Mexico offers U.S. based companies reduced labor costs within
reasonable geographic proximity. Mexico also permits the economical
and efficient bidirectional movement of goods across our common
border. While the advantages are substantial, from an insurance and
risk management standpoint there are exposures that are complex,
potentially catastrophic, and at times, uninsurable.
General Information About Mexico
Geography and geology make operating and insuring a business in Mexico
challenging. The entire country is slightly less than three times the
size of Texas. Over 80% of Mexican cities are located less than 125
miles from a coast, which exposes much of the country to the four
natural paths that exist for hurricanes to follow. There are five
different seismic plates that result in several earthquakes per day.
At least one of which equals 3.5 on the Richter Scale.
Mexico’s capital, Mexico City, is the center of the nation’s
political, cultural, and economic life. It is the home of almost 19
million residents and, like Kobe, Japan; it is built entirely on top
of a lake. This causes the entire city to sink every year and
intensifies the magnitude of earthquakes. Mexico also has inconsistent
and lax building codes, which are left to each city to establish and
enforce. Unfortunately, most cities have not established their own
building codes, so the quality of construction can vary greatly within
a city.
Mexican Insurance Marketplace
Unlike many emerging markets, the Mexican insurance marketplace is large and diverse including subsidiary operations of some of the largest global insurers. The quality and availability of suitable coverage is not an issue. The Mexican market also has the capacity to address many of the aforementioned exposures, i.e., Wind, Earthquake.
In 2006, Mexico was ranked 29th worldwide in terms of premium for all classes of business, and second within Latin America (Brazil is first). Its growth having been exceeded only by that of Venezuela and Argentina. For non-life business, Mexico was ranked 22nd worldwide, and for life business Mexico was 29th.
Topics of Discussion
This document highlights the most common operational scenarios that expose portfolio companies and private equity firms to loss in Mexico, and how they should be addressed from an insurance and risk management standpoint. The scenarios are as follows:
- Your product is manufactured in Mexico at a facility that is owned and/or managed by your company
- A Mexico based contract manufacturer is responsible for all aspects of the manufacturing process of your product, but they can’t or won’t prove that they purchase valid insurance
- Your employees travel to Mexico for business reasons
- You have full-time employees based in Mexico that require health insurance and/or Workers’ Compensation coverage
- An acquisition is based in Mexico
- Directors and/or officers permanently reside in Mexico
- Your product is manufactured in the U.S. and sold in Mexico
- Your product is manufactured, sold, and intended for use in the U.S., but somehow ends up involved in a lawsuit in a Mexican court
Your Product is Manufactured in Mexico at a Facility That is Owned and/or Managed by Your Company
Mexico prohibits the insuring of property or operations located in Mexico with insurance policies that are issued to protect companies that are based outside of Mexico. Failure to issue a “local” policy in Mexico can lead to several unfavorable responses from insurers and their government. Including, but not limited to, fines, tax penalties, denial of the claim, imprisonment, and travel limitations by your company’s management to their country.
Mexican liability policies respond to the codified civil justice system. Additionally, the policies typically carry a jurisdictional limitation restricting coverage to claims brought within the borders of Mexico only. The increase in cross border commerce, particularly since the ratification of NAFTA, has also fostered an increase in cross border legal actions. U.S. Federal Courts have accepted jurisdiction in cases where an event in Mexico is alleged to be the responsibility of a U.S. owned entity. Cases are heard based upon U.S. practice and awards are the same as for events occurring within the U.S. A typical Mexican policy would not respond to a U.S. suit. Merely arranging a local Mexican policy, as many brokers do, only covers part of the exposure.
To ensure that coverage is in place to respond to claims or suits in any jurisdiction permitted by U.S. law, based upon an occurrence in Mexico, it is necessary to coordinate local Mexican insurance with coverage issued in the U.S. The coverage should mirror the objectives and risk tolerance of the overall organization, so it is important for the U.S. based decision maker to control the coverage placed in Mexico. Potentially disastrous inconsistencies in coverage can occur if the decision is left to local management. Not to mention there is potential cost savings associated with coordinating the coverages appropriately.
The policies available in Mexico respond to the statutory, political and cultural norms of the country. Therefore, a U.S. based insurance buyer should not expect a Mexican insurance policy to respond in the same manner as one issued in the U.S.
A Mexico Based Contract Manufacturer is Responsible for All Aspects of the Manufacturing Process of Your Product, but They Can’t or Won’t Prove That They Purchase Valid Insurance
This exposure creates challenges even if the contract manufacturer evidences coverage. The level of sophistication of coverage in emerging markets is, at most times, questionable at best. It is also impossible to know if the buyer kept the coverage in force after the evidence is provided. Mexico still does not recognize the importance of insurance the way that we do in the U.S. Also, determining whether or not the coverage would respond appropriately can be challenging because the policy will not be issued in English. Your broker must understand how the insurance system works in Mexico.
The most important thing to keep in mind is that it is your brand at risk when a claim occurs. Ultimately, the contract manufacturer’s policy might pay a claim, but their insurer will concentrate on making the contractor whole. There are insurance products that allow you to extend your insurance program to your international contract manufacturers. This allows you to control how the program is designed, negotiate the premium, and control the claims process. The expense associated with obtaining coverage, and/or the expense that you incur under your deductibles/self-insured retentions when a claim occurs, can be passed through to the contract manufacturer. This approach is typically followed when your business model has a heavy reliance on a Mexican based contract manufacturer.
Your Employees Travel to Mexico for Business Reasons
In Mexico, a kidnapping occurs every six hours on average. Mexico is now second only to war-torn Colombia in the number of annual kidnappings. While few victims are killed, few perpetrators in this thriving multimillion-dollar industry are ever caught. As many as 4,000 'express' kidnappings occur in Mexico each year. The most common scenario occurs when passengers in unlicensed taxis are driven to ATMs and forced to withdraw money. Whenever possible, U.S. based employees should use a car service while travelling in Mexico. A random taxi should never be hailed from the street.
Be sure to consult with your insurance broker regarding how the auto insurance that you buy in the U.S. will be recognized in Mexico. Some of the physical damage coverages that you buy in the U.S. might carry over; however, you should always buy the liability coverage that the rental company offers. The Mexican government considers automobile accidents a criminal offense. More alarming is the fact that police officers are responsible for determining who is at fault when an accident occurs. Therefore, there is a high likelihood that determining fault in an auto accident might not go your way if there is any grey area.
There is also the possibility that a non-Mexican employee, or other expatriate, could require medical care while visiting Mexico. If possible, we recommend that the employee return to their home country as soon as possible in order to receive the required medical attention. If that is unrealistic, we recommend the purchase of a Global Medical insurance policy that will address these expenses on a primary basis. Without this policy, all medical expenses will be treated as an out-of-network benefit by U.S. based health insurers (thus increasing the employee’s out-of-pocket expense), or worse yet, not be covered at all. There are services included in the policy that can improve the employee’s quality of care while being treated in Mexico, e.g. referral to English speaking doctors, treatment oversight by a U.S. medical professional, etc.
You Have Full-time Employees Based in Mexico that Require Health Insurance and/or Workers’ Compensation Coverage
Mexico does not have Workers' Compensation legislation as we know it in the U.S. Social security provides a wide range of benefits for sickness, disability or death resulting from a work-related accident or disease. The contributions paid by employers cover almost all workers, and as a result, there is no need for private insurance arrangements. The Mexican Social Security Institute (Institute Mexicano del Seguro Social - IMSS) is financed by employers and provided for employees. Health services are available through the IMSS to employees and their families for non-work related injuries and illness.
The healthcare system in Mexico is decentralized, and services are provided through several national healthcare institutions. It is a complicated system that offers varying degrees of coverage, each catering to specific income groups. In the public sector, the Secretariat of Health is responsible for formulating and supervising national health related policies. The organization is under funded and generally lacking in resources. Most users of this service tend to be from the poorer sections of society.
The private sector, still small but showing steady growth, caters to the more affluent members of society who are seeking the best possible level of healthcare. Each of the 32 states also has its own health ministry, which often results in a considerable duplication of bureaucracy.
There are three types of core private medical insurance policies typically found in the market, which are termed "gastos medicos". There are varying degrees of coverage and several optional benefits, which are summarized as follows:
- A basic plan would provide a limited amount of cover for specific conditions with treatment through an approved network of national medical facilities. Using facilities outside the network requires the insured to self fund sums above those normally paid.
- An intermediate plan functions the same as a basic plan but pays for reasonable costs from the more expensive hospital or doctor. Authorization from the insurer must be obtained prior to proceeding with treatment.
- A comprehensive type of plan offers the widest coverage. There is no set maximum cover limit and the insured may use any hospital or practitioner. The insurance is for total health cover rather than to fill any gaps in state provision.
An Acquisition is Based in Mexico
An acquisition of a Mexican company presents multiple insurance and risk management challenges. Most notably, insurers must be given 90 days written notice to cancel an insurance policy; therefore, integrating the target’s exposures into your program at close can come at a significant expense.
In addition to premium projections and a plan to integrate their exposures into the U.S. program (where legal), your broker should focus on the following coverages and services:
- Business Income Exposure Analysis: Business Income coverage is very important since there is a high likelihood of a catastrophic loss at your facility. Whether it is due to a natural disaster, poor building codes, or a combination of both. Properly protecting your income stream is one of the top priorities of any program that we put in place.
- Building Inspection Reports: It is important for the U.S. decision maker to know whether or not the building they occupy, while visibly modern, can withstand a natural disaster. Most Mexican brokers are able to perform building inspections for
insured's. It typically takes a couple of weeks to complete an inspection.
- Catastrophe Modeling: The right software program can determine how close the property that your locations occupy is located to a seismic plate, volcano, or hurricane path.
- Travel Risk Assessment: Your people will no doubt visit the facility one or more times prior to closing the deal. Your broker should be able to alert you to weather patterns that will affect your trip, and the probability of violence in the region due to situations like elections or labor strikes and/or just general problems in the area.
It might be necessary to focus on other areas depending on the target’s specific operations and location.
Directors and/or Officers That Permanently Reside in Mexico
A local Directors’ and Officers’ Liability policy must be placed if you have a director or officer residing in Mexico. Failure to do so will leave that
individual (s) exposed to an uninsured claim. There is no other legal or suitable way to insure a Mexico based director or officer, even if your U.S. based D&O policy is issued on a worldwide basis.
Your Product is Manufactured in the U.S. and Sold in Mexico
Product Liability coverage is affordable and easy to obtain for a U.S. based company that manufactures a product in the U.S. and sells it in Mexico. This exposure can be addressed for as little as $2,500 annually.
Unfortunately, at this moment a product liability suit involving your product could be transpiring somewhere around the world and you could be unaware that it is happening. Some international courts are not required to notify the defendant of the pending suit. Most insurance policies purchased in the U.S. provide coverage on a worldwide basis; however, most insurers will only tender a defense if the suit is brought in the U.S. Therefore, without a Foreign Liability policy your company could be uninsured for suits that are brought outside of the U.S., and for federal enforcement orders that are recognized by a U.S. court.
Your Product is Manufactured, Sold, and Intended for Use in the U.S., but Somehow Ends Up in a Lawsuit in a Mexican Court
Coverage to address this exposure is easy to obtain and relatively affordable. However, it is a difficult claim scenario to foresee and the expense is equally difficult to justify. Coverage for this exposure can be secured for as little as $2,500 annually. It will provide coverage as illustrated in the prior section.
Addressing the aforementioned exposures requires the coordination of brokers and underwriters in both Mexico and the U.S. At Equity Risk Partners, we have Mexican partner brokers that we work with on almost a daily basis. We also have direct contact with underwriters on both sides of the border. Our partner broker in Mexico is Pablo Lorant from Grupo LM&S. You can learn more about them at
www.lmsmexico.com.mx.
Please let your Equity Risk Partners professional know when you are traveling
to Mexico (for business or pleasure), considering selling your product/service, and/or operating a facility in Mexico. It would be our pleasure to assist you in assessing the risks associated with doing so.
Our series on emerging markets will continue with a similar analysis of India, China, and Brazil.
