Taking the Brakes Off Mexico’s MTPL Market
In September last year mandatory motor third-party liability (MTPL) insurance was introduced for private vehicles using Mexico’s federal roads. But surprisingly, the landmark legal move has not yet driven up policy purchases; MTPL penetration remains stubbornly low at just 28% of vehicles.
There are a number reasons why MTPL take-up has so far been sluggish, primarily to do with the way the law is being implemented and enforced.
Firstly, the new MTPL law is being phased in gradually. The initial wave applied only to vehicle models manufactured in 2011 or later. In January this was extended to models dating from 2008 and will continue in further tranches until 2019 when all models must be insured.
As having insurance is usually a pre-requirement to obtaining a bank loan, in terms of policy sales, the majority of people in possession of a newish car will already have had insurance. For the rest of the people there is currently little incentive to purchase MTPL cover for their vehicle.
Drivers in Mexico are rarely required to present proof of insurance. For example, it’s not required when they change registration plates or update their driver’s licenses. Nor is it necessary to present an insurance document when putting a vehicle through its emissions test - a six-monthly inspection for cars older than two years.
Instead, vehicle insurance supervision is carried out by the federal police. Fines range from 1,400-2,800 MXN (96-192 USD), equivalent to 20-40 days minimum wage, but with a 45-day grace period in which to provide proof of insurance, many wait to be caught before making the purchase.
The use of fake policy documents is also an issue, though the creation of a centralized database of auto policies, currently being championed by the Mexican Association of Insurance Institutions (AMIS), will help to make this more difficult.
Another major reason for the poor sales of MTPL insurance in Mexico is the relatively low level of compensation currently awarded in the case of road accidents. That said, it is likely that recent changes to Mexico’s Federal Labor Law will lead to a major rethink of MTPL coverage for both insurers and consumers.
Here’s why: The General Law of Insurance Institutions and the Federal Civil Code refer to the Mexican Federal Labor Law to set minimum amounts to compensate damage caused to third parties. On December 1, 2012 an amendment to Article 502 of the Law came into force that effectively increased minimum payments by up to 600%.
Furthermore, each state in Mexico has its own rules relating to compensation for death caused by accidents; some refer to the Civil Code, others a lifetime pension. Frequently, awards are at the discretion of a judge, which can lead to levels that are well above the minimum mandatory sum insured.
Even with the introduction of the new mandatory MTPL law, the minimum compulsory sums insured are currently just 50,000 MXN (3,450 USD) for property damages and 100,000 MXN (6,900 USD) for personal injury. We predict that the gap between the level of insurance cover purchased and the amounts individuals are required to pay will widen significantly over the coming two to three years. Indeed, signs seem to suggest that compensation payments are already starting to accelerate, both in terms of value and frequency.
Together, the recent legal developments present a mixed blessing for Mexico’s MTPL market. With greater incentive for auto owners to buy cover, the brakes may finally come off MTPL sales. On the flipside, insurers will have a raft of new challenges to manage in the shape of growing claims severity and frequency and escalating legal costs.