The upbeat mood towards implementing Solvency II in Mexico is in stark contrast to Europe where, as Life Insurance International (LII), issue 272 reported, although the implementation of Solvency II is due for 1 January 2014, whether this deadline will be met is fraught with uncertainty.
Manuel Aguilera Verduzco, president of the National Insurance and Surety Commission in Mexico, (CNSF), says: “Since adopting Solvency I, we have updated our formulas several times for calculating regulatory capital requirements in order to become more risk-sensitive.
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“We intend to implement a Solvency II system that will have standard formulas and will also allow for internal modelling for solvency margins. We expect to implement Solvency II in Mexico in January 2014, and this will include an Own Risk and Solvency Assessments (ORSA) system similar to the ORSA system introduced in Europe as part of Solvency II. We already have a reduced form of ORSA in Mexico.”
“Adopting Solvency II means that Mexican insurers will have to increase their regulatory capital, but the expected new capital requirements are likely to be modest,” says Franklin Santarelli, managing director, Latin America Financial Institutions at Fitch Ratings.
Eduardo Recinos, senior director, Northern Latin America, Insurance, at Fitch Ratings, adds that one impact of Solvency II will be a need for insurers to invest in new IT systems so they can more effectively measure their risks.
“The CNSF and the Association of Mexican Insurance Companies (AMIS) have been working together to evaluate the effect of Solvency II on Mexican insurers,” Recinos adds. “The regulator will be flexible, so that there won’t be a negative impact on insurers from adopting Solvency II.”
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By GlobalDataIn 2008, the CNSF and AMIS began work on a new insurance law, which is now in final draft form. The Insurance and Surety Law (LISF), which is expected to be submitted to Mexico’s Congress before the end of the current legislative session on 1st December 2012, will provide a legal framework for implementing Solvency II in Mexico.
“The new law will also create a new line of business for insurers,” says Verduzco. “Currently, only specialist non-insurers – known as surety (fianza) companies – are allowed to issue surety bonds for government projects. In Mexico, any company undertaking work for the government is required to have a surety covering it against non-completion of the project. The new law will allow insurers to offer sureties in competition with the specialist surety companies.”
“We don’t anticipate any problems with the law being passed by Congress,” says
Aguilera Verduzco. “It is a very technical piece of legislation that is very close to international insurance standards. Also, we don’t envisage any problems in Mexico migrating to Solvency II in January 2014.”
Daniel Gerber, co-chair of US law firm Goldberg Segalla’s Global Insurance Services Practice Group, explains: “Given Mexico’s commitment to implementing Solvency II and the leadership show by the regulator, I am optimistic Mexico will successfully implement these new reforms.”
Mexican banks and insurers are not yet allowed to use international financial reporting standards (IFRS) for regulatory purposes, and are instead required to use MFRS (Mexican Financial Reporting Standards).
While Solvency II is one of the most onerous changes facing insurers, there is also a drive globally towards insurance accounting rules convergence.
“There are some regulatory accounting standards in Mexico that differ from international financial reporting standards for example, our treatment of catastrophic reserves,” says Aguilera Verduzco.
“Our strategy is to move to convergence with international accounting standards, and, as these international standards converge with IFRS, Mexico will also converge with IFRS. We see Mexico adopting IFRS for insurance in 2013-2014.”
Mexico’s regulatory structure
In Mexico, all insurance regulations are supervised at the federal level. Insurers have to comply with two insurance laws: the Insurance Contract Law (LCS), which regulates the sale and distribution of insurance policies; and the General Law of Insurance Institutions and Mutual Insurance Companies (LGISMS).
“LGISMS regulates who can be licensed to sell insurance products, and how insurers must invest their assets,” says Yves Hayauxdu-Tilly, a partner at UK-Mexican law firm Nader, Hayaux & Goebel. “It also addresses corporate governance issues, and defines what reserves insurers must hold.”
Insurance companies are regulated by Mexico’s Ministry of the Treasury and Public Credit (SHCP), through the CNSF.
“The SHCP sets insurance industry policy and introduces primary regulation, with strong input from the CNSF, which issues secondary legislation and is responsible for supervising insurers,” says Gerber.
The CNSF has the power to fine non-compliant insurers, adds Hayaux-du-Tilly.
“The SHCP has to approve license applications from new domestic and foreign insurers,” says Verduzco.
“The Ministry gets the CNSF to perform a technical evaluation of insurers seeking licenses, which includes examining its business plan.”
“An insurer requesting a license must deposit with Nacional Financiera, a Mexican- government owned development bank, an amount equal to 10% of its minimum paid-up capital,” says Aureliano Gonzalez-Baz, a lawyer with Mexican law firm Bryan Gonzalez Vargas & Gonzalez Baz. “The deposit is reimbursed when the insurer starts operations, or if it is denied a license.”
“In 2002, Mexico introduced a regulation that prohibits insurers from offering both property and casualty (P&C) and life insurance,” says Verduzco.
“However, the regulation only applies to new insurers that have been licensed in Mexico since 2002. Older insurers that already offered both P&C and life policies were allowed to continue in both markets. It would have been unconstitutional to force them to choose between P&C and life insurance.”
Every year, SHCP sets the minimum paidup capital requirement for different insurance product lines such as life, property and casualty and health and accident.
“The purpose of the minimum paid-up capital requirement is to ensure licensed insurers are of an adequate size for the Mexican market,” says Verduzco.
The minimum paid-up capital requirement is calculated in inflation index currency units called UDIs that are investment units.
“UDIs were set up many years ago to allow for high inflation,” says Hayaux-du-Tilly. “Each year, the SHCP publishes the official Mexican Peso exchange rate for UDIs.”
In 2012, the minimum paid-up capital requirements for life insurance product lines and for health and accident lines are respectively 6.8bn UDIs and 1.7bn UDIs.
Insurers are required to maintain a minimum solvency margin, which measures the difference between an insurer’s regulatory risk capital and its liabilities.
According to Adriana Rubio, PwC Mexico’s Insurance Practice leader, and Emma Gabriela Gasca, PwC Mexico’s Insurance Practice senior manager, the solvency margin is based on an insurer’s operating risks as well as factors, such as its last 12 months of written premiums, its last 12 months of technical reserves, its last 12 months of total claims, its last 36 months of incurred losses, and the credit rating of its reinsurer.
“Mexico’s solvency margin and technical reserves requirements are very stringent,” says Recinos. “If an insurer’s solvency margin has a deficit, then its minimum paid-up capital will have to be increased.”
Distribution
Only insurance companies registered with the SHCP are allowed to underwrite insurance policies, including microinsurance.
“Mexico follows the broker model for selling insurance,” says Hayaux-du-Tilly. “Brokers and agents must be licensed by the CNSF, and their staff are required to take exams.”
However, bancassurance is an important distribution channel in Mexico.
“Banks and non-regulated entities such as retailers can only distribute insurance products that are non-negotiable,” says Hayauxdu- Tilly.
“These are products such as car insurance, credit insurance, and basic life insurance, where the customer’s only decision is whether or not to pay the premium. Only licensed brokers and agents can sell policies where advice or negotiations are required because of the product’s complex nature.”
Although several banks such as Banamex and BBVA Bancomer own insurance subsidiaries, other Mexican banks have been divesting their insurance subsidiaries, because of the Basel II rules governing banks that own insurers, says Hayaux-du-Tilly.
For example, in March 2012 HSBC sold its Mexican P&C insurance arm to AXA, which now distributes its products via HSBC branches.
“Banks either have joint ventures with insurers, such as Banorte with Italy’s Assicurazioni Generali, or they just distribute the insurers’ products in their branches,” Hayaux-du-Tilly says.
According to PwC’s Rubio and Gasca, the real year-on-year growth rate for the accident and health insurance sector was 7% in 2011, while auto-related insurance grew by 7.3%, and other P&C lines by 23.6%. “Mexico’s non-life insurance sector has been enjoying respectable top-line growth,” they state.
The CNSF also has specific rules governing microinsurance sales.
For example, agents selling microinsurance products do not have to be evaluated and certified by the CNSF, as long as they have received appropriate training from the respective insurer.
Microinsurance premium payments must have a 30-day grace period, and insurance contracts must be written clearly and precisely.
For both group and personal life or accident and health microinsurance, the sum insured must not exceed the annualised minimum wage in Mexico City by four times.
Monthly premiums for P&C microinsurance must not exceed the annualised minimum wage in Mexico City by 1.5 times.
Mexico’s life insurance market is expected to increase from MXN 124.9bn ($9.7bn) in 2011 to MXN 191bn in 2016 at a compound annual growth rate of 9.3%, according to a report, which is available at the Insurance Intelligence Center.
Insurance Intelligence Center. The report is called Life Insurance in Mexico, Trends and Opportunities to 2016: Tax Incentives to Continue to Encourage Investment in Life Insurance Retirement
Products.
It explains that Mexico’s growing middle class population, a rise in disposable income and a growth in the awareness of life insurance were among the growth drivers for the Mexican life insurance market between 2007-2011.
The low penetration of life insurance in Mexico is set to help drive the Mexican life insurance market from 2012-2016.
