MEXICO CITY--(BUSINESS WIRE)--A.M. Best has commented on the preparedness of the Mexico insurance industry ahead of Hurricane Patricia, expected to make landfall Friday evening, Oct. 23, 2015, saying that overall, the industry is well capitalized to absorb the financial impact of this type of event.
Hurricane Patricia, which is situated off the country’s Pacific coast, became the strongest hurricane ever measured in the Western Hemisphere earlier on Oct. 23, with sustained 200 mph winds. The current forecast has the hurricane making landfall in the state of Jalisco, which is approximately 300 miles west of Mexico City. A.M. Best expects that for most primary insurers, the biggest impacts from Patricia will be wind and downed tree damage to roofs and cars, as well as business interruption losses from prolonged power outages and deterioration of touristic infrastructure. Damage from coastal flooding and inland flash flooding is also likely. The total insurance in force as a whole for the states of Guerrero, Michoacán, Colima and Jalisco, excluding federal infrastructure, amounts to USD55.3 billion according to data published by Evaluación de Riesgos Naturales (ERN) in June 2015. A.M. Best estimates that around 10% of the total retained hydrometeorological exposure of local insurers is located in the affected area.
A.M. Best notes that the Mexico regulators, Secretaria de Hacienda y Crédito Público (SHCP) and Comisión Nacional de Seguros y Fianzas (CNSF), have rules in place to help mitigate the risks to insurers, including required capital for hurricane risk that is equal to probable maximum loss (PML) calculations. The regulators also take into account the geographical and structural characteristics for each company’s risk portfolio through use of the hydrometeorological risk model from the Engineering Institute of Universidad Nacional Autonoma de Mexico (UNAM). Furthermore, Mexico-based insurers are required to hold a catastrophic reserve for hurricane and other hydrometeorological risks. In addition, 86.6%, according to CNSF, of the exposure in the country is ceded to highly rated reinsurers through excess of loss contracts. However, global reinsurers will not face a material impact, as it is expected that even with this event, reinsurers will remain below their catastrophe budgets for 2015. National reinsurance companies are not expected to have a significant impact on their balance sheets as catastrophic reserves are sufficient to cover its PMLs.
News reports also have indicated that the hurricane could trigger the Class C notes ($100 million) of MultiCat Mexico Ltd. (Series 2012-1) given the current path and central pressure estimates if the hurricane makes landfall. The MultiCat Mexico Ltd. parametric catastrophe bond provides earthquake and Atlantic and Pacific Hurricane coverage on occurrence basis. The Class A (USD 140 million) covers just earthquake risk and Class B (USD 75 million) and the Class C (USD 100 million) covers earthquake and Atlantic and Pacific Hurricane. For the Class C Note to trigger, the central pressure must be less than or equal to 932mb and greater than 920mb for a 50% payout of the bond amount (i.e., 50% of USD 100 million); 100% payout if central pressure is less than or equal to 920mb. The National Hurricane Center currently estimates Patricia’s minimum central pressure at 880mb.
A.M. Best will continue to monitor the financial impact of this hurricane on rated entities and will provide updates on ratings as required.
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