On April 4, 2013, the new Insurance and Surety Institutions Law (New Law) was published in the Federal Official Gazette, together with amendments to certain provisions of the Mexican Insurance Contract Law. This New Law merges in one body of law the legal provisions applicable to insurance companies and surety companies and, in order to allow for its correct implementation, it will enter into force in 730 calendar days after its publication. Below is a review of the legislative background and a synthesis of the relevant aspects.

Background

The bill draft was discussed for more than 2 years.

On December 13, 2012, the New Law was approved by the Mexican Senate. The House of Representatives approved the New Law on February 28, 2013.

Relevant aspects

New Capitalization Requirements

  • Solvency II

As a result of the economic crisis of 2008, Mexican authorities developed a new legal and technical framework for Mexican insurance institutions based on the Solvency II Directive enacted by the European Union. [1]

The financial position of the Insurance Institutions will be strengthened through the adoption of international standards in the areas of regulation and supervision of its activities. The foregoing will be accomplished by: a) new calculation of the determination of the Technical Reserves and Capital through a new actuarial model; b) Corporate Governance under the responsibility of the Board of Directors and c) Disclosure of information and credit  grades of the market.

  1. Technical Reserves

Pursuant to Article 216 of the New Law, all insurance institutions must create the following technical reserves:

  1. Current risks
  2. Pending obligations to be fulfilled
  3. Catastrophic risks
  1. Corporate Governance and Supervision

The Board of Directors must supervise the operation and compliance of the Corporate Governance, as established in article 70 of the New Law.

  1. Disclosure

According to Article 307 of the New Law, the financial statements of the insurance  institutions must contain a note that discloses the funds that cover the Investment Base and the level of sufficiency of the Eligible Own Funds that cover the solvency capital requirement.

  • Eligible Own Funds

Eligible Own Funds shall integrate the solvency capital.

The Board of Directors must make sure that the Eligible Own Funds are sufficient to cover the solvency requirement.

Pursuant to Article 243 of the New Law. Eligible Own Funds shall not be less than the minimum paid-in capital of the insurer.

Moreover, pursuant to article 245 of the New Law, all institutions shall perform, on a yearly basis, a Dynamic Solvency Test to evaluate the sufficiency of the Eligible Own Funds.

  • Investment Policies

Furthermore, the New Law provides that insurance and surety institutions can create its own investment policies, with clear purposes, an equilibrium among assets and liabilities, liquidity, and in line with the nature and currency in which they assume obligations. 

Technical Reserves and other assets shall be invested pursuant to the investment policy approved by the Board of Directors.

The Investment Committee is responsible of selecting assets and investments to be acquired by the insurance or surety institution.

Surety Insurance ("Seguro de Caución")

The New Law and the amendments to the Insurance Contract Law provide a "surety insurance" which consists in the payment of a compensation to the insured as a penalty for the patrimonial damages suffered as consequence of a breach of contract, excluding the obligations related to a financial contract.

Article 17 of the New Law establishes that surety insurance shall be accepted in the same way as surety bonds for securing obligations assumed with the Federal and local governments.

Authority of the National Insurance and Surety Commission (CNSF)

Insurance licenses will be granted by the National  Insurance and Surety Commission (Comisión Nacional de Seguros y Fianzas, CNSF) rather than by the Ministry of the Treasury and Public Finance (Secretaría de Hacienda y Crédito Público, SHCP). Likewise, the CNSF can take measures in order to verify that insurance and surety institutions are in compliance with the requirements established in the different regulations.

  • Registration of Adhesion Contracts

Adhesion contracts must be registered before the CNSF.

Conclusion

The New Law provides a consolidated legal framework by which the CNSF will "keepan eye" and regulate the capital requirements of insurance and surety institutions. Within the following two years, insurance institutions will need to fund its solvency capital with its own funds, i.e., Eligible Own Funds.