After 71 years of Institutional Revolutionary Party (PRI) rule, Mexico elected National Action Party (PAN) party candidate Vicente Fox, governor of Guanajuato state and former executive president of Coca-Cola for Mexico and Central America. Having worked successfully to improve Guanajuato's domestic economy and foreign trade profile during the last five years, Fox is now ready to apply his optimism for improving Mexico's economy and his vision for global opportunity throughout all of Mexico.
The insurance industry has a long history of providing long-term commercial stability and individual protection for the population and its property. In Mexico, well-respected industry organizations such as AMIS (Mexican Insurance Association) and CNSF (Comisión Nacional de Seguros y Fianzas) can offer relevant insights and tangible proposals in step with the president-elect's themes and goals.
Wasting no time
Taking office 1 December, Fox has already visited Canada, the US and several countries in Central and South America to strengthen relationships and offer a more substantial platform for NAFTA expansion going forward. In the first half of 2000, Mexico increased foreign investment by 11%. But, in July alone, foreign investment rose an unprecedented 25% as general investor confidence followed Fox's election. The significant raise in Mexico's investment grade last summer offers demonstrable proof and international validation that more expansive trade relations with North America, South America and Europe are warranted.
As president-elect, Fox is seeking not only capital, but also local investments to build and restore industries and factories - creating a stable job market and improved salary income for the Mexican working class. As the economic situation progresses, employment opportunities increase and more companies succeed, the insurance sector will also expand based on more corporate- sponsored coverage and individuals buying independent policies.
However, in Mexico, even when the economy is poor, the market still maintains sufficient coverage for personal accident, health and pensions. Last year, life premiums were reported at US$4.9 million and property/casualty premium revenues reached US$3.5 million. One major factor for this level of activity was the privatization of pension plans in July 1997, which caused premium revenues to rise at rates greater than casualty lines - a first for the Mexican market.
Incentivization for long-term stability
As Fox has justifiably focused on macro- economic issues in the last five months, it is now time to seriously engage recognized insurance industry leaders to devise specific solutions that directly address many of the key themes of his platform, including term stability and lifestyle improvements. For many, many years, individual insurance policies - whether for homeowners, health or pensions - were considered luxury items. In an uncertain economic environment with an unstable currency, the Mexican population was faced with more immediate financial concerns. Planning for the unforeseeable, or even the future, was not a realistic undertaking.
As a byproduct of the 1995 currency crisis, the Mexican labor force today comprises an inordinately large number of urban self-employed men and women compared with equally developed nations. This resulted largely from major layoffs in an employment market unable to absorb the massive influx of these newly out-of-work individuals. Out of sheer necessity and self-determined resourcefulness, the majority of these workers became self-employed without benefits in a market where self-insurance was well out of reach.
Presently, the socio-economic and political climate - with so much promise for reform and long-term stability - is encouraging the Mexican business community, government and working class to begin seeking more comprehensive, affordable life and health coverages. As Fox attracts more foreign investment and recruits more mult-national corporations to Mexico, the insurance industry is meeting the challenge with proactive programs, products and initiatives to create markets for these new or returning consumers.
In AMIS, Fox will find an intelligent and practical ally to craft affordable corporate insurance solutions for employee benefits and also to develop individual policy programs that offer life, health and personal accident insurance to the middle market. The CNSF is also seeking an audience with Fox to introduce progressive insurance proposals that offer reform and direct benefit for the industry and the consumers. Through in-depth analysis of these recommendations, including tax benefits for companies and incentives for the self-employed, Fox can begin to bring sophisticated insurance coverage to the average citizen and, in doing so, help shape long-term quality of life issues for the Mexican people.
Requirements of reinsurance companies
However, the type of reforms required to create affordable, relevant insurance products depends not only on government and foreign investment concerns. It will also be critical for the reinsurance sector to openly and aggressively create advanced new approaches and seek to improve existing products at each opportunity. It is incumbent upon the Mexican reinsurance community to proactively gauge client needs in a reformed government environment and to operate with the necessary capacity to keep premiums firm and the insurance market stable.
As large foreign investors bring infrastructure-building development to Mexico, the reinsurance market must be prepared with coverages to address construction, engineering and multi-faceted property coverages. This will inevitably spur new competition and result in a market reform of its own.
Outside influences raising the bar
As new foreign companies enter the market, they will inevitably bring with them proven, sophisticated insurance practices to the nation's ultimate benefit. Working with established Mexican companies, large foreign entities are analyzing the industry landscape to determine the most profitable insurance sectors in which to focus. For example, the new Nortel Networks building complex in Mexico City's World Trade Center required large sums of foreign investment to complete and is already creating cottage industries to service its wide-ranging needs. Unsurprisingly, advanced insurance companies are developing sophisticated packages to insure the construction period. If successful, these types of new coverages will no doubt continue to evolve - producing more stable investment conditions, new products and new market entrants from around the world.
In general, the Mexican insurance market's approach to risk management differs from the US and even differs from other countries in Latin America, as a more diverse range of coverage is applied. This is largely a result of the diversity of companies in this market, mainly from Europe and the US, each offering different approaches to products and services. In many ways, the adoption of these more advanced business practices has taught the Mexican market new ways of doing business. But in the end, the most effective product or approach to client service will derive from deep local insight into the realities facing the insurance sector, the corporate environment and the individual needs of the Mexican consumer. This requires in-depth cultural knowledge to adjust certain terms or make certain revisions to offer the population more comprehensive coverages at better prices.
A return to stable pricing
More competition in the marketplace will undoubtedly have a favorable impact on consumers with greater availability and choice to boost long-term coverage and pricing stability. In general, markets began to change in the last year - signaling a downturn in market conditions for the insurance sector - in Mexico and around Latin America. For the past five years, premiums have been very low. Now, the market is returning to technically appropriate pricing, encompassing not only the coverage price, but also including the cost of technical support. Up until 1995, Mexican reinsurance premiums only accounted for commercial prices without any consideration to the strong technical participation in product development. With these changes, we foresee insurance companies resuming sound capitalization status as reinsurers are able to establish fair pricing for the comprehensive range of skilled services provided.
It is not healthy for the market to increase premiums one year and reduce them the next based on the previous year's results. Rather than undergoing regular price fluctuations, some companies have decided to leave the market altogether following a downcycle. That effect on capacity and confidence goes much further toward long term market dysfunction and poor product offerings for the consumer. A return to comparable pricing represents a sound step toward long-term market stability for all.
Now is time for president-elect Fox to work with the reinsurance industry in general, as well as AMIS and CNSF in particular, to devise new tax benefits and desirable market conditions that create more advanced employee benefit packages and more affordable individual policies for the self-insured. He will undoubtedly find an industry eager to assist and a partnership that offers long-term stability to Mexican families and the economy as a whole.
Claudia Elena Aragón is regional managing director in the Mexico City office of Latin American Re.