Two years after the Insurance and Bonding Companies Law was enacted, surety insurance is finally starting to take effect in Mexico and coexist with other institutions that integrate the bonding sector.
In Mexico, surety insurance is regulated as a mechanism to guarantee obligations, under which an insurer must indemnify the insured (ie, the beneficiary) in case of a breach of the policyholder’s legal or contractual obligations.
Surety insurance’s main benefit is that it represents yet another mechanism to guarantee obligations which may prove, in practice, to be much more effective than traditional bonds. In essence, surety insurance is easier to collect and enforce than traditional bonds. The federal government is expected to start requesting surety insurance from its contractors, rather than traditional bonds. This shift in policy will encourage development in the surety insurance market.
To offer this type of insurance, insurers must be expressly and exclusively authorised as a monoline business (which includes traditional bonds). Traditional bonding companies cannot issue surety insurance unless they convert into surety insurers. Consequently, transitory articles to the Insurance and Bonding Companies Law allowed bonding companies to convert their bonding business into surety insurance business if they requested to do so before December 31 2015. Before the regulator will authorise such a conversion, companies must make an effort to adjust their systems, accounting and compliance activities and new product development in order to meet insurance compliance requirements.
The regulator is now issuing the corresponding authorisations and surety companies are finalising their preparations to secure the operational go-ahead, after proper inspections, to offer surety insurance products.
Accounting, reporting and – most importantly – the technical reserves calculation differ significantly for surety insurance and bonding. It is expected that surety insurance will soon replace traditional bonding transactions, which will ultimately facilitate trade and public procurement.