MAQUILADORAS: Understanding the Insurance Requirements

(GRM006)

Speakers:

• Edgar Garcia, International Area Manager, Willis Towers Watson – Ciudad Juárez, Mexico

• Jose Heftye, Senior Director, Treasury, Flextronics

• Moderator – Valerie Joseph Senior Vice President - International, Willis Towers Watson

Learning Objectives

At the end of this session, you will be able to:

• Describe the essential aspects of Mexican insurance

regulations governing maquiladoras

• Use metrics that measure the risk exposures of your

maquiladora operations

• Select a structure for your insurance program that

incorporates maquiladora requirements

What are Maquiladoras?

• Foreign owned or operated assembling, processing or manufacturing

businesses established across Mexico

• Generally located on the northern border cities of Tijuana, Ciudad

Juarez, Matamoros, Mexicali, Reynosa, Nogales and Tecate

• Maquiladoras import material and equipment from the foreign country

and export finish product usually back to the originating countries on

duty-free/tariff-free basis.

• Maquiladoras also benefit from other operational costs

Mexico Insurance Industry -Regulatory OverviewAdmitted Insurance Requirements

• What is Non-Admitted insurance?

• Non-admitted insurance is a policy issued in one country by an insurer which

is not registered or licensed to write insurance in the countries where the

exposures reside. In other words, no policy is issued – or specific risks

covered locally. Instead, risk transfer is arranged in another country.

• Non-admitted insurance is strictly prohibited in Mexico, and would be permitted

only if coverage and/or product are not available in the local market and then

would be subject to previous written authorization from the Insurance Authority.

• Exceptions are Marine Cargo Imports into and Exports out of Mexico

• Penalties for breach of this regulation include imprisonment and fines

Mexican Insurance Association shows there are 89 mandatory

insurances in Mexico (50 federal level and 39 municipal or state

level). The following are applicable for Maquiladoras

Auto Third Party Liability insurance:

• Compulsory in at least 13 States and Mexico City

• In Mexico, only 3 out of 10 vehicles have Third Party Liability insurance:

• Average cost per person per accident is between MXP25,000 to MXP50,000 (est.

US$1,500 - US$3,000) for bodily injuries and between MXP20,000 and MXP40,000

(US$1,125 – US$D2,250) for property damage; fines for not carrying insurance are

approximately MXP3,500 (US$200)

• Amendments to the Federal Bridges and Highways law for traveling on Federal

highways, roads, bridges :

• Third Party Liability will be compulsory in 2019 for all vehicles,

• It is already compulsory for models 2005 and newer

• However mandatory limit is very low: MXP100,000 (<US$6,000) for bodily injury

and MXP50,000 (or under US$3,000) for property damage.

Compulsory Insurance

Workers Compensation

• WC benefits are included in government mandatory program, called IMSS (Instituto

Mexicano del Seguro social), Social Security

• Compulsory for all employers in Mexico, who are mandated to provide health, disability

and life coverage to all active employees

• Failure to comply with this obligation may result in high fines, sanctions and in some

severe cases IMSS can confiscate machinery & stock in order to guarantee payment of

outstanding premiums.

Environmental Liability

• For companies or individuals transporting toxic or hazardous materials.

• Otherwise mandatory if the environmental authority requires it, which normally occurs

after they have performed a survey to the plant; typically, the authority is not specific on

what limit to carry.

Other Insurances

• Third party liability for fare-paying passengers on all forms of conveyance

Compulsory Insurance

Broker/Agent Involvement

• Brokers or Agent involvement is standard practice in Mexico

• Advantage of using a broker is their knowledge on the local law environment and

it’s continuous changes to guide Insureds

• Brokers do not issue Certificates of Insurance; only Insurers

• A major task of the Broker is in respect of the Anti-Money Laundering regulations,

requires Broker to obtain from insureds and to submit to insurers the following

critical documents to comply with Insurance and Surety Companies Law:

Incorporation deed Federal Tax Payer ID card Power of attorney

Utility bill - not older than 3 months ID of the legal representative

Complete Insurer’s Client ID Form to be signed by the legal representative

• Brokers must keep copies of these documents on file together with the evidence of

delivery to Insurers and are subject to periodic audits by the Insurance Authority to

verify compliance. Non-compliance may result in sanctions and fines.

• Insurers will not issue policies until they have received these documents

Mexico’s Industry Practice

Mexico’s Industry Practice

Premium Invoicing & Payment Procedures

• Broker or agents are not allowed to issue legal invoices to clients, nor can they collect

money from clients to pay for policy premiums; only Insurers can issue invoices and

are normally issued along with the policy.

• Mexican Insurers can receive payment from the local operating company or from its

HQ outside Mexico.

• Most Mexican Insurers have a USA bank account for these purposes, making it easier

for foreign companies to make payments.

• A few Insurers may ask for the documents required by the Insurance and Surety

Companies law, from the company making payment.

• In some cases, when payments come from outside Mexico, Brokers can, as a

courtesy, provide a USA type invoice to clients; usually such invoices include

instructions for direct payment to the Insurers.

Payment Invoicing & Payment Procedures

• Brokers require proof of premium payment as Insurers need this order to track the

funds, and therefore, consider the policy as paid.

• Without this evidence of payment the policy is considered unpaid by Insurers and

subject to cancellation on the due date.

Grace Period

• Mexican insurance law states that Insurers are free to give policyholders whatever

grace period they desire to pay premiums, as long as it does not exceed 30 days

• Some insurers may offer only 15 days to make payment or policy will be cancelled

with no prior notice.

• Insurance law states policies will be automatically cancelled if payment is not

received by Insurer on the due date

• Insurers are not obligated by law to send a cancellation notice to clients, so normally

notices of cancellation are not issued to either clients or brokers.

Mexico’s Industry Practice

Maquiladoras Exposure –

A Risk Manager Perspective

Risk Visibility

Risk Improvement

Risk Financing or Transfer

Risk ManagementCycle

Risk VisibilityMaquiladoras Operational Structure

Owned Operations Outsourced Operations

Assets / Property

Third Party Liability

Reputational

Financial

Employees

Business Partners

Business Interruption

Low Risk

Medium Risk

High Risk

Risk Visibility – Owned Operations Assets /

Property

Third Party

Liability

Reputational

Financial

Employees

Business

Partners

Business

Interruption

Property Damage

PD, BI, Environmental

and Product Recall

Loss of Revenue or

Brand Equity

FX, Credit, Tax

and E&O

Local, US and Third

Country Nationals

Contractors, Customers

and Suppliers

Supply Chain

Interruption

Building, Equipment and

Inventory

Third Party

Indemnification

Share-holder Value, Extra and

Legal Expenses

First Party and Third Party

Financial Loss

WC, Medical, K&R, Repatriation

and Executives Concentration

Property Damage and Bodily

Injury

Loss of Revenue or

Profit

Risk Visibility – Outsourced Operations Assets /

Property

Third Party

Liability

Reputational

Financial

Employees

Business

Partners

Business

Interruption

Property Damage

PD, BI,

Environmental and

Product Recall

Loss of Revenue or

Brand Equity

FX, Credit, Tax

and E&O

Limited to Employees

Visiting Third Party

Operation

Limited to BPs Visiting

Third Party Operation

Supply Chain

Interruption

Inventory At Third Party

Locations

Potentially Limited to

Products Liability

Minimal if isolated from

Third Party

First Party and Third Party

Financial Loss

WC, Medical, K&R, Repatriation

and Executives Concentration

Property Damage and

Bodily Injury

Loss of Revenue or Profit

Risk ImprovementOwned Operation Outsourced Operation

Assets / Property Implement Safety Standard

(e.g. FMG)

Set Up BCP

Transportation Security

Comply with Safety Standard

Contractual Requirement

Set Up BCP

Transportation Security

Business

Interruption

Identify Single Source Suppliers

Set Up BCP

Identify Single Source Suppliers

Set Up BCP

Third Party

Liability

Quality Control

Phase I Reports for New

Locations

Contracts Design

Quality Control Process

Contracts Design

Owned Operation Outsourced Operation

Reputational Define Crisis Management

Team and Response Plan

Define Cross-Company Crisis

Management Team

Financial Continuous Monitoring on FX,

Credit and Tax metrics

E&O: Quality and Supply Chain

Control

Continuous Monitoring on FX,

Credit and Tax metrics

E&O: Quality and Supply Chain

Control

Employees and

Business

Partners

Define Clear Protocols to

manage Security, Safety and

Medical Emergencies

Avoid Executives Concentration

Define Clear Protocols to

manage Security, Safety and

Medical Emergencies

Avoid Executives Concentration

Risk Improvement cont’d

Risk Financing Or Transfer

Owned Operation Outsourced Operation

Assets /

Property

• Property Insurance

• Marine Insurance

• Contractual: PD/BI and Marine with Loss

Payee Assignment

• Indemnity Provision, Limitation of Liability

and Jurisdiction Clauses

Business

Interruption

• Business Interruption

Insurance

• Contingent Coverage

• Contractual: PD/BI with Loss Payee

Assignment

• Indemnity Provision, Limitation of Liability

and Jurisdiction Clauses

Third Party

Liability

• General, Auto and

Products Liability

Insurance

• Product Recall Insurance

• Contractual: GL/AL/PL with Named Insured

requirement

• Indemnity Provision, Limitation of Liability

and Jurisdiction Clauses

Risk Financing Or Transfer cont’d

Owned Operation Outsourced Operation

Reputational Reputation Insurance Contractual: Reputation Insurance with

Named Insured requirement

Indemnity Provision, Limitation of Liability

and Jurisdiction Clauses

Financial Property and BI

Insurance (FX, Tax and

Extra Expenses)

Trade Credit

Errors and Omissions

Contractual: PD/BI with Loss Payee

Assignment

Indemnity Provision, Limitation of Liability

and Jurisdiction Clauses

Employees and

Business

Partners

Workers Compensation

Medical

K&R

Contractual: WC/EL or local equivalent with

Named Insured requirement

Indemnity Provision, Limitation of Liability,

Hold Harmless and Jurisdiction Clauses

Cross-Border Operations Challenges

Assets / Property

Business Interruption

Safety and BCP standards varies per country

(Code vs. Highly Protected Risk)

Third Party Liability Litigious environment is less aggressive outside

the US

Multiple Legal “gray areas”

Reputational Impact on global brands (Internet and

social media)

Financial Political risk exponentially growing

Employees Increasing Employee Union pressure

Business Partners Contractual design standard varies per country

(indemnity provisions, limitation of liability and

ability to enforce contractual arrangements)

Traditional Insurances for Maquiladoras

• Structuring an insurance program for a Maquiladora would depend on its size,

operation, location and line of business.

• Typically, a program would consist of the following policies:

• Property Damage & Business Interruption

• General Liability

• Inland Transit

• Major Medical Expenses

• Life

• Automobile

Insurance Program Options

Global vs Local Insurances

• Coverage Scope

• Pure local policies not as broad as Global or Integrated policies on the following basis:

i. The local policy format is different as the one under an integrated program; and

ii. The capacity limit of local Insurers is by far less than those of global Insurers

• The local policy forms do not have blanket limits but have a breakdown of coverages

where specific limits must be indicated for the following items:

• Buildings, Contents, Stock, Machinery & Equipment, EDP, Machinery Breakdown,

Burglary, Money & Securities and Glass Breakage

• Consequential Loss including Gross Earnings (mostly for companies selling directly in

Mexico), Loss of income, fixed expenses and salaries and Extraordinary Expenses

• Local insurance could be a preferable option than global programs, for small and mid

size companies, based on price and required coverage for the local operations

Insurance Program Options

Global vs Local Insurances

• Coverage Availability

• Local policies are limited to the coverage agreed under the Insurer’s reinsurance

contracts

• Although Insurers are regularly including new coverages under their traditional

Package Policy model, asking for coverages similar as the ones found under a

Global program represent investing a lot of time and there is no guarantee Insurers

will agree to provide such coverages.

• Deductibles

• Deductibles under Global programs are usually, by far, higher than local insurances

• Large multinational companies view their ability to absorb bigger deductibles from an

overall global perspective

• Small and medium size companies usually cannot absorb large deductibles as huge

losses can easily put them out of business

Corporate risk management philosophy usually

dictate the appropriate program structure

Insurance Program Options

Local

Insurance Program /

Self-Insurance

Local

Insurance Program /

Self-Insurance

DIC / DIL

Global

Insurance Program / Self-Insurance

Deductible / Retention Deductible / Retention

Owned Structure Outsourced Structure

Ins

ura

nc

e L

imit

Risk Financing Or Transfer - Structure

Owned Structures Insurance Programs

Stand-Alone Local Policies Local Policies With DIC/DIL

Global Non-Admitted Program Global Admitted Program

Takeaways & Q&A

Takeaways

• Engaging a local broker is advantageous

• Non-admitted insurance not permissible in Mexico and penalties include imprisonment

and fines

• Main insurances for maquiladoras include General Liability, Property Damage, Auto

Liability and Major Medical & Life

• Global programs are traditionally broader than pure local policies in scope and

availability of coverage as well as policy limits

Q&A

Thank you!