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15 February 2011
The Mexican insurance market is increasingly attractive to underwriters because of its potential for growth. A substantial number of non-admitted insurers offer a wide range of products in Mexico through licensed and non-licensed agents. Although the potential revenues are certainly sweet, the consequences may prove sour. Non-admitted underwriters and their agents must be aware of the risks associated with offering and issuing insurance products in Mexico. The general principle under the General Law on Insurance Institutions and Mutual Companies is that only entities that are duly licensed by the Ministry of Finance and Public Credit may carry out active insurance underwriting in Mexico.
Article 3 of the law prohibits entities other than insurance companies from engaging in insurance activities in Mexico; it also prohibits Mexican individuals or entities from concluding insurance contracts with foreign insurance companies. The prohibition includes, but is not limited to, personal insurance when the insured is in Mexico at the time of execution of the insurance contract. Furthermore, the law prohibits restricted insurance operations within the Mexican territory, irrespective of whether they are provided directly or through agents or by public or private means. Contracts executed in contravention of these prohibitions have no legal effect and the insureds may request the reimbursement of their premiums.
As it is difficult to enforce the prohibition on non-admitted insurance companies, which often do not even have a formally established office in Mexico, enforcement often takes the form of penalties for the insureds in Mexico. Contravention of the prohibitions may result in fines and imprisonment. Premiums paid to non-admitted insurers are not deductible for Mexican tax purposes. More seriously, the law provides for up to 15 years' imprisonment for individuals who contravene the prohibitions and act as insurers or intermediaries. Parties that contract with foreign companies for insurance face up to 10 years' imprisonment. However, certain exceptions apply. The ministry may authorise the contracting of coverage with non-Mexican insurance companies where:
The ministry's authorisation may be revoked if the interests of the insured are deemed to be at risk. If such circumstances arise, the ministry - before taking action - must give the insurance company an opportunity to comment and present its case, and must receive a prior opinion from the National Insurance and Securities Commission.
When acting outside of the scope of the relevant exceptions and without valid authorisation, non-admitted insurers not only jeopardise their underlying activities, but also put the insured at risk. Therefore, when analysing the Mexican market, non-admitted insurers should base commercial decisions not only on the attractiveness of the market, but also on the restrictions that apply to market participation.
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Carlos Ramos Miranda