Although all of the Latin American jurisdictions had notable regulatory and market developments in 2008, Mexico stands out as particularly significant given the size of the market involved.
Steady Growth and Development
Mexico remains the second-largest insurance market in Latin America, with approximately 25% of the region's gross premiums. As of the end of the first quarter of 2008, the Mexican insurance market was made up of 95 companies, with 47 of those companies majority-capitalized from abroad. 52 of the companies include life insurance operations, while 61 companies maintain non-life operations. Life insurance premiums rose 16.4% over the previous year, while liability insurance premiums grew by 5.2 (11.6% when excluding auto insurance).
Perhaps the most notable aspect of the Mexican insurance market in 2008 was the absence, outside of one particular high profile claims dispute, of any particularly significant developments in the market, which was instead characterized by steady growth and development. That being said, the Comision Nacional de Seguros y Fianzas ("CNSF") did issue several circulars of interest to foreign-based insurers and reinsurers, including updated regulations governing minimum ratings for registration as a foreign reinsurer and adjusting the reporting requirements of reinsurers operating in the market.
First, on April 3, 2008, CNSF announced new requirements for periodic reporting by reinsurers of financial information. Under the regulation, reinsurers are required to file a separate annual business plan for each line of reinsurance offered, and are further required to file reports three times a year regarding their operations (again, with a separate report for each line of business). The business plan must include a strategic plan and statistical information concerning risks and amounts assumed and premiums received, while the reports must include certain information regarding reinsurance contracts realized during the relevant period. The stated purpose of these new requirements is to permit the CNSF to better monitor and ensure the financial stability of the reinsurance industry.
Second, on July 14, 2008, CNSF issued new minimum rating requirements for foreign reinsurers seeking registration to operate in Mexico. The new minimum ratings are B+ (A.M. Best); BBB- (Fitch); Baa3 (Moody's); and BBB- (Standard & Poor's). Not surprisingly, if the applying reinsurer cannot meet the minimum ratings requirements, it will not be registered on the General Registry of Foreign Reinsurers and will not be permitted to conduct reinsurance business in the country.
Finally, as to the unfortunate claims dispute issue, it serves as a reminder that, while the Mexican insurance market may appear modernized and stable, it is not without its risks and local flavor. On April 25, 2008, Norberto Luis Ferrara Perini, the head of AIG's Mexican subsidiary, and Nestor Diaz Barriga, an outside counsel for the company, were arrested based upon a criminal fraud complaint filed by TV Azteca arising from a commercial policy coverage dispute. Although TV Azteca subsequently withdrew the criminal complaint, it did so only after the gentlemen had spent a number of days in prison and the insurer had agreed to settle the coverage dispute. Prior to the arrest, the insurer had maintained that the insured's coverage claim was without merit.
Conclusion: Cautious Optimism
Trends in the Latin American economies generally and insurance markets specifically indicate that insurance and reinsurance companies with a dedicated strategy and experienced advisors can take advantage of tremendous opportunities in the region. On the other hand, however, the undertaking of activities in the region without a coherent plan or full understanding of the local regulations and markets can lead to unprofitable operations and significant potential enforcement issues with local regulators.
Given the sorts of local idiosyncrasies that exist in many of the Latin American markets, and the frequent fundamental changes such as those seen in the past year in regulatory requirements, failure to understand and closely monitor market and regulatory developments can impact both a company's profitability and its continuing right to conduct business in the region's jurisdictions. It is therefore imperative that insurance and reinsurance companies operating or considering expansion into the region obtain the assistance of experienced and knowledgeable advisors.
If you would be interested in learning more about these issues and/or insurance and reinsurance developments in other Latin American countries in 2008, we would like to invite you to our free webinar on January 21, 2009 entitled "(Re)emerging Mercados: Significant Recent Developments in the Latin American Insurance and Reinsurance Markets." To view an invitation and register for this event, please click here: http://www.insurereinsure.com/BlogHome.aspx?entry=1279.
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.