Hurricane Otis’ category 5 onslaught in the Acapulco region of Mexico is currently estimated to cost the local insurance and global reinsurance industry somewhere from US $1.8 billion to as much as US $6.5 billion, according to rating agency AM Best.
In a report, AM Best noted that, “Insured losses from Hurricane Otis are likely to fall to reinsurance companies, causing further reinsurance market hardening and creating exposure management challenges for primary companies in the upcoming renewals.”
Typically, insurers cede more than three-fourths of their local exposure to highly rated reinsurance companies, through excess-of-loss reinsurance arrangements, which enables them to withstand catastrophe loss events.
AM Best added, “With this hurricane and expectations that future wind events will be severely intensified by the El Niño phenomenon, primary carriers likely will be pressured further by additional reinsurance pricing increases and tighter capacity.”
Property insurance penetration is low in the state of Guerrero that was affected most by hurricane Otis and for the insurance industry, the biggest impacts will be caused by damage to high-value hotels, resorts, commercial and residential infrastructure, with the Acapulco region worst affected, as well as claims from business interruption losses due to prolonged power, water and food outages, AM Best said.
Overall, AM Best believes that Mexico’s insurance industry is strongly capitalised and has sound levels of catastrophic protection in place to deal with an event even as extreme as Otis, but it’s clear the global reinsurance industry will take a significant share of the eventual industry loss from the hurricane.
Economic losses remain estimated around the US $15 billion mark and AM Best notes reports suggest the modelled insurance industry loss estimate sits somewhere in the range of US $1.8 billion to as much as US $6.5 billion.
But, the rating agency does believe hurricane Otis could be yet another catalyst for continued market hardening in reinsurance as, “the current reinsurance market hardening cycle could be further exacerbated as a result of Hurricane Otis, expecting that future wind events will be severely intensified by the El Niño phenomenon.”
AM Best also notes that certain parametric insurance contracts are likely to have been triggered by hurricane Otis, given the high wind speeds and low central pressure of the hurricane when it struck the Mexican coast near Acapulco.
In addition, AM Best also notes the expected payout to come from the Mexican government’s World Bank facilitated catastrophe bond, which we have covered in depth.