It is often said that an insurer's most important 'clients' are not its insureds, but insurance agents - an insurer may offer the best insurance product, but it will not be sold unless the agents like it. As a result, insurers tend to attach great importance to their relationships with insurance agents. Insurance products are commonly marketed by entering into commission agreements with agents. Commission may be paid according to various schemes and forms, including the use of signing bonuses, but the aim is the same: to incentivise agents to sell particular products. Some insurers are even willing to pay commission in advance.
However, insurers should carefully review the forms of incentive and payment that they offer. Mexican law significantly restricts the ways in which insurers may distribute insurance products and a commercial practice that is authorised - or at least commonly accepted - in certain jurisdictions may incur large fines in Mexico.
Article 41 of the Insurance Law provides that insurance companies may pay commission or other compensation to insurance agents only for the contracting of insurance, based on premiums which have been paid to the company. Thus, the law prevents insurers from paying agents for the sale of products before they are sold and paid for.
Commonly accepted practices that are prohibited under law include paying advance commission, signing bonuses that are then compensated with commission and loans payable with commission. While these practices may be common and are tolerated, there is always a risk that the corresponding payments trigger penalties and may even be considered as non-deductible. Consequently, contracts with agents shall specifically state that commission will be paid only on premiums effectively received by the insurance company. Further, insurance policies must state that the insured may ask to know the actual commission being paid to the agent, if it so wishes.
Insurers must take this restriction seriously; many will be required to implement special measures in order to ensure compliance. The prospect of entering into new insurance business with potential clients often makes those responsible overlook the limitations in this area, but a breach of the rules may result in a fine by the National Insurance and Bonds Commission and an order to implement auto-correction or regularisation plans.
For further information on this topic please contact Carlos Ramos Miranda at Barrera, Siqueiros y Torres Landa, SC by telephone (+52 55 5091 0000), fax (+52 55 5091 0123) or email ([email protected]).