With ratification of the North American Free Trade Agreement (NAFTA) by the United States in late 1993, Canada, Mexico, and the United States have entered into a cooperative economic system designed to open markets between the three nations. Although substantial free trade (including insurance services) has long existed between the United States and Canada, this has been less true with respect to Mexico. However, during the late 1980s, a political warming between the United States and Mexico began a liberalization in the Mexican insurance industry. Price and policy form controls were loosened, a solvency margin system was established as the basis for regulation, restrictions on reinsurance placement were eliminated, and foreigners could acquire minority ownership of insurers doing business in Mexico. But there continued prohibitions against foreign management or equity control, which is essential for foreign market access and expanded business opportunities.

NAFTA abolishes limitations such as these, thereby opening the door for substantial competition between insurers of all three nations throughout North America. In doing so, NAFTA seeks to create a free trading block from the Yukon to the Yucatan, which will exceed the European Community both in population and market size. In addition, NAFTA sets the precedent for expanding trade with other areas of Latin America, thereby fostering free movement of goods, services, and investments throughout both North and South America.

NAFTA phases out all tariffs, some at the outset and others over a period of time, between the United States, Canada, and Mexico. It opens the economy of each NAFTA nation to direct investment by persons from the other two countries. It includes provisions that, among other things, prevent the use of nontariff barriers to restrict trade, protect sensitive industries from import surges, open the Mexican service economy, require levels of intellectual property protection, and provide means for dispute resolution.

Although the prime focus of NAFTA has been on goods rather than services, Chapter 12 of this agreement takes the initial step toward establishing a free-trade zone in services as well. Under Chapter 12, each NAFTA nation must treat service providers of another NAFTA country on a basis no less favorable than it accords its own service providers. A country may not require a service provider from another NAFTA country to maintain an office or be a resident as a condition of providing services.

Trade agreements establish rules based upon mutual need. In addition, they establish a framework of increased predictability for business development. By establishing a standard of national treatment for business and the terms under which companies may sell across borders, NAFTA has created a secure business relationship among the three countries. Within a certain time, U.S. companies in Mexico will be treated no less favorably than Mexican companies, and U.S. companies will be able to sell services from the United States to Mexico without having to leave home.

Under NAFTA, all barriers to insurance activities in Mexico will be removed by the year 2000 following a phase-in period. Starting January 1, 1994, restrictions on ownership of Mexican insurers and brokers commenced being phased out. Insurance agencies and brokerages established in the United States will be permitted to own and operate agencies and brokerages in Mexico. This may be accomplished by establishing or acquiring Mexican agencies and brokerages. Such subsidiaries will not be subject to any equity or market share limitations. With respect to insurance companies, by 1996, U.S. and Canadian firms that currently possess a minority equity ownership position in Mexican insurers will be permitted to increase such equity participation to 100 percent. Other insurers involved in joint ventures with Mexican insurers will be able to increase their ownership in stages to 100 percent by the year 2000.

The pact also permits U.S. and Canadian companies to establish Mexican subsidiaries as of January 1, 1994, subject to individual company market-share caps of 1.5 percent. In addition, there is an aggregate market-share limit for all controlled subsidiaries of 6 percent. The aggregate limit is increased to 12 percent by 1999. However, by January 1, 2000, all aggregate and company share limits will be eliminated.

It should be noted, however, that these will still be Mexican companies doing business in Mexico. Hence, they will be subject to the same rules, procedures, and approvals of the Mexican insurance regulatory authorities to which other Mexican companies are subject. (However, the sale of insurance through branches of U.S. or Canadian companies established in Mexico will no longer be permitted.) Most importantly, NAFTA commits the Mexican government to regulate U.S. insurers in the same manner it regulates its own domestic companies. In addition, NAFTA lifts Mexican restrictions against Mexican residents purchasing certain insurance products while in the United States.

In short, unlike GATT, NAFTA sets forth a specific schedule for parties to open their insurance markets. The GATT treaty has no effect on the implementation of NAFTA.