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Mexicos Transformation Behind Every Great Project is a Serious Insurer
September 18, 2014
In December 2012, the tri-party “Pacto por Mexico”, provided a foundation for political, fiscal, banking, energy, and telecommunications reforms. Since then, taxes have been raised and action plans created to help Mexico build on its strengths, heighten productivity, and spread prosperity to every citizen. The ultimate goal is a “profound national transformation”, and a seat for Mexico at the center of the world arena, economically, politically, as an energy power, and as a global logistics hub.
Mexico is open for business.
Over the past three decades, Mexico has opened its economy to increasing private investment. This process was accelerated when Mexico joined the APEC (Asia-Pacific Economic Cooperation) in 1993, NAFTA (North American Free Trade Agreement) and the OECD (Organization for Economic Co-operation and Development) in 1994, and the EU and EFTA (European Free Trade Association) in 2001. From 1982 to 2013, the number of state-owned enterprises shrank from 1000 to only 25 of the 500 principal companies in the country. The Pacific Alliance with Chile, Colombia , and Peru in 2012 marked another milestone in regional and global connectivity. It not only facilitates regional trade, but also concentrates economic clout, serving especially as a stronger bridge to the fast-evolving Asia-Pacific.
There is plenty of room for private investment, and Mexico’s macroeconomic fundamentals have remained stable despite temporary setbacks, largely due to a healthy, reliable banking system and a vast, internal market. Right now Mexico stands out as one of the strongest contenders in the Latin American region, with projected growth rates of 3.2% and 3.7% for 2014 and 2015, higher than the regional average of 3%.
Statistics on Mexico’s government website state that innovation produces two thirds to three fourths of the GDP (Gross Domestic Product) in developed nations. So, like China and India, Mexico is promoting innovation as the chief tool for transforming into a first-tier, intellectual-leadership economy. Technology is an incredible driving force, and according to physicists, today’s advanced technology makes it possible for a national economy to raise its profile within one generation. The government has even published a six-point innovation strategy, addressing a goal to every stakeholder— from citizens and teachers to institutions, corporations, and government. Each high-level innovation goal clearly aligns with one or more of the practical regulatory reforms being promoted.
Many of those practical reforms address the infrastructure upgrade needed to pave the way for sustainable growth. The government has committed to a host of impressive infrastructure projects with a pledge of USD 315 billion. But the interdependencies between macroeconomic targets, legislation, and infrastructure improvements create a complex risk landscape. Numerous obscure regulations are being modified regularly, to keep pace with wider reforms.
First, liability and indemnity laws are continuously changing. Insurance limits have to be higher, and coverage has to be broader. Even so, umbrella coverage is becoming an outdated term, because individual elements carry different risks, and require appropriately differentiated levels of protection.
Then there are sudden and drastic legal changes. For example, the Environmental Liability Act of 2013 requires companies to set aside considerable funds to remediate potential environmental damage, the costs of which can rise to hundreds of millions. Far from adding a cost burden, environmental insurance has been proven to be a lifesaver for companies involved in all sorts of activities, particularly energy and infrastructure. It allows businesses to transfer the burden of the financial reserve of millions to the insurance company, for a premium as low as 2% of the reserve. This frees up business capital for years, if nothing happens. Plus, it provides security, if something does happen.
Insurance is a Protector and Liberator
There are a slew of other regulations which are continuously evolving, and have to be tracked and accounted for in terms of risk. Mexicans have traditionally viewed insurance as a legal burden. But basic, out-of-the-box insurance is only a fraction of what an experienced, global insurer can provide. The real essence of insurance is risk transfer. It not only protects the bottom line; it is one of the most powerful enablers for business.
The important projects underway in Mexico—a new international airport in Mexico City, an aqueduct, high-speed railways, highways, and more—are huge, high-profile, and confronted with risks on every front. One significant delay, a natural catastrophe, or an accidental regulatory misstep could eat away the profit margin, and even destroy a company’s reputation and market share. Both Mexican multinationals and foreign firms will benefit from close collaboration with a serious, global insurer, who has the scope and longevity to commit from project inception to completion.
Serious global insurers don’t want to charge high premiums for high risk. They want to help companies minimize risk, first and foremost. So they will be expert advisors on large-scale projects, and offer smart, risk-engineering teams with strong scientific backgrounds, who will analyze project risks in depth, and help mitigate them wherever possible. They should also assist companies in developing rigorous, internal, risk-management procedures.
Once risks have been analyzed and quantified in detail, the insurance coverage can be fully customized. Each risk element can be accurately covered, so that clients have appropriate limits for higher risk, and don’t pay for extra coverage where risk is low. Profit margins on long-term projects depend on getting the risk analysis, risk transfer, and insurance coverage right.
Having a global insurer with local partners around the world will also help Mexican multinationals to get local-language policies wherever they need to, with wordings which are fully compliant with local laws. At the same time, the insurer will integrate their policies into a global program. This saves costs, since common risks are aligned and covered together. It also alleviates the tax burden, because indemnity funds are paid by the insurer in the jurisdiction where the loss was incurred.
The Risk and Rewards of Mexico’s Transformation
Modernizing the infrastructure and pursuing first-class innovation are accelerating change, and speeding up the tempo of risk.
- About The Author
- Alvaro Salamanca
- Country Manager Mexico of XL Group’s insurance operation
- By Region