At risk: As Mexicans slowly warm to the idea of getting insured, recent acquisitions are putting the insurance industry in foreign hands. (Special Report).

Just one step behind the banks, Mexico's insurance industry is marching down the path of globalization. There are 65 insurance companies in Mexico, "and it's likely that this number will drop drastically within the next two years, when there will be no more than 20 players in the Mexican market, 90-100% of which will be of foreign origin," says Mexico City daily Reform a columnist Samuel Garcia.

Although the shift may not be quite as quick and thorough as that, it is clear that foreign companies are poised to dominate the local insurance industry, which before Nafta was almost completely Mexican-owned. The clearest sign came with a one-two punch this summer: Soon after Citigroup bought Mexico's second-largest bank Banacci, Dutch insurance giant ING Group bought Seguros Comercial America, Mexico's largest insurance company.

With that purchase, foreign control of the insurance market jumped to 36%, a figure that looks likely to grow dramatically in the near future.

The announcement of the Seguros Comercial America deal was soon followed by leading bank BBVA-Bancomer agreeing to sell its insurance unit Seguros BBV Probursa to Globe Insurance Company Ltd, a subsidiary of British insurance giant Royal & Sun Alliance Plc. That added one more name to the long list of foreign buyouts in the past year, as New York Life Insurance Co. bought Seguros Monterrey-Aetna, Kemper bought Seguros La Territorial, Swiss company Wintherthur bought Seguros Altas and Aba Seguros was purchased by General Motors' GMAC Holdings.

As this issue went to print, of the 65 insurance companies in Mexico, 24 were affiliates of foreign companies, 21 of them had foreign minority share-holders and only 20 were fully Mexican-owned.

This foreign ownership doesn't bother Manuel Aguilera Verduzco, president of the National Commission of Insurance and Securities (CNSF).

"Nationality is no guarantee that insurance companies will meet their obligations. Furthermore, the alliances and mergers of recent years don't speak of the difficulties that companies face to stay in business, but the consequences of globalization."

Though some may downplay financial difficulties in the sector, it's clear that many insurance companies are in dire straits. The 1994/1995 peso crisis wreaked havoc on the sector, and five years of double-digit growth in the market hasn't been enough to pull many companies into the black. Despite strong profits by the top insurance companies, the average profit of all the sector's companies together was a meager 1% in the first quarter this year, after being slightly in the red during the same period in 2000. The sale of Grupo Pulsar's s remaining stake of Comercial America to ING for US$791 million was emblematic of industry difficulties, a result of the need for owner Alfonso Romo to pay off some US$1.3 billion in debt.

With a market capitalization of some US$65 billion, far exceeding the value of all Mexican insurance companies put together, ING could shrug at the expense.

TWO ON THE AUCTION BLOCK

For now, more than half the insurance market remains in Mexican hands. That could change rapidly if the rumored foreign interest in the sale of Grupo Nacional Provincial (GNP), the nation's second-largest private insurer, results in a deal. Investors in GNP's parent company Grupo Bal could pull in US$3 billion from the sale.

Rumors aside, a company that is definitely approaching the auction block is Aseguradoras Hidalgo, the government-owned insurer that covers several public companies, including Petroleos Mexicanos (Pemex), the Federal Electricity Commission and the airlines. Having this lucrative captive-customer base gives it a quarter of the insurance market from the word "go," and that's what has other insurance companies fretting. Agreeing that as a government agency, Hidalgo has first choice on mega-contracts for state companies and therefore enjoys a distinct advantage, the Fox administration scrapped a plan to put only 49% of Hidalgo on the market, and has vowed the government will rid itself of the whole thing. But tricky dealings with opposition legislators may limit the administration's freedom to dump the debt-ridden, inefficient agency off to the highest bidder.

Speculation runs rampant as to who might buy the company, especially as Mexican ownership of the domestic insurance industry hangs in the balance. Purchase by a national player such as GNP would create a power-house with a huge chunk of the market, whereas if a foreign company were to buy Hidalgo, a solid majority of the industry would be in the hands of extranjeros.

A GOOD TIME TO BUY

It doesn't take much imagination to figure out why a foreign insurer would want to buy a Mexican one. Regulations have loosened to the point that there are few hurdles to jump in getting to the rapidly growing market. The growth potential is huge, as the Mexican insurance market is still in its infancy, accounting for only 1.9% of gross domestic product (GDP), compared to an average of 6% for most industrialized nations and above 10% in the United States and Japan. But even regional neighbor Brazil nearly doubles the Mexican figure at 3.5% of GDP. The CNSF has set a goal of more than doubling the market, to 4.5% of GDP, within six to eight years.

That may seem an ambitious goal, but such growth is a real possibility. Social security reform, especially in the local retirement-fund administrator (Afore) market, have the potential of generating a huge captive market.

Economic growth and stable inflation also make insurance attractive. Historically, periodic peso devaluations made eventual payouts unreliable--who knew what a 100,000-peso life insurance policy would be worth when you finally passed away?

But today "the tendency for lower inflation" says Jose Luis Llamosas Portillo, director of the Mexican Insurance Institutions Association (AMIS), "allows a more just premium structure for the insured. It's been demonstrated that when inflation is low, the insurance industry grows. What we have seen since the beginning of this sexenio is that inflation is continuing to drop."

Combined with stable growth for the economy, paying insurance premiums today for an eventual payout in the future is starting to look like a fine idea to new insurance customers.

"LA VIDA No VALE NADA..."

But the ever-shrinking peso is just one of the historical factors that have held back insurance growth. The late national poet and social critic Octavio Paz once wrote: "The Mexican's indifference toward death is fostered by his indifference toward life." That may be some cultural explanation as to why many Mexicans view life insurance as an alien idea. Gringos, Japanese and the like may try to control death by preparing for it with monthly payments and balance sheets, but here, it could be said, it is simply another reality to accept and submit to.

Less metaphysical sources also point to other cultural limitations on the Mexican insurance industry. After the

1985 Mexico City earthquake, economic chaos ensued as "houses weren't insured and neither were many public buildings. At that time you could see an increase in demand (for insurance), but after a few years it dropped off. We Mexicans have a very short memory," Alberto Villagran, director of damage insurance at AMIS, told BUSINESS MEXICO.

Gabriel Gonzalez, assistant director of damage insurance for ABA Seguros, points out that even living in the shadow of a smoking volcano isn't enough to get denizens of Mexico City and its environs to buy home insurance.

"The majority think: if it hits us, it hits us and ni modo. Historically, people don't trust insurance policies, regarding them as scams," he adds.

Getting the idea of insurance into the head of the average working-class Mexican, who barely makes enough to keep going on a daily basis, requires highly creative thinking.

"You have to recognize that families lack (resources) in Mexico, but the insurance sector has reacted very well and today it is profitable to protect your patrimony ... with insurance that can be really affordable," says Jose Adrian Ruiz de Chavez, Assistant Planning director for Seguros Principal. "We offer a plan (through businesses) so that workers can be insured with benefits for their families, for 25 pesos (a month)."

Over time, affordable plans with proven results could bring a far greater number of people into the insurance culture.

The irony is that such creative methods to get insured -- the efforts that have made the industry grow at a rate of 10-20% annually since 1997 -- may have come too late to keep domestic control of the industry. Perhaps Mexicans may finally start insuring themselves in great numbers once they no longer own their insurance companies.

Josh Tuynman is a fully insured Mexico City-based freelance reporter.

INSURANCE SECTOR GROWTH

                  (*) MARCH '00  (*) MARCH '01  % CHANGE  % OF MARKET

Total                 21.6           24.6         13.8       100
Life                   7.7            7.8          1.1       31.6
Pensions               2.8            3.3         15.9       13.3
Health, accident       2.3            2.8         23.6       11.6
Auto                   5.8            6.5         12.8       26.4

(*)Billions of pesos

Source: AMIS

RELATED ARTICLE: Getting Insured in Mexico

"What is the quality of insurers in Mexico?" is the first question U.S. companies ask when looking to cover their ventures south of the border.

"If we've got US$10 million in losses from an earthquake in Puebla, how can we be sure we'll get our money back?" is a typical question for Jim Labelle, president of Flagstaff, Arizona-based International Insurance Group. As a broker of Mexican insurance for U.S. businesses and individuals, he tells clients that dealing with Mexican companies is no different than dealing with U.S. companies: you must first check the company's finances. If there's no danger the company will go bankrupt, you're in good hands, he told BUSINESS MEXICO. Financial ratings agencies such as Ambest and Standard & Poor's have easily available rankings for insurance companies. A five-minute check at www.ambest.com showed that Grupo Nacional Provincial, the largest Mexican-owned insurer, carries a rating of A (excellent) from the rating agency.

"GNP and Seguros Comercial America together control 50% of the market, so we're real comfortable with them," says Labelle.

Despite the high quality and reliability of top Mexican insurers, many U.S. businesses choose to work through U.S. brokers, at least initially.

"Over time, as they become familiar with the Mexican business environment, they may start dealing with a local broker," says Labelle. And with U.S. insurers, at least peso fluctuation is one less thing to worry about, given that everything-premiums and payouts-is denominated in dollars.

Environmental Risk

Although it is fairly simple to ease a U.S. businessperson's doubts about dealing with insurance companies in a foreign country, there are plenty of other risks in Mexico--but then that's what insurance is for in the first place.

For example, when shopping around for a hotel or factory location, there are a number of risks to keep in mind that will affect the cost of premiums. Acapulco tops the list for natural disaster risk, having the nation's highest premiums for earthquake insurance as well as being exposed to seasonal hurricanes. Researching the location of a business, even within a city, can reduce risk--and premiums. Within Mexico City, earthquake insurance is cheaper for buildings in the hills of Santa Fe or San Angel, rather than ones located on the wobbly lakebed beneath the city's center.

And then there's the danger of the open road. Theft is so prevalent that insuring cargo is prohibitively expensive, with exorbitant premiums and 25% deductibles.

"We see a lot of losses from theft and hijacking, so some companies will self-insure, rather than pay the high premiums on cargo shipments," says Labelle.

That's a factor that keeps many maquiladoros right up against the U.S. border. "Folks who are shipping goods from the interior of Mexico are rethinking their strategies," says Labelle.

Location, location, location, That's the key for insurance as much as any other factor in business.