Insurers will endure one of worst hurricanes in Mexican history

There is only a low probability that ratings of property/casualty insurance companies in Mexico will be affected by Hurricane Patricia, which made landfall on October 23 along Mexico’s west coast, rating agency Fitch has said.

Despite being one of the worst hurricanes in Mexican history, and affecting a major tourist area, Fitch believes the losses caused by Patricia will be absorbed by the insurance/reinsurance industry without causing widespread financial stress, considering the ample solvency margins, catastrophic reserves and reinsurance coverage of the Mexican insurance industry.

The federal government estimated that around 3,500 houses were damaged and the same number of agricultural hectares, which represents approximately 2 percent of total housing (of the population that participated in last census) in the area and less than 1 percent of planted area in affected states, respectively.

According to the National Water Commission, Patricia hit Bahias de Tenacatita, Cuestecomate, and Navidad, towns of Jalisco state, and the storm produced 305 km/h maximum sustained wind speeds, with gusts up to 380 km/h and headed north-northwest at 22 km/h.

Several forms of coverage will be most affected, including fire, flood, agriculture, marine, motor, and disruption in economic activity, which is one of the most difficult coverages for which to evaluate the extent of the losses.

Many industries, including hotels, restaurants and gas stations, have halted their activities, and ultimate insured losses will depend, in part, on the speed with which businesses can resume normal business. Several large private or government accounts are reported to be affected as well. However, these are mainly written und er 100 percent facultative reinsurance covers, or protected through multi-layered catastrophe reinsurance.

Hurricane Patricia, when it hit the Mexican coast, was classified as category 5, the maximum on the Saffir-Simpson scale. Even though this natural event degraded as it passed over mountain areas it caused catastrophic damage to buildings, housing, agriculture and livestock. Nonetheless, Fitch believes that insured losses will be lower than the economic losses due to a number of mitigating factors.

The area affected by the hurricane and the country, in general, has a low insurance penetration; most of the claims are expected to be protected by reinsurance purchased following risk analyses using sophisticated catastrophe models; the insurance industry has accumulated an ample amount of catastrophic reserves, and is also covered by the current Catastrophic Fund System backed by the Mexican regulator, to which insurers are required to contribute; and the insurance sector is well capitalised and able to absorb losses of large magnitude, even when catastrophic reserves are not incorporated by the Mexican regulator in their capital calculations.

Insurance penetration in Mexico is only 2.1 percent of GDP, one of the lowest rates in Latin America, and it is estimated that only 5 percent of Mexican homes are protected by some kind of property and casualty insurance.

The current regulatory framework in Mexico follows a conservative approach toward catastrophic risk and reinsurance protection. Based on information gathered by Fitch from various local insurers, the typical probable maximum loss from catastrophic events would average less than 3 percent of the equity capital for many companies.

In addition, due to stringent regulations, insurance companies in Mexico have accumulated a substantial amount in catastrophic reserves for natural disasters totalling $2.3 billion, or 41 percent of industry’s total equity.