Client Alert

New Obligations for Insurance Companies in Mexico

July 1, 2008

En Español

On June 20, 2008, a decree was published in the Federal Official Gazette, adding a new article (Article 39)¹ to the General Law of Insurance Companies.²

According to the decree, Article 39 shall come into force the day after its publication, that is to say, June 21, 2008.

Pursuant to Article 39 and as soon as certain deadlines are reached, insurance companies in Mexico will be compelled to use standard model policy wordings for certain types of risk.

Article 39 Dissected

Under the new Article 39, all insurance companies in Mexico will have to offer basic standard products and standard policies to insure the following risks:

1. Death
2. Personal injury (accident or illness) 
3. Medical expenses 
4. Health (accident or illness) 
5. Car accident (third-party liability resulting from the accident)

Pursuant to Article 39, following consultation with the insurance companies and the National Commission for the Defense of the Users of Financial Services (CONDUSEF),³ the model policy wordings will be drafted and published by another regulatory agency, the Insurance and Bonds National Commission (CNSF).⁴

The standard policy wordings are intended to harmonize the contract terms relating to the description of risks covered, exclusions, insured amounts, the due date(s) for premium payments, deductible levels and claims reporting and notification procedures. Insurance companies will have to offer these standard wordings to their clients in addition to the specialized products that they now offer.

Legislative History of Article 39

The broad purpose behind Article 39 is explained in the introductory paragraphs of the bill and can be summarized as follows:

“The increase in variety and sophistication of insurance products offered in the Mexican market negatively impacts consumers; it is very difficult for the average buyer of policies to make a well informed purchase decision, in particular for first time consumers.

The specificity of certain risks and the ambiguity of the terms used in policies make the comparison of cost (premium)-benefits among the offers of the various insurance companies more difficult, and hinder the consumer’s choice of the best product.

The standardization of the ‘basic’ insurance policies will make it easier to choose a particular product, and at the same time will enhance the competition between insurance companies.”

New Obligations for Insurance Companies Pursuant to Article 39

With Article 39 entering into force, the insurance companies will, first, have to propose to the CNSF specific conditions that they consider should be included in the standard model policies.

Then, the insurance companies will have to register (with the CNSF), offer and use the standard model policies published by the CNSF, along with their other policies and financial products.

The foregoing obligations must be fulfilled by the insurance companies within 180 days after the CNSF publish the standard model policies⁵ (which in turn is supposed to occur within 180 days after Article 39 comes into force).⁶

It is important to note that the standard model wordings used by each insurance company will have to be registered with the CNSF, as every other insurance contract offered by insurance companies.

It should further be noted that the insurance companies shall inform the CONDUSEF and the public, on a monthly basis, about the premiums for their standard products. This obligation may be fulfilled by publishing and updating the information on their websites.

Conclusion

The effect of Article 39 is to compel insurance companies to adopt standard policy wordings for certain basic insurance products. The broader purpose is to encourage the insurance companies to compete in terms of the prices (premiums) to be paid by the consumers, not in terms of the conditions set forth in the policies they offer.

Despite the good intentions of the drafters of Article 39, the results, in practice, of the standard model policies to be published by the CNSF are still to be seen. Depending on the foregoing, insurance companies may argue that Article 39 (i) puts an unfair burden on them and (ii) goes against basic principles of a free market economy, by constraining competition instead of promoting it.

^{1  The initiative came from the Senate and was approved by the Mexican House of Representatives (Cámara de Diputados), and sent to the President, on April 30, 2008.
2  Ley General de Instituciones y Sociedades Mutualistas de Seguros.
3  Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros. 
4  Comisión Nacional de Seguros y Fianzas.
5  This period ends on December 18, 2008.
6  This period ends on June 16, 2009.}