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>> MEXICO


Recaredo Arias J., Director General of The Asociación Mexicana de Instituciones de Seguros A.C. (Mexican Association of Insurance Companies) The Road towards Competitiveness: The Mexican Insurance Industry



This year Mexico is celebrating the bicentennial of its struggle for liberation and the first 100 years of the revolutionary deed from which the current institutions originated. The insurance industry has formally been involved in this last stage of the country’s history, and it has clearly contributed to the Nation’s development by boosting an improvement in Mexican’s quality of living. In the article below, Recaredo Arias J. Director General of the Asociación Mexicana de Instituciones de Seguros A.C. (Mexican Association of Insurance Companies) discusses the outcome of this effort by focusing on the evolution of the final phase of these cycles, i.e. the last twenty years when, following the latest major legal reform, and as a materialization of century-long efforts, insurance companies as a whole have taken a step forward towards globalizing their operations in order to allow Mexico to competitively enter the global marketplace. Moreover, he shares his views on the expected future and the actions already taken to get there.


Introduction

The year 1990 marked the beginning of a new era for the financial sector in general, and for the insurance industry in particular. The new legislation, whereby foreign capitals were once again welcomed following the prohibition that was in force since 1965, was an opportunity to put and end to government protectionism and to allow Mexican companies to enter the global marketplace.
Following the enactment and regulation of the law in 1993, the Mexican insurance industry was ready to take the path to modernization within the framework of the North America Free Trade Agreement, which came into force on 1 January 1994. Now that there was open competition, actions towards competitiveness were undertaken immediately.
Competitiveness

This term means the ability to maintain and increase a business’ share in International markets while concurrently raising a society’s standard of living .
As far as the insurance market is concerned, in the period 1990-2008 the Mexican industry grew from 0.2% to 0.45% of global premiums, and therefore ranked No. 30 in the ranking of international premium producers. Throughout that same period, the Latin American insurance sector more than tripled its market share, which climbed from 0.7% to 2.46%. The progress made by Mexico compares favorably with the rest of Latin America, especially considering that as a result of the crisis that unleashed in 1995 the country witnessed a historical collapse which resulted in premium production figures being the same as for 1991.
In this same context, and thinking of competitiveness in terms of a company’s ability to penetrate, expand and consolidate in a market (whether domestic or foreign), Mexican insurance has managed to grow its market share as a percentage of GDP from 1.18% to 1.96% in 2009. This progress has been made hand in hand with institutional soundness, and demand has been backed by financial adequacy: Mexican solvency requirements in the market are almost twice as much the legal requirement. In spite of the recent financial and economic crisis, no institution failed; they could all meet their contractual obligations and are still in business.
Furthermore, unlike the situation prevailing in the economy as a whole, in the last annual cycle insurance grew by 13.5%, whereas the value of domestic production went down by 6.5%.
The joint work undertaken by the Sector and by its authorities had a great say in this performance, as it contributed to insureds keeping their contracts in force. It publicized the advantage of maintaining life and health care insurance covers; disseminated the benefits of insurance among the population at large; agreed upon measures to fight fraud against carriers; offered facilities to pay premiums in installments and temporarily change deductibles, coinsurance and insured amounts by adjusting covers to insurance programs that would respond to the needs of insureds as mandated by the situation; expedited the payment of benefits to provide victims with timely liquidity; entered into Agreement with health care institutions to curb costs and improve services, and reached an agreement with the authorities on interim measures, thus promoting flexibility in restructuring investment portfolios in the face of potential gaps in regulatory parameters.
Thus, premium density has grown from USD 34.4 per person to USD 176.5 in the last two decades. Coupled with the above is its ability to contribute to increasing the quality of living of the population, so that the sector now has 98 M individual insurance contracts in force, i.e. 4.7 times more than the number of contracts effective in the early ‘90s, whereas the population growth rate was 33% in that same period. In turn, the GDP per capita grew by 2.98%.
The protection afforded to the Mexican society, as measured by the insured amounts in force, also witnesses to this sector’s contribution to overall welfare: With MXN 57.7 B , it is almost five times the Gross Domestic Product.
Competitiveness is also defined as a region’s ability to attract and retain investments , underpinned by the concept of meritocracy, i.e. an action to get what another region or set of regions is also trying to achieve.
Transferring this concept again to the insurance arena, it is possible to define competitiveness in terms of:
1. The ability to attract, retain and make investments in the insurance sector.
2. The ability to attract investments via economic protection programs.
3. The ability to diversify supply.
Firstly, it is worth noting that the sector’s capitalization grew 2.36 times between 2000 and 2008, compared to 1.3 times in the period 1990-2000. The number of carriers doing business in the Mexican market increased from 44 to 100 between 1990 and 2010, and 65% of the insurers that are members of AMIS are foreign subsidiaries .
Secondly, savings made through issued premiums account for 144% and 117%, respectively, of Mexican exports to the EU and Latin America, and to 93% of Mexico’s foreign investment (both direct and portfolio) in 2009, and to 84% of remittances sent by Mexican migrants.
Assets allocated to technical reserves position the insurance sector as the third most important institutional investor, and as a significant source of funding for infrastructure works and for the production system.
Thirdly, and unlike the situation prevailing back in the 1990s where 81.6% of premiums were concentrated in the hands of only 7 companies, now 82.9% of premiums are issued by 16 carriers. As measured by internationally accepted indicators , insurance ranks amongst the top three most competitive industries in Mexico.
Not only capital has become diversified. So have business niches and the way to do business. With the new financial guarantee and mortgage loan insurance lines, supply now meets the demand for all lines, and practically all sales, collection and servicing channels ― agents, brokers, bankassurance, direct sales, Internet, chain stores, telemarketing and, more recently, social networks― are used to reach out to all social strata.
Sustainable Competitive Advantage

In order to maintain its differentiation based on its exclusive perception, the insurance sector has engaged in an ongoing communications campaign addressed to the population at large where it disseminated the positive aspects of insurance and the benefit of being insured as the best option to face the risk by transferring it to expert companies. Moreover, it has maintained an ongoing lobbying strategy to raise awareness among key players, especially at a legislative level, of the value that these institutions have to restore the equity impacted by adverse contingencies, and as a source of funding for national development.
In facing the market, the organization may decide to commit all its efforts to designing and building something unique that will set it apart in the eyes of the consumer. In return, the market will reward it with the highest price paid to a competitor ever.
In applying the postulate described above to the insurance market, supply has become diversified, and in doing so it has sought the price advantage to face market forces successfully, taking care to be responsible in not exceeding technical limits. Thus, decisions are related to achieving a cost structure that may be identified as the lowest cost by the competition, i.e. by the various players within the sector and by the other financial intermediaries competing for people’s savings.
Exemplified below is the behavior of individual life insurance prices in the past decade. Although global market figures are summarily presented, the index shows that the variety of insurance prices set on the basis of transaction, service, cost and cover enjoys a competitive advantage compared to other goods and services.
The Path towards Sustained Competitiveness

Drawing the path to the expected future has taken two years. Thus, in progressing towards this ideal situation, we did not wait to be led by habit but, rather, we decided to become actively involved in order to make things happen.
It took us almost twenty-four months to almost fully agree on the legal and regulatory framework that will regulate this business from now on. The new model is based on the European principles called Solvency II or risk-based supervision, which replace the current performance-based supervision principle.
Underlying this change there is the definition of responsibilities, which is based on strictness and technical evidence. In essence, each interested party will undertake full responsibility for comprehensively managing its risks.
Two basic concepts will underpin this strategy: Corporate Governance and Economic Value.
The major “how” consists in becoming aware, measuring exposure, deciding on the scattering of risk, and undertaking liability for the risks faced. The above involves all parties, from users to insurance institutions, including intermediaries and external auditors, as well as the authorities, even those that are there to protect an defend users.
Market defects will be overcome through disclosure and transparency.
An Outline of The New Legal Framework:

Challenges

The new legal framework will encourage the competitiveness of the Mexican insurance sector in the international market. The challenge stems from making it competitive within its boundaries, against itself and against other financial system players, identifying it as a unique, differentiated business activity, in a context influenced by financial convergence.
Yet another major challenge will be developing internal models to determine capital requirements based on Solvency II principles.
However, beyond statutory provisions, what matters is to know how to make the best out of the risk-based supervision model, so as to use not merely for reporting purposes but also as a comprehensive management system within insurance companies, in order to turn it into a development instrument for this sector.
Gradual Approach: For now, there are discussions under way to determine the timeframe necessary in order to give insurance companies time to adapt their practices to this new approach. Concurrently, work is being undertaken to implement international registration and financial reporting standards (IFRS).
The definition offered by CEPAL/ONUDI (1989) is interesting given its focus on the creation of job opportunities.
Ability means the different actions taken to gain market position.
Thousand million.
Mexican Competitiveness Institute.
A company where a foreign firm has a majority equity holding.
Herfindahl Index: It is a measure of companies’ size vis-à-vis the industry, and an indicator of the competition among them. It is a commonly accepted measure of market concentration.
Value Chain Analysis: In Porter’s view, there are two achievable advantages for the company: one is the exclusive perception; the other, the advantage offered by the lowest cost.
Ley de Instituciones de Seguros y Finanzas (Mexican Financial and Insurance Institutions Law), negotiated with the Sector’s regulatory and supervisory leading authorities. Subsecretaría de Hacienda y Crédito Público; Unidad de Seguros, Pensiones y Seguridad Social; y Comisión Nacional de Seguros y Fianzas (Undersecretariat for Trade and Public Lending; Insurance, Pension and Social Security Unit; Mexican Insurance and Finance Committee) (they are all agencies of the Secretaría de Hacienda y Crédito Público (Secretariat for Trade and Public Lending), except the Mexican Insurance and Finance Committee, which is an independent agency)).

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