The impact of Mexico’s recent quakes

Mexico’s insurance industry is still assessing the aftermath of two earthquakes in September. AM Best’s Alfonso Novelo, senior director-analytics, and Elí Sanchez, senior financial analyst, addressed questions on the potential impact on insurers for FIDES Today.

What should the insurance industry expect with regard to the potential volume of earthquake-related claims?

Based on AM Best’s discussions with Mexico’s earthquake insurers, the earthquake claims will be manageable due to the local regulator’s willingness to allow use of the EQ Catastrophic reserve, the low retention level in earthquake coverage among primary insurers and their highly rated reinsurance partners. While AM Best expects loss ratios to increase, this impact will be mitigated by these reasons.

The participants in this earthquake sector have a high level of sophistication in claims processing, as well as much experience from the 1985 earthquake when claims and losses were significantly higher. While Florida’s insurers face pressure from a shortage of claims adjusters following Hurricane Irma, this is not the case in Mexico. Some insurers have mentioned that they are seeking out at-risk policyholders to determine whether they were affected.

Does AM Best expect any notable losses, and potentially long-term gains, in business lines such as trade credit, inland marine or other lines related to supply chains?

AM Best does not expect trade credit to be affected as damage to production facilities was very limited. There were minor damages to infrastructure, but overall it remains operational as roads are diverse and electrical services in heavily industrialised areas were not disrupted. In 1985, supply chain coverage was affected by damages to the whole productive chain, but subsequent improvements in construction standards have bolstered the infrastructure.

What will be the impact on the reinsurance sector?

Much of Mexico’s reinsurance capacity is derived from highly rated foreign companies. AM Best expects some modest price hardening for loss-affected areas as well as additional review of loss corridors, harder cash calls, along with more stringent terms and conditions.

In Mexico, the quality of reinsurance programmes is strong in terms of coverage and security. The Comisión Nacional de Seguros y Fianzas (CNSF), the local regulator, requires foreign reinsurers to have a minimum global credit rating of ‘bbb-’ (B+) from AM Best. Many of the catastrophe-exposed insurers in Mexico place their treaty and facultative cat programmes with reinsurers with a rating of ‘a-’ (A-) or higher.

Will the earthquakes and their impact on the Fonden catastrophe bond sour the appetite of insurance-linked securities (ILS) investors?

AM Best believes this may be the case. In addition, the increase in interest rates could also retrieve some of the excess capital that previously sought returns in ILS and similar risk transfer vehicles. Additionally, the nature of the securities will become better understood in the region, as principal is at risk. Also, there will be an increased awareness on the structuring of these instruments, as magnitude as a parameter alone does not express the potential damage that a seismic event can cause.

What possible rating considerations does AM Best give to a company’s ability to respond during a crisis?

Successful examples of risk mitigation or minimisation of losses may improve AM Best’s assessment of a company’s enterprise risk management practices and could translate into rating actions. Conversely, if losses materialise and are greater than expected and exceed a company’s risk tolerance, it may have a negative effect on its rating.

This also impacts a company’s business contingency plans and the adequacy of its respective reinsurance program. AM Best believes that a company should be able to respond promptly in a catastrophe scenario to its client’s needs, with an adequate understanding of the amount at risk from any exposures, and the certainty that its own reinsurance will mimic the coverage it provides to its clients.

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