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Mexican Insurance Market: developments and new regulations
National Association of Insurance CommissionersSummer National Meeting
Philadelphia, PAJune 11, 2002
Mexican Insurance Market: developments and new regulations
Manuel Aguilera-Verduzco
Insurance and Surety National Commission (CNSF-Mexico)
President
Contents
1. The Mexican Insurance Market in 2001
2. Recent reforms to the Mexican Insurance Legislation
3. Outlook of the Mexican Insurance Industry
Real growthwritten premiums
7.5%
-13.8%
21.1%
7.7%
12.7%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1993 1994 1995 1996 1997 1998 1999 2000 2001 Mar-02
Source: CNSF-SHCP
7.7% 6.7%
-3.8%
10.5%
21.1%
7.0%9.3%
12.5%
7.5%
-13.8%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1993 1994 1995 1996 1997 1998 1999 2000 2001 Mar-02
Life PensionsHealth and Accidents P&C without AutoAuto Total
Real growthcontribution by line of business
Source: CNSF
7.7% 6.7%
-3.8%
10.5%
21.1%
7.0%9.3%
12.5%
7.5%
-13.8%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1993 1994 1995 1996 1997 1998 1999 2000 2001 Mar-02
Life Non-Life Total
Real growthcontribution by line of business
Source: CNSF
Growth dynamicsmain factors
Market maturity
MarketLiberalization
Macroeconomic Environment
Regulatory Reform
Macroeconomic environmentwritten premiums real growth vs. GDP
-2.0%1.9% -0.3%
7.5%7.7%12.7%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
1993 1994 1995 1996 1997 1998 1999 2000 2001 Mar-02
GDP Written Premiums
Source: CNSF-SHCP
Macroeconomic environmentwritten premiums real growth vs. inflation
12.7%7.7%
-13.8%
7.5%4.7%4.4%
52.0%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
1993 1994 1995 1996 1997 1998 1999 2000 2001 Mar-02
Written Premiums Inflation
Source: CNSF-BANXICO
Growth dynamicsmain factors
Market maturity
MarketLiberalization
Macroeconomic Environment
Regulatory Reform
Market Liberalizationmarket participants
113 18 23 24 26 29 31 361
2 2 2 2 26
12
1412
15 16 16 14 1314
34 35
2830
30 26 24 25 24
32
1
100
20
40
60
80
100
1993 (44)
1994 (48)
1995 (56)
1996 (61)
1997 (70)
1998 (68)
1999 (68)
2000 (70)
2001(70)
2002e(88)
Subsidiaries Subsidiaries & FCFinancial Conglomerates Rest of the industry
Source: CNSF
Market Liberalizationliberalization and industry concentration
10.6%
9.1%
12.3%
0
20
40
60
80
100
1993 (44)
1994 (48)
1995 (56)
1996 (61)
1997 (70)
1998 (68)
1999 (68)
2000 (70)
2001 (70)
2002e(88)
5%
6%
7%
8%
9%
10%
11%
12%
13%
Subsidiaries Subsidiaries & FC Financial ConglomeratesRest of the industry Herfindahl Index
Source: CNSF
Market Liberalizationinsurance product filing
226507
845
1,285
2,113
3,021
3,577
4,068
417
9041,263
1,5571,897
2,1212,346
2,529
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1994 1995 1996 1997 1998 1999 2000 2001
Life Non-Life
Source: CNSF
Growth dynamicsmain factors
Market maturity
MarketLiberalization
Macroeconomic Environment
Regulatory Reform
Market Maturityinsurance industry portfolio
41.6% 58.4%
57.9% 42.1%
0% 20% 40% 60% 80% 100%
2001
2000
1999
1998
1997
1996
1995
1994
1993
Life Non-LifeSource: CNSF
Insurance densityinternational comparison, premiums per capita (2000)
0
1,000
2,000
3,000
4,000Ja
pan
Uni
ted
Kin
gdom
Uni
ted
Stat
es
Irela
nd
Fran
ce
Aus
tralia
Can
ada
Ger
man
y
Spai
n
New
Zea
land
Arg
entin
a
Chi
le
Mex
ico
*
Bra
zil
Indi
a
(US
Dolla
rs)
Market MaturityInsurance density (premiums per capita)
74 70 76
9187
96104
117
0
20
40
60
80
100
120
140
1994 1995 1996 1997 1998 1999 2000 2001
(US
Dol
lars
)
Source: CNSF-CONAPO
Insurance penetrationinternational comparison, premiums/GDP (2000)
0
2
4
6
8
10
12
14
16
18
Uni
ted
Kin
gdom
Japa
n
Irela
nd
Aus
tralia
Fran
ce
Uni
ted
Stat
es
Spai
n
Can
ada
Ger
man
y
New
Zea
land
Chi
le
Arg
entin
a
Indi
a
Bra
zil
Mex
ico
(% G
DP)
Insurance penetration 1994-2001written premiums / GDP
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%19
94
1995
1996
1997
1998
1999
2000
2001
1.23%
1.82%
Source: CNSF
Estimated insurance penetration 2002-2020written premiums / GDP
0%
1%
2%
3%
4%
5%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
High Scenario Medium Scenario Low Scenario
2.8%
1.23%
1.82%
Source: CNSF
Growth dynamicsmain factors
Market maturity
MarketLiberalization
Macroeconomic Environment
Regulatory Reform
Regulatory reform
Regulatory Reform
• Started in 1993
• Main objectives:
• Fulfill international standards on insurance regulation and supervision
• Promote the development of the insurance market
Directive regulation
Solvency regulation
Pro-competitive solvency
regulation
Inte
rnat
iona
l st
anda
rds
com
plia
nce
leve
l
Regulatory reformtrends
Support on independent third partiesand corporate governance
IAIS Insurance Core PrinciplesGeneral structure
Organization of theInsurance Supervisor (1) Market Conduct (11)
Licensing andChanges in Control (2-3)
Supervision andSanctions (12-14)
Corporate Governanceand Internal Controls (4-5)
Cross Border BusinessOperations (15)
Prudential Rules (6-10) Coordination, Cooperationand Confidentiality (16-17)
IAIS Insurance Core PrinciplesAssessment mechanisms
Spectrum of assessment mechanisms
WB-
IMF
FSAP
Self
asse
ssm
ent
coor
dina
ted
byan
othe
r sup
ervi
sor
Self
asse
ssm
ent
coor
dina
ted
by a
nex
tern
al a
sses
sor
Self
asse
ssm
ent
Self
asse
ssm
ent
base
d on
inte
rnat
iona
llyac
cept
ed m
etho
dolo
gies
IAIS Insurance Core PrinciplesMexico overall level of observance in 1993
0
1
2
3
E-1 E-2 E-3 E-4 E-5 E-6 E-7 E-8 E-9 E-10 E-11 E-12 E-13 E-14 E-15 E-16 E-17
Self-assessment 1993
O
LO
MNO
NO
O: Observed LO: Largely observed; MNO: Materially Non-Observed; NO: Non-observed
E-1: Organization of the Insurance Supervisor
E-2: LicensingE-3: Changes in ControlE-4: Corporate GovernanceE-5 Internal ControlsE-6: AssetsE-7: LiabilitiesE-8: Capital Adequacy and
SolvencyE-9: DerivativesE-10: ReinsuranceE-11: Market ConductE-12: Financial ReportingE-13: On-site InspectionE-14: SanctionsE-15: Cross Border business
OperationsE-16: Coordination and
CooperationE-17: Confidentiality
IAIS Insurance Core PrinciplesMexico overall level of observance in 1997
O
LO
MNO
NO
0
1
2
3
E-1 E-2 E-3 E-4 E-5 E-6 E-7 E-8 E-9 E-10 E-11 E-12 E-13 E-14 E-15 E-16 E-17
Self-assessment 1993 Improvement 1993-1997
O: Observed LO: Largely observed; MNO: Materially Non-Observed; NO: Non-observed
E-1: Organization of the Insurance Supervisor
E-2: LicensingE-3: Changes in ControlE-4: Corporate GovernanceE-5 Internal ControlsE-6: AssetsE-7: LiabilitiesE-8: Capital Adequacy and
SolvencyE-9: DerivativesE-10: ReinsuranceE-11: Market ConductE-12: Financial ReportingE-13: On-site InspectionE-14: SanctionsE-15: Cross Border business
OperationsE-16: Coordination and
CooperationE-17: Confidentiality
IAIS Insurance Core PrinciplesMexico overall level of observance in 2001
O
LO
MNO
NO
0
1
2
3
E-1 E-2 E-3 E-4 E-5 E-6 E-7 E-8 E-9 E-10 E-11 E-12 E-13 E-14 E-15 E-16 E-17
Self-assessment 1997 Improvement 1997-2001
O: Observed LO: Largely observed; MNO: Materially Non-Observed; NO: Non-observed
E-1: Organization of the Insurance Supervisor
E-2: LicensingE-3: Changes in ControlE-4: Corporate GovernanceE-5 Internal ControlsE-6: AssetsE-7: LiabilitiesE-8: Capital Adequacy and
SolvencyE-9: DerivativesE-10: ReinsuranceE-11: Market ConductE-12: Financial ReportingE-13: On-site InspectionE-14: SanctionsE-15: Cross Border business
OperationsE-16: Coordination and
CooperationE-17: Confidentiality
IAIS Insurance Core PrinciplesMexico overall level of observance in 2002
O
LO
MNO
NO
0
1
2
3
E-1 E-2 E-3 E-4 E-5 E-6 E-7 E-8 E-9 E-10 E-11 E-12 E-13 E-14 E-15 E-16 E-17
FSAP Assessment 2001 Improvement 2001-2002
O: Observed LO: Largely observed; MNO: Materially Non-Observed; NO: Non-observed
E-1: Organization of the Insurance Supervisor
E-2: LicensingE-3: Changes in ControlE-4: Corporate GovernanceE-5 Internal ControlsE-6: AssetsE-7: LiabilitiesE-8: Capital Adequacy and
SolvencyE-9: DerivativesE-10: ReinsuranceE-11: Market ConductE-12: Financial ReportingE-13: On-site InspectionE-14: SanctionsE-15: Cross Border business
OperationsE-16: Coordination and
CooperationE-17: Confidentiality
Contents
1. The Mexican Insurance Market in 2001
2. Recent reforms to the Mexican Insurance Legislation
3. Outlook of the Mexican Insurance Industry
Regulatory reformpro―competitive solvency regulation
Supervisory Body
Independent Third Parties Board of Directors
Legislative process
� The reforms were included in the second set of the Financial System Reform publicly stated by the Federal Government.
� The initiatives were presented by the President to the Congress on November of 2001.
� The reforms became effective on January the 17th of 2002 .
Elements considered in the reform
1. Self assessment of the compliance with the IAIS Insurance Core Principles (2000).
2. WB-IMF Financial Sector Assessment Program results (2001).
3. Insurance Industry opinions.4. Financial system reforms previously approved by the
Mexican Congress.
General objectives of the reform to the Insurance Law
1. Promote a sound development of the insurance industry.
2. Harmonization with the regulatory framework applicable to the rest of the Mexican financial sector.
3. Advance towards a greater level of international standards’ compliance regarding insurance regulation and supervision.
Insurance Law Reformgeneral structure
1. Promotion of the insurance industry development
2. Regulation and supervision modernization
3. Corporate governance development
General structure (1):Promotion of the insurance industry development
1. Access to alternative capital sources 2. Promote product innovation 3. Operation processes via electronic means 4. New activity areas and business
opportunities
1. Access to alternative capital sources
� Extension of the available scope for corporate debt issuing.
� Broadening the possibilities to access financial reinsurance, as a way to support risk diversification and financial support of the domestic insurance companies.
2. Promote product innovation
� Introduction of a process that facilitates and accelerates insurance products’ filing.� The purpose is to encourage innovation and competition
in the market place.
3. Operation processes via electronic means
� It will make possible for insurance companies to send information for supervisory purposes via Internet or any other available technology.
� It creates the required legal framework to allow electronic insurance transactions.
4. New activity areas and business opportunities
� Authorization granted to the insurance companies in order to allow the inclusion of activities related with the distribution of mutual investment funds.� It will allow a more flexible operation of certain kind of
insurance products.� It will also constitute a new business opportunity by itself.
General structure (2):Regulation and supervision modernization
1. Licensing and shareholders’ change of control2. Technical reserves and solvency margin3. Inspection and surveillance 4. Foreign subsidiaries
1. Licensing and change in control
� Standardize guidelines that rule the licensing requirements and shareholders’ change of control.
� Specialization of Life and Non-Life insurance companies for new licenses, in order to protect the policyholders’ interests.
� Authorize that a same investor may keep two or more insurance companies in a similar operation (same line of business).
2. Technical reserves and solvency margin
� Include the actuarial concept of “sufficiency” in the technical reserves’ valuation.� Establish the requirements that the actuaries must fulfill
in order to: file insurance products, carry out reserve valuations and perform actuarial auditing.
� Eliminate the “prevision reserve”.� The purpose of this technical reserve, will be covered
with equity resources.
2. Technical reserves and solvency margin
� Include in the solvency margin regime an incentive to promote the diversification of reinsurers related to the cession and acceptance of reinsurance operations.
� The solvency margin regime is complemented with a prospective monitoring analysis which will allow the identification of problems that require preventive measures.
3. Inspection and surveillance
� Establish the CNSF’s capability for adopting control measures in case of serious financial situations derived from shortages in regulatory parameters (reserves and capital).
� Establish professional license requirements and certification for:� The actuaries who elaborate insurance products and
valuate technical reserves.� The accountants who will subscribe the financial
statements of an insurance company.
3. Inspection and surveillance
� Establish the CNSF’s capability for supervising companies that provide outsourcing services to supervised insurance companies.
� Enable the possibility for the CNSF to hire auditors and other independent professionals as auxiliary staff in the CNSF’s inspection activities.
3. Inspection and surveillance
� Adequate procedures regarding regularization plans.� These plans look for a transparent procedure to aim the
correct coverage shortage in reserves and equity requirements.
� This instrument will also allow the adjustment of observed deficiencies regarding the general operations of an insurance company.
4. Foreign subsidiaries
� Eliminate the restriction to establish subsidiaries or branch offices outside the national territory by a subsidiary established in Mexico.
� Allow the establishment of two or more subsidiaries in the same line of business.
� Homologate the different requirements regarding shareholders’ changes of control, management board and CEO.
General structure (3):Corporate governance development
1. Corporate governance2. Self correction programs 3. External auditors
1. Corporate governance
� The Board of Directors must establish:� Policies, strategic objectives and norms regarding
corporate governance as well as guidelines that prevent conflict of interests.
� That at least 25% of the Board’s members must be independent.
� That Board’s sessions must fulfill the following conditions:
� at least 51% of its members must be present, and;� at least one of them must be an independent member.
1. Corporate governance
� Define the operations that must be authorized with the vote in favor of the majority of the independent board members.
� Establish standards for the companies to perform “fit & proper” tests regarding its board members and executives.
� Establish the figure of the Compliance Officer, appointed by the Board, as a corporative mechanism to monitor the compliance of the internal and external regulation.
2. Self correction programs
� Include the possibility of self correction programs to correct irregularities detected by the insurance company.
� The self correction programs must be presented by the Compliance Officer and have to be informed to the Board.
3. External auditors
� Establish measures that guarantee a suitable switching of both, financial and actuarial external auditors.
� The information to be disclosed in their reports, regarding other services and, in general, any professional or business relation that insurance companies maintain with the auditors.
Contents
1. The Mexican Insurance Market in 2001
2. Recent reforms to the Mexican Insurance Legislation
3. Final remarks
Final remarks
� The performance of the Mexican Insurance Industry in the recent years has shown a great dynamism, reflected in its growth rates, above those presented by the economy as a whole.
� This situation has been favored by a greater competition in the market, the entrance of companies and the development of suitable products for the consumers necessities.
Final remarks
� Moreover, the structural change of the industry, the possibility to get into new businesses and the expected sustained growth of the Mexican economy, allow to anticipate that real growth rates will continue in the years to come.
� Even so, the insurance sector needs to sustain comparable growth rates so that it can reach a maturity level similar to that observed in other emerging economies with similar economic development.
Final remarks� The recent structural reforms, the macroeconomic
achievements, and the opening to the international markets as well as the international scrutiny in Mexico, have set the necessary bases for the consolidation of the Mexican insurance industry.
1.0*13.04.5Property and Casualty 9.3*15.917.4Health and Accidents7.8*10.612.7Life5.1*12.79.1Insurance Sector
1.7**-0.36.6GDP
2002(estimate)
20012000Growth rates (%)
Source: * * SHCP* CNSF