MAQUILADORAS: Understanding the Insurance Requirements (GRM006)

Transcription

1 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

2 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

3 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

4 Mexico Insurance Industry - Regulatory Overview Admitted 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

5 Compulsory Insurance 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.

6 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

7 Mexico s Industry Practice 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

8 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.

9 Mexico s Industry Practice 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.

10 Maquiladoras Exposure A Risk Manager Perspective Risk Visibility Risk Financing or Transfer Risk Management Cycle Risk Improvement

11 Risk Visibility Maquiladoras Operational Structure Low Risk Medium Risk High Risk Owned Operations Outsourced Operations Assets / Property Business Interruption Third Party Liability Reputational Financial Employees Business Partners

12 Risk Visibility Owned Operations Assets / Property Business Interruption Third Party Liability Reputational Financial Employees Business Partners Property Damage Supply Chain Interruption 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 Building, Equipment and Inventory Loss of Revenue or Profit 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

13 Risk Visibility Outsourced Operations Assets / Property Business Interruption Third Party Liability Reputational Financial Employees Business Partners Property Damage Supply Chain Interruption 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 Inventory At Third Party Locations Loss of Revenue or Profit 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

14 Risk Improvement Owned Operation Assets / Property Implement Safety Standard (e.g. FMG) Set Up BCP Transportation Security Outsourced Operation Comply with Safety Standard Contractual Requirement Set Up BCP Transportation Security Business Interruption Third Party Liability Identify Single Source Suppliers Set Up BCP Quality Control Phase I Reports for New Locations Contracts Design Identify Single Source Suppliers Set Up BCP Quality Control Process Contracts Design

15 Risk Improvement cont d Owned Operation Outsourced Operation Reputational Define Crisis Management Team and Response Plan Financial Continuous Monitoring on FX, Credit and Tax metrics E&O: Quality and Supply Chain Control Define Cross-Company Crisis Management Team 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

16 Risk Financing Or Transfer Assets / Property Business Interruption Third Party Liability Owned Operation Property Insurance Marine Insurance Business Interruption Insurance Contingent Coverage General, Auto and Products Liability Insurance Product Recall Insurance Outsourced Operation Contractual: PD/BI and Marine with Loss Payee Assignment Indemnity Provision, Limitation of Liability and Jurisdiction Clauses Contractual: PD/BI with Loss Payee Assignment Indemnity Provision, Limitation of Liability and Jurisdiction Clauses Contractual: GL/AL/PL with Named Insured requirement Indemnity Provision, Limitation of Liability and Jurisdiction Clauses

17 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

18 Cross-Border Operations Challenges Assets / Property Business Interruption Third Party Liability Safety and BCP standards varies per country (Code vs. Highly Protected Risk) 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)

19 Insurance Program Options 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

20 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

21 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

22 Insurance Limit Risk Financing Or Transfer - Structure Global Insurance Program / Self-Insurance DIC / DIL Local Insurance Program / Self-Insurance Deductible / Retention Owned Structure Local Insurance Program / Self-Insurance Deductible / Retention Outsourced Structure

23 Owned Structures Insurance Programs Stand-Alone Local Policies Local Policies With DIC/DIL Global Non-Admitted Program Global Admitted Program

24 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!