Last year, Mexico's government passed a bill that instituted mandatory liability coverage for cars being driven on roads kept by the federal administration. The bill is not very ambitious and has fallen short of the expectations of insurance companies. But it marks significant progress in a country that is one among only a few in Latin America where car owners are not supposed by law to provide some kind of insurance coverage to their vehicles. As of today, a mere 28% of the cars in circulation benefit from some kind of insurance protection. Insurers in Mexico hope that the new compulsory third-party cover will boost the market, and also improve the country's poor road safety record.
When the new law is implemented from September 2014 the police will be able to demand from cars that are being driven on federal roads proof that they have a minimum of third-party liability cover. Limits are quite low, and initially the rule will not affect all users of federal roads. But Mexico's insurance association Asociación Mexicana de Instituciones de Seguros (AMIS) sees it as a move that could herald a brighter future for the segment.
“We have been fighting for this for several years,” said Luis Alvarez Marcen, the head of Property Damage and Auto Insurance at AMIS. “Regrettably, the bill does not meet our expectations. But we are going in the right direction, and the idea is to consolidate these changes in the months to come.”
Industry concerns with the new law relate to the protracted and restricted application of the rule and the lower levels of protection that the mandatory coverages will provide. Initially only cars built after 2011 and with a sale value of more than MXN180,000 ($13,750) will be affected. In 2015, cars made after 2008 will become liable. The following year, the lower threshold goes back to 2005. The plan is to bring all cars in circulation under the new rules within six years.
There will also be a gradual strengthening of the kinds of coverage required. To begin with the mandatory insurance will cover expenses to deal with injuries caused to third parties to a maximum value of €100,000 ($138,000). At the end of the six-year implementation period, they should also include a €50,000 limit to cover damages caused to other cars involved in an accident. Such limits are seen by the industry as insufficient, considering the costs involved in medical treatments and the repairing of vehicles. But nevertheless they could create interesting possibilities, Alvarez said.
“The basic mandatory policy provides the ground for consumers to understand the benefits of the product and later to purchase other voluntary policies as well,” he remarked.
The next step for the industry is to devise affordable products that will meet the requirements of the law in order to make them available to car owners in September. According to Alfonso Novelo, an insurance analyst at rating agency AM Best, insurers are working with estimates that range from MXN300 to MXN400 for how much the premium will cost every year. That is not a lot of money as more sophisticated coverages are sold in Mexico for more than twice as much, and the general view is that nobody will be making much profit from the mandatory policies. But the promise of convincing buyers to subsequently upgrade is driving optimism in the market.
“When people start to see the benefits of this kind of product, whose costs will be small, they may change their views about insurance coverages,” Novelo said.
There are precedents to justify such views. The vast majority of motor insurance policies sold in Mexico today provide a comprehensive level of protection that go well beyond the basic coverages available in the market. Alvarez noted that about 24% of the cars on Mexican roads were carrying policies that provided not only civil liability, but also coverage for medical costs, theft and vehicle damage. In other words, only one out of every seven car owners who have some kind of coverage have actually opted for just the basic cover similar to the mandatory insurance being created.
There are other regulatory moves that are improving the outlook for motor insurance in Mexico too. Alvarez noted that the state of Jalisco had recently adopted a well-intentioned mobility law that institutes the need for cars to have insurance if they are to be driven on metropolitan roads. That kind of measure is important because, in Mexico's federal government system, the regional and municipal authorities also have the power to legislate on issues related to the driving of cars. That is why the central government was able to introduce the obligation relating to federal roads, but not to make it applicable to metropolitan areas. As a result, in theory at least, drivers can avoid the purchase of insurance if they have no plans to travel out of their home towns.
The Jalisco example however points to a more widespread awareness to improve the situation on Mexican roads, Alvarez said. It is an overdue effort: according to the World Health Organisation, the country occupies the seventh place in the ranking of countries with the highest number of deaths on the road, and traffic accidents cost about 1.7% of GDP every year.
But Alvarez noted that the situation was changing. Mexico has signed international agreements to improve its road safety record and associations of victims have become ever louder, engaging the media in an effort to highlight the fates of families that are brought to misery when one of their members is involved in a traffic accident. As a result, in addition to Jalisco, other regional bodies, such as the government of the Federal District, which encompasses Mexico City, are also updating their traffic laws, with mandatory insurance for metropolitan roads among the propositions being discussed. The use of breathalysers has been spreading around the country, and so has the use by the police of speed-control cameras, among other safety measures. “Things have been improving gradually. We cannot claim to be at the level of the US or Europe, but things are changing,” Alvarez said.
However, any progress that is made needs to be properly enforced. Alvarez remarked that 19 out of 32 regional administrative entities already have laws in place that demand owners of private cars to have some kind of insurance cover. “The problem is that such rules are not enforced by means of fines, so nobody purchases the coverages,” he said. The industry would like to see this situation turned around. “The panorama for the following months is very favourable, but it is necessary that the authorities show the willingness to impose fines in order to make it all a reality,” Alvarez added.
If things go according to expectation, motor insurance could get a significant boost as a result of the new regulations. According to Novelo, it needs it. The sector has more or less stagnated in recent years, amounting to 20% of total premiums in Mexico's insurance market. AMIS has estimated that motor insurance premiums expanded by around 6% in real terms in 2013, a number that has followed the trend of previous years, but is well below the average of the insurance market, which grew by 10.7% last year.
There are 38 companies selling motor insurance in the country, although Novelo said that it is actually a very concentrated sector, with five companies gobbling up around two thirds of all premiums. They are Quálitas, AXA, GNP, ABA Seguros and Seguros Inbursa, and the ranking has not moved much in recent years. ABA Seguros has recently been acquired by the Mexican unit of ACE, but Novelo does not see the operation affecting the league tables. “Perhaps we could see in the future other mergers or acquisitions that could change the picture of the market,” he said.
A move towards a higher volume of sales of products with added value would certainly be welcomed by the sector. Novelo said that motor insurance has high distribution costs in Mexico. Loss ratios are stable, although they can vary much from company to company. More importantly perhaps, he said that the competition today is very much based on the ability of companies to offer the most affordable products. “There are companies who love to compete with pricing,” Novelo pointed out. “In fact, we always ask insurers when they believe that price wars in motor insurance will come to an end.”
He noted that this is less of a problem in individual insurance contracts, but a significant factor in large car fleets, especially in the case of multi-annual policies that have restrictions to price movements for a number of years ahead, even if loss ratios move up. “Motor insurance is a line that is very attractive in terms of volumes, but companies must be careful about pricing,” Novelo pointed out. “It is important that Mexican insurers develop better way to evaluate the risks that they are taking.”
Mexico is a large country where it is not always easy to reach potential consumers. The disparity in the penetration of motor insurance reflects this fact. According to Condusef, a consumer protection agency, in Mexico City 92.7% of the cars have some insurance coverage in place. In the state of Guerrero, the ratio is a mere 10%. Therefore the distribution aspect is an important one. It is also going through changes at the moment.
Since the beginning of April 2014 banks have been forbidden by the financial authorities to force customers taking out a loan to buy a car to buy a motor insurance contract from a chosen insurer, which is often part of the same group. They can still demand a motor insurance policy as a condition to grant a loan, but clients now have the freedom to chose a provider. The change could have effects on the market as the selling of motor insurance linked to car loans has been one of the main drivers of premium growth in recent years.
“It does not strike me as a very good measure,” Alvarez said. “In the end of the day, if a bank is providing a credit and has its own insurer or agreements with trusted insurers, it will have the security to know that the coverage will be there for the duration of the loan. The new rule will create certain practical problems that banks are dealing with by negotiating with new insurance partners.” He noted that banks negotiating agreements with other insurers to link the duration of the policy to the duration of the loan, or to demand the payment of premiums upfront.
The massification of motor insurance might also be helped by improving the products available in the market, according to critics. In a recent evaluation by Condusef only 7 out of 23 basic motor insurance policies available in the market received a grade of more than 7 out of 10. The entity has also noted that Mexicans believe insurance policies are too expensive in the country. The basic motor insurance evaluated have annual fees that vary from MXN670 to MXN2,770, and cover civil liabilities of up to MXN250,000.