enforced by the lawful use of the public force; and (b) in order to "participate" in the capital of a Mexican insurance company, the respective entity must have corporate and economic rights as a shareholder of the Mexican insurance company either directly or indirectly through third parties.

The amendment under the Bill substitutes a much broader prohibition pursuant to which foreign governments or foreign official entities were not allowed to participate in the capital of Mexican insurance companies directly or indirectly (through an interposed person).

Article 75, Section II of the Insurance Law has also been revised to allow the SHCP to revoke the license of a Mexican insurance company only if the Mexican insurance company establishes relationships of dependence with foreign governments or foreign official entities.⁸ Although the Insurance Law and the Bill are silent, vis-à-vis, the concept o "relationship of dependence", in our opinion, there is a "relationship of dependence" only when the foreign government or foreign official entity has financial or corporate control or has the capacity to influence, directly or indirectly, the decisions of the Mexican insurance company.

Mexican insurance companies must inform to the National Insurance and Bonding Commission (Comisión Nacional de Seguros y Fianzas) ("CNSF") any case in which a foreign entity that acts as authority participates directly in the capital stock of a Mexican insurance company In case the Mexican insurance company fails to inform the CNSF of the foregoing, it would be subject to a fine of up to $486,700 Pesos (approximately US$45,250 Dollars)⁹; and the foreign "authorities" participating in the capital of the Mexican insurance would also be subject to a fine of up to $973,400 Pesos (approximately US$90,500 Dollars).¹⁰

The direct or indirect acquisition of shares by foreign entities that act as "authorities" may be nullified, in which case these entities may not exercise any right, corporate or other rights stemming from the shares of the Mexican insurance company.¹¹

Article 41 of the Insurance Law provides that entities without a license to act as insurance agents may receive compensation for the distribution of non-negotiable insurance contracts on behalf of Mexican insurance companies; provided that these are not pension insurance products under Mexican social security laws (the "Distributors").¹² Distributors may be compensated for the aforementioned services in the terms and subject to the conditions of service agreements registered with the CNSF.

Financial intermediaries subject to the inspection and surveillance of Mexican regulatory authorities that distribute insurance products under Article 41 of the Insurance Law 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:

(i) In case the insurance products offered to the public contain a savings or investments component, the Mexican insurance company responsible for developing such products must register with the CNSF a specialized training program for the employees, representatives and attorneys-in-fact of the respective Distributor;¹³ and

(ii) For insurance products different to those referred to in Section (i) above, the Mexican insurance company must agree in the service agreement entered into with the Distributors the training programs for employees, representatives and attorneys-in-fact of the Distributor.¹⁴

Distributors that are not financial intermediaries and/or are not 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 rules¹⁵:

(i) 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 Mexican insurance companies or evaluated and certified by the CNSF¹⁶; and

(ii) The specific requirements and measures to be taken to avoid conflicts of interest which may arise when one or more Distributors are under the financial or administrative control of one company or a group of companies, and distribute insurance products for more than one Mexican insurance company.¹⁷

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

Reserves for ongoing risks which must be created and maintained by Mexican insurance companies that offer pension or survival insurance for age, early retirement or retirement under private schemes that complement social security, will be formed as follows: (i) the expenses that arise from the administration of the portfolio in which the funds of the pension or survival insurance premiums are invested, and (ii) the mathematical reserve of premiums that correspond to the policies in force at the time of their appraisal. The mathematical reserve must now be calculated with actuarial methods based on generally accepted principles that must be registered by the Mexican insurance company with the CNSF pursuant to General Rules to be issued by same.¹⁸

The Amendments provide that Mexican insurance companies must now invest the total amount of their technical reserves, resources and assets, and capital reserves pursuant to general rules to be issued by the SHCP.¹⁹

It will be considered that Mexican insurance companies fail to cover technical reserves, resources and assets or minimum capital reserves if they do not have enough resources to back them up or when the resources are not invested pursuant to the investment regime referred to in the previous paragraph or as otherwise provided by the Insurance Law.

The CNSF will have authority to impose fines to Mexican insurance companies when they fail to cover technical reserves, resources and assets or minimum capital reserves. The fines will be enforced for deficits in the technical reserves, resources and assets or minimum capital reserves. The amount of the fines will be calculated by multiplying the deficit in a given period by the average equilibrium inter-banking interest rates (tasas de interés interbancaria de equilibrio) published in the Official Gazette of the Federation.

Mexican insurance companies were not allowed to create any lien on their property. Under the Bill, Mexican insurance companies will be authorized to create liens on cash or bonds as it may be required to comply with their obligations under future or option agreements, securities, lease of securities (reportos) and loans of securities carried-out pursuant to general rules issued by the CNSF.²⁰

When the CNSF notices that the technical reserves, investments of the technical reserves, minimum capital reserves or minimum paid-in capital stock of a Mexican insurance company does not comply with the requirements set forth by the Insurance Law, the Mexican insurance company will have to submit a plan to the CNSF with the steps to reconstitute the deficiencies mentioned herein. Once the plan is approved by the CNSF, the Mexican insurance company must reconstitute its deficiencies within a specific period set forth in the plan. If the insurance company fails to comply with the plan within the period set forth therein, the CNSF will give a notice to the SHCP of the failure of the Mexican insurance company to comply with the plan.

Upon receiving the notice from the CNSF, the SHCP may no longer grant the Mexican insurance company another period of 30 (thirty) to 60 (sixty) days to reconstitute its deficiencies, as it did prior to the Bill. Instead, the SHCP will initiate a proceeding to revoke the license of the insurance company.²¹

In addition, if the Mexican insurance company fails to reconstitute its financial deficiencies during the periods set forth under the Insurance Law or fails to comply with any other requirement set forth under the Insurance Law, the CNSF may now enforce any of the following sanctions: (i) refrain from registering new insurance products for that insurance company; (ii) suspend the distribution of profits to the shareholders’ of the Mexican insurance company, (iii) totally or partially decrease the issuance or retention of premiums and the acceptance of reinsurance operations; (iv) call to a General Shareholders’ Meeting or a Board of Directors Meeting of the insurance company to discuss the financial situation of the insurance company, in which an officer of the CNSF may participate to take note on the financial situation of the insurance company, or (v) differ the payment of the principal and/or interests of the securities issued by the insurance company or, in its case, order the acceleration on the conversion of debentures into shares.

The CNSF will be now required to provide assistance and legal services to its officers, members of its Governing Board and auditors in connection with liabilities arising from their duties. The legal assistance services will be provided with funds allocated by the CNSF for such purposes pursuant to General Guidelines to be approved by the Governing Board of the CNSF.²²

The Amendments prohibit Mexican insurance companies from registering in their Stock Registry Book (Libro de Registro de Acciones) any transfer of shares (i) of entities acquiring shares that are considered an "authority"; and (ii) of acquiring entities that fail to observe the regulations of the Insurance Law in connection with transfer of shares.²³

If the aforementioned prohibition is not observed (i) any party that is affected by the unlawful transfer of shares may request the annulment of such transfer before a competent court, in which case the parties that unlawfully acquired such shares may not exercise the corporate or economic rights conferred thereunder; (ii) the Mexican insurance company must inform the foregoing to the CNSF and in case the Mexican insurance company failed to inform the CNSF of the foregoing, it would be subject to a fine of up to $486,700 Pesos (approximately US$45,250 Dollars); and (iii) the foreign entities that acquired the shares of the Mexican insurance company in breach of the prohibit referred to herein may not exercise any rights, corporate or others, granted thereunder and would be subject to a fine of up to $973,400 Pesos (approximately US$90,500 Dollars).

The CNSF may now fine the persons that provide false information regarding the capacity (i.e. shareholder, attorney-in-fact, trustee, etc.) in which they represent a Shareholder in a Shareholders’ Meeting of (i) a Mexican insurance company, (ii) the holding company of a Mexican insurance company, or (iii) the entity that controls a Mexican insurance company. The fine amounts to 15% of the value of the shares with which the above-mentioned persons participated in the Shareholders’ Meeting.

Likewise, the CNSF may now fine Mexican insurance companies that grant additional benefits or any other benefits before the term provided for in a pension agreement to persons that in the future may become insured parties or beneficiaries under such agreement.

Article 145 Bis of the Insurance Contract Law was amended in 2002 to include the "claims made" concept; however, the final text of Article 145 Bis did not accomplish the goals for which it was created.

The Bill amends Article 45 Bis of the Insurance Contract Law to improve the legal framework for claims made and occurrence made in civil liability and permits Mexican insurance companies to take responsibility in civil liability insurance policies: (i) for events occurred during the life of the respective insurance policy or the year before, provided that the insured or Mexican insurance company receives a claim for the first time and in writing during the life of the policy, or (ii) for events occurred during the life of the insurance policy, provided that the insured or Mexican insurance company receives the claim for the first time and in writing during the life of the policy or within one year following its termination. The amendment provides that the one year periods set forth therein may be extended but not reduced.

Furthermore, the Bill provides that the temporary limitation on coverage may be opposed before the insured and third party suffering the damage even in case they do not know about the existence of the insurance, the occurrence of the casualty or the materialization of the damage.

Finally, the Bill expressly provides that the accumulation of amounts insured will be subject to the general regulations on accumulation of amounts insured under the Insurance Contract Law.

Should you have any question or would like to receive additional information in connection with the Amendment to the Mexican Insurance and Insurance Contract Laws, please do not hesitate to contact any of the partners of the Insurance and Reinsurance Practice of Jáuregui, Navarrete y Nader.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.