Otis Likely to Be One of Costliest Hurricanes for Mexico Insurance Market: Gallagher Re
Hurricane Otis is expected to be one of the costliest natural catastrophe events in Mexico’s history with initial economic losses expected to top US$10 billion, according to Gallagher Re.
Further, insured losses are expected to run into the billions of dollars, making the hurricane one of the most expensive events – if not highest – on record for the Mexican insurance market. “Given the scale of damage to several high-end commercial properties, this will be a notable driver of the insured payouts,” said the hurricane commentary from Gallagher Re.
Hurricane Otis rapidly intensified on October 24 to become a Category 5 hurricane as it headed towards the Pacific coast of Mexico. It made landfall in the state of Guerrero and the City of Acapulco (with a population of more than 1 million people), during the early morning hours of October 25, as the strongest hurricane in the modern record to strike Mexico’s Pacific Coast.
Acapulco’s Economic Losses Seen at $15 Billion as Hurricane Otis Death Toll Rises
Otis’ estimated wind speeds at landfall were 165 mph (270 kph) with the minimum central pressure at 923 millibars. [Editor’s note: A Bloomberg article on Oct. 28 indicated death toll from Hurricane Otis has risen to 43, while 36 people are still missing.]
The Gallagher Re report said the intensity of Otis at landfall is expected to trigger a payout from Mexico’s active catastrophe bond, which was originally issued by the World Bank’s FONDEN (natural disasters fund) in 2020.
Gallagher Re said the cat bond placement has coverage broken into four separate classes:
- Low-frequency earthquakes,
- High-frequency earthquakes,
- Atlantic Ocean hurricanes, and
- Pacific Ocean hurricanes.
The four potential payouts range from US$60 million to US$125 million, and each have parametric triggers that need to be met to be initiated, Gallagher Re said.
The overall size of the bond is US$485 million. Because FONDEN was eliminated in September 2021 and is no longer tied to the cat bond, this means that payments are expected to be directed straight to affected residents, Gallagher explained. “Such a change means that some municipalities and states are not able to receive funds to complete reconstruction to damaged public infrastructure.”
Gallagher Re said the trigger for hurricane payments in Mexico are central pressure based and require a minimum pressure of 935 millibars. “Otis came ashore with a minimum pressure of 923 millibars, and initial market guidance suggests this could result in a 25 to 50% payout of the ‘Class D Pacific’ hurricane note – which is US$125 million. Should the 50% threshold be reached, this would result in a payout of at least US$62.5 million.”
“The insured loss is going to take some time to get figured out, but the expectation is there will be a sizeable portion of the damage that is uninsured or underinsured,” commented Steve Bowen, chief science officer, Gallagher Re, in a statement accompanying the report.
“From a scientific perspective we are reaching the point where it is less surprising to see bouts of rapid intensification by tropical cyclones as the oceans continue to warm,” he said. “What remains most shocking and concerning is the rapid intensification occurring up to the point of landfall and subsequently affecting highly populated areas. That is a very concerning trend and one that is becoming more common as the coastal population grows around the world.”
Climate change research indicates that more high-end tropical cyclones can be expected, he said. “We need to be making smart decisions on how we’re better preparing for this growing risk. This includes a smarter approach to how and where we build, making strategic investments around infrastructure modernization, and ensuring more financial protection for citizens in the aftermath of events.”
Source: Gallagher Re