Getting a Piece of the Mexican Rock : NAFTA could open the vast, underinsured markets of Mexico and Latin America to U.S. insurance companies.

NAFTA, for most Americans, is a code word for either job loss to Mexico or salvation for lagging demand in the U.S. markets. But for many U.S. and multinational firms, NAFTA is the logical confirmation of a process of capital expansion that will continue independent of the treaty. That is not to say that NAFTA ratification will not make investments in Mexico more attractive. But astute corporate investors--both American and others--view the next four years as the window of opportunity for entering the relatively immature Mexican consumer market with fewer competitors.

Perhaps one of the more aggressive business sectors to pursue this strategy has been insurance. Unlike auto or agriculture, insurers--who rely on good broker relationships, electronic transactions and well-trained employees--need not worry about environmental regulations. The high-tech environment of most insurance firms results in high worker productivity and specific skills that complement underdeveloped foreign insurance markets. Yet American insurers’ increased interest in Mexico and Latin America is not stimulated by labor considerations or by the prospect of more liberal NAFTA tariffs. Rather, it is the harsh reality that many of these firms will no longer be financially viable as the U.S. insurance market loses premium revenue to state and federal health-insurance reform. As American insurers downsize and streamline their medical branches, many will shift to the more competitive life and long-term disability market. Yet even there, profit margins are becoming slimmer due to short-term premium price wars.

Thus both U.S. and European insurance firms view the Latin American market, starting but not ending with Mexico, as their future. Both European and American insurance firms are vying for almost 7 million potential Mexican buyers of life, property and casualty, supplemental medical and long-term disability insurance. Compared with Canadians and Americans, Mexicans are substantially underinsured. For example, 81% of all American households own life insurance. In Canada, life-insurance coverage in force exceeds national income. Across the board, market insurance penetration is almost complete in developed countries. Future premium growth as well as investment opportunities will be south of the border.

The attractiveness of the Mexican market is not only due to its potential for rapid growth, but also due to Mexican federal policies that have liberalized the regulatory climate for foreign investors over the last six to eight years. Even before NAFTA ratification, equity-share ownership by any foreign firm of a Mexican insurance firm can be as high as 49%. After the treaty, it can go up to 100%, in stages and sooner for those in before NAFTA. Thus, it is not surprising that of the 38 private insurance companies in Mexico, almost a third have already established joint ventures with foreign firms--more than half with such major European insurance firms such as Generale of Italy, Commercial Union of Great Britain and Alliance of Germany. Although these firms will not derive benefits from NAFTA, they recognize that early entry into the growing Latin American market will pay off, even with limited ownership.

Similarly, American insurance firms investing in Mexico recognize that more important than NAFTA is early market entry with a solid Mexican partner. Cigna, Aetna, Chubb and AIG are among the major American players that have joint ventures with Mexican firms. Several other companies are quietly seeking marriages in Mexico, and the current NAFTA debate provides them with greater negotiating leverage. For firms that want only the most profitable partners, post-NAFTA may be too late to enter the market competitively, and other Latin American countries such as Argentina will be more attractive.

Mexico’s economic success in attracting foreign investment is not unnoticed by other Latin American leaders. The formula for success goes beyond population size. At least for insurance, there must be a prospect for a sizable emerging middle to upper-middle class that will have disposable income and the desire to protect it. Insurance companies are diligently figuring probable returns on future investments as they get ready to enter and alter the tropical paradise of the past to the financial paradise of the future.