In Mexico, certain activities require the purchase of compulsory liability insurance; including those which represent an environmental risk or that could imply an inherent risk for the population.

Compulsory Insurances must be purchased in compliance with a legal provision (whether law regulation or administrative resolutions) of any jurisdiction (federal, state or municipal). In Mexico there are more than 100 laws and regulations that include expressions such as "must purchase insurance" or "must have insurance", and this is without considering the official local norms.

The Mexican Insurance Contract Law (known as "Ley sobre el Contrato de Seguro") establishes that the effects of compulsory insurance cannot cease, be cancelled or terminated prior to the end of its period.

If the risk materialises, it could allow the insurance company to oppose the aforementioned coverage exceptions (e.g. aggravation of risk or inaccurate or false statement by the insured); in the case of compulsory insurance, the insurer is obliged to compensate those affected, although it may recover the amount paid from the policyholder. Not forgetting that in Mexico, affected third parties have direct action against insurance companies.

In this scenario, the reinsurer’s relationship with the cedants and/or the cedant's relationship with the insureds could easily be affected, as it is common that the former ignore the fact that they are underwriting compulsory liability insurance. Furthermore, having to recover from the original insured could easily jeopardise the commercial relationship.

We suggest that Reinsurers and Insurers seek advice prior to underwriting risks associated with certain industries (e.g. oil and gas) to avoid finding themselves in a complicated position.