On 4 April 2015, Mexico officially welcomed its new Insurance and Surety Institutions Law (Ley de Instituciones de Seguros y Fianzas) marking, amongst other things, a new regulatory framework on insurance surety law.

This new law should reinforce Mexico’s position as a world leader in surety. In fact, the Surety bond industry in Mexico is one of the largest in the world after the US and Italy, with US $421 million in written premiums (September 2013). At the end of December 2014, the surety sector was comprised of 16 companies, 3 of which were integrated financial groups and 6 are subsidiaries of foreign institutions, the rest local, with the largest Surety player being locally owned Grupo Aserta, fianzadora Aserta, S.A. de C.V., Grupo Financiero Aserta, (about a quarter of the market) followed by (in order) Afianzadora Sofimex, S.A, Chubb de México, Compañía Afianzadora, S.A. de C.V., Fianzas Dorama, S.A., y Mapfre Fianzas, S.A. By the fourth quarter of 2014, the surety sector accounted for 9,192.0 million pesos, equating to a real annual increase of 10.3 % at the end of the fourth quarter of 2014 compared to the same period last year, of which 96.2 % were for new premiums and the remaining 3.8 % were refinancing . As of December 2014, the surety sector posted a net profit for the year of 1,625.9 million pesos, representing an increase, in real terms, of 28.4 % compared to that reported in late December 2013.[1] This only goes to show how the surety market in Mexico is growing, even prior to the implementation of the new law.

Amongst other innovative changes, the new law brings into play a new surety insurance product in Mexico called the “seguro de caución” (Insurance Bond), merging insurance and surety products and blending the legal provisions that apply to both in a relatively revolutionary way. It should be noted that this follows some other jurisdictions, such as Argentina, where Insurance Bonds have been issued for the past 5 decades (since 1961 by Decree 7607/61). The result should make for a more agile guarantee, sitting independently of its related agreement in a stand-alone insurance policy that documents its own legal and contractual obligations (unlike a surety bond which cannot exist alone as it operates alongside and collateral to the main agreement). Under the Insurance Bond the Insurer is bound up to the insured amount that is stipulated in the policy itself rather than the norm of a surety bond which is for the value of the main collateral agreement, and a claim would be triggered by a breach of the provisions of the terms of the policy with recovery of a claim through the courts, as opposed to a breach of the main agreement. Recovery is also different under an Insurance Bond as the party bound to perform must return the amounts paid by the Company to the Insured, and it is then up to the party to recover any amounts it considers wrongfully paid. With a Surety Bond, the principal has discretion to make payment only of what is necessary or required under law. Guarantees are also optional under an Insurance Bond as opposed to binding for a Surety Bond. There are however, also several similarities between the two forms of bond in relation to termination and recovery for beneficiaries, for example.

Another substantial element of the new law is the incorporation of the principles of the EU Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), such as corporate governance, self-regulation and internal controls, demanding more rigorous capital requirements, for example. The new law introduces a three-pillar solvency framework. Pillar I, for regulatory discipline, (which in fact will not come into force until April 2016) is based on the quantitative measures of capital adequacy and valuation to reduce the probability of insolvency of financial entities; pillar II, self-discipline and qualitative measures, which addresses enterprise risk management; and pillar III, on market discipline, which deals with market disclosure and transparency.

In addition to those two key changes, the new law shifts the authority on several regulatory matters from the SHCP to the CNSF, and replaces the statutory examiner with an audit committee. It provides for the creation of a proper framework of self-regulatory bodies for the development of the industry, renewing the framework for the liquidation and dissolution of insurance and surety companies and creates the framework necessary to permit insurance companies to carry out “securitisations” that will enable them to transfer insurance portfolios to vehicles offering securities to the public at large.

The impact of this new law is still unknown, but according to Óscar Vela Treviño, Mexico’s finance ministry’s manager for its insurance, pensions and social security department, smaller insurers are likely to disappear or merge in order to continue operating, which has been the outcome in other countries that have implemented Solvency II. Traditional surety companies will need to consider whether to include Insurance Bonds in their portfolio. On the other hand, he is reported to have said that the benefits of the new law should include greater insurance industry transparency and better technical risk management. It may also encourage more foreign investment. It also opens up new opportunities in the insurance market. In terms of practical application of the law, Article 17 expressly requires that this new form of surety insurance be accepted as guaranteeing obligations for government projects in the same way as traditional surety bonds from a surety company are used. Only time will tell….