14 Inside FAC

Mexican standoff

Amid uncertainty about the scale of is in for change. The insured losses in Mexico from recent month opened with an 8.1 magnitude earthquake catastrophes there remains little centred in the Gulf of consensus about the effect on rates, Tehuantepec on 7 September findsInside FAC – the second strongest earthquake in Mexican history and the most intense eptember 2017 was a brutal month globally in 2017, killing 100 people and Sfor the people of Mexico, with two causing substantial damage across the state earthquakes and a hurricane causing of Chiapas. Insurers were put on notice, at untold misery, multiple deaths and the same time as many were looking at the The substantial property damage across the for potential losses. Fonden country. Not long after Hurricane Katia made schemes are run by But if the general view in the global landfall at , , before individual states, which buy programmes reinsurance market is that rates will appearing to blow itself out. The to cover the vast majority of uninsured inevitably rise, those who ply their trade in windstorm then crossed the country Mexicans and are designed to be the first the Mexican direct and facultative (D&F) before transforming into Hurricane Otis, form of response, covering homes as well market are not in universal agreement. a Category 3 storm, on 18 September, as some government-owned infrastructure “Across the portfolio I would expect some causing yet more damage along the Pacific assets, with a federal umbrella, or Super positive rate change,” notes Simon Jackson, coast. The next day a 7.1 magnitude Fonden, on top of the states’ covers. head of the open market property book earthquake centred just 120km south of The , Veracruz, and at Beazley Group. “Obviously the recent Mexico City caused more despair, killing Chiapas Fondens are likely to be heavily disasters in Mexico are devastating for the 361 people and injuring 6,000 as multiple impacted by recent catastrophes, and are country and the people, and that’s also buildings collapsed across the populous disproportionately reinsured in London. against a backdrop of reducing rates in the region. The federal government also insures region over the last few years. The region many of its services (for example schools, and the business that we see from there is Buckets of reinsurance medical facilities, electricity and water) in not only exposed to natural catastrophes, Mexico has always relied on reinsurance, the facultative market, with several likely to but is also subject to levels of attrition.” with more than half of all premium still have substantial losses. It’s not a view with which Mike Papworth, ceded on a facultative basis and much Finally there will be some losses from the senior partner and head of P&C at Miller of the remainder going to treaties. Local private industrial and commercial markets, Insurance Services, entirely agrees: “It’s insurers have traditionally held small many of which will also be picked up by early days, but our perspective is we still retentions, pushing the bulk of losses into reinsurers. have a job to do for our clients to secure the London and Miami markets. The latest estimate for Puebla insured the best price, and I’m not convinced we The Mexican market can be largely split losses is $4.8bn (see boxout), and with can categorically say we’re in a hard market. into three distinct buckets: Fonden (Fondo local insurers holding minimal retentions What we can say is that rates aren’t going Nacional para el Desarrollo Nacional, or the overwhelming majority of that will down anymore! But whether they’re going the Federal Funds for Natural Disasters), be picked up by reinsurers, principally in up? It’s too early to say.” government-owned entities and private London and Miami. Lloyd’s has announced Despite the differing views, there seems businesses – with household insurance that it is looking for 30 percent rate little doubt that the Mexican D&F market largely non-existent. increases across the board for Mexican business, a position that was not seen as helpful by the wider market. Shake it up “In terms of rate increases, Mexico’s With the overwhelming majority of the Puebla quake at $4.8bn, based on an government sector is running marginal claims yet to be adjusted, reinsurers actuarial study and its proprietary loss on premium versus exposure,” Papworth have little in the way of hard information estimation software R-PLUS. The firm says, “And I don’t think you can speak on the scale of the losses they face has provided a state-by-state breakdown to any Lloyd’s underwriter who will tell as the market prepares for the 2018 based on a representative portfolio you they’re making loads of money out of renewal season. Many of them are formed by thousands of private and Mexico. Before all this happened they were turning to seismic engineering specialist public sector assets. Evaluación de Riesgos Naturales (ERN) Its shake map was built from data already marginal, and the fact that Lloyd’s – which has worked with the Mexican obtained after a few seconds of the has been hit disproportionally means they insurance market as well as consulting earthquake occurrence, using data will try to push for rate increases.” on construction across the region – for a from all of the accelerometric stations He continues: “Where Lloyd’s sometimes better idea of what to expect. (facilities that measure seismic activity) lets itself down is making overarching ERN has estimated insured losses from in the country. statements, like everything up 30 percent, which in practice just doesn’t work. It

October 2017 www.insidefac.com Inside FAC Mexico 15

becomes a knee-jerk reaction, and what it is expected that a number of them may place it, so experienced brokers come to the then happens is some of the continental have losses close to or above the loss limits fore in a market change like this.” reinsurers say they’ll look at things on a purchased from the recent Puebla quake,” It’s a view that Papworth has some case-by-case basis. We’ll see what happens he says. sympathy for: “I remain firmly convinced in October/November – whether Mexico One problem that has to be solved is the that tendering actually pushes your starts heading more towards the continent tendering process for government business, premiums up. I did a paper on this a few or the US markets.” which has previously caused roadblocks. years ago, and if you go to Germany or Does this mean Lloyd’s might lose this “The tender process is challenging,” sighs Japan where they don’t tender they have business? “They might be happy to lose it,” Beazley’s Jackson, “for underwriters and some of the lowest base costs of reinsurance says Papworth. “But if they’re not then it for brokers, from a business planning anywhere, and it’s based on a very different might be that the business just goes and perspective. My view is to transact with philosophy. If you look at rates they are they’ll have to say ‘I won’t do 30 percent, distribution partners with whom we can consistently lower, and consistently even, maybe I’ll do 10 percent’, just because of trade through the cycle. There are varying whereas in Mexico it’s just up and down commercial and budget pressures.” standards of partner, and I like to align constantly.” with respected and experienced partners in However, he adds: “It’s a country that Global concerns the region.” heavily relies on insurance, on risk transfer, But the Mexican market can’t be reviewed He adds: “The key in any changing market so all of that means that, handled correctly, in isolation, and with substantial is to have a broker that can sell the rate there are still opportunities, and they will hurricane losses to follow from the change, and is confident in being able to still have to buy reinsurance.” US and Caribbean, the European and American players will likely be looking for Mexico petroleumMexico petroleum and other and others liquids liquids production production rate increases too. Uwe Fischer, general 4 manager for Chaucer Miami, tends to History Projections think so: “I think it’s the moment to IEO 2014 increases rates, as in Mexico they have 3 3.7 million been extremely low – and I think all the barrels/day accumulation of these events, including the in 2040 2 hurricanes, should create a certain reaction IEO 2013 in the market. 2.1 million “We have to buy additional reinsurance 1 barrels/day capacity, so we are trying to increase rates Million per day barrels in 2040 in cat territories, particularly in Mexico. 0 Reinsurers have to judge exactly the 2010 2015 2020 2025 2030 2035 2040 impact, but we will see some reactions. It Source:Source: US Energy InformationInformation AdministrationAdministration won’t be a heavy reaction, I think, but we have reached the bottom and we should see some increases in the next few months.” Staking a claim His London-based colleague Alex Campbell agrees, and notes that rates Before there can be any certainty on that entails.” aren’t the sole focus going forward: “Rates where rates are headed, the current According to Marcelo Fazio, managing across the board will have to go up, not just claims have to be adjusted. While director of Latin American operations for this would have been (and still is) global forensic accounting firm MDD: because there have been so many events a substantial job for the adjusting “Business interruption (BI) is invariably in one area in a compact season, but more community, technological advances are the largest component of property importantly the focus is going to be on the helping to get the job done. losses, particularly on large industrial or scope of cover offered. “In the old days these sorts of losses commercial covers, but that may not be “We’re not stating minimum increases would have taken a lot longer to adjust,” the case in Mexico with relation to the across the board – it’s every account on its says David Pigot, CEO of Cunningham recent earthquakes. merits – but we are looking for increases on Lindsey. “We’re talking to our clients in Mexico “The adjusters would need to go and globally, as well as getting reports the book, depending on the account. And to each site and manually record the from the affected states, and while there we will be doing due diligence on the terms damage in person, but now ‘before and will be a number of accounts affected and conditions. We will be drilling down, after’ satellite imagery and the use of by the earthquakes, we have been told and we will be taking out a lot of covers drones has made life a little easier for that most of the large accounts were that have found their way in.” the team. not severely affected, and overall BI is A lot of what comes into London from “There’s still a lot of work to be unlikely to represent the typically largest done, and technology can’t replace an component of the losses across the Mexico are the government accounts experienced adjusting team, particularly country,” he says. and they tend to be low loss limits with in substantial natural disasters such “Furthermore, intelligence from a high rates on line and high values, says as the Mexican earthquakes or the number of carriers suggests that as Campbell. Rates and self-insured retentions Caribbean windstorms, but it does help much as one-third of notified losses have diminished substantially over the last to minimise the amount of time needed will likely fall below deductible, but the few years and coverage has been expanded. across multiple locations, and the cost situation continues to evolve.” “They all need rating improvements as www.insidefac.com October 2017