December 16th, 2008

Mexico: Catastrophe Reinsurance Market 2008

Posted at 12:50 AM ET

2008 Reinsurance Market Position

The Mexican market for 2008 to 2009 has remained stable, with no significant changes from the previous year, reflecting low catastrophic events (Tabasco) and a competitive and aggressive market. After Hurricane Wilma in 2006, with more than USD2 billion of losses, insurance companies modified their underwriting policies and conditions. Now, the market has more competitive rates and conditions.

Mexico and Central America did not have major catastrophic losses this year and only several companies affected their programs. For this reason prices dropped by 10 percent to 20 percent in the first two quarters of 2008.

Insurance companies in México are looking to retain more on major risks and optimize their automatic capacities, as well as more coinsurance between companies to try to be more competitive. Facultative reinsurance remains aggressive, and there is excess capacity as new reinsurers become more interested in the market.

In 2008, the Mexican officials authorized the use of a new hydro-meteorological model (created by ERN, the same company that built the earthquake model) to calculate exposures and determine probable maximum losses (PMLs) for flood events. This caused significant increases of the reserves and the amounts of coverage required for some companies.

Also, merger and acquisition (M&A) activity is influencing this market. An important European company bought one of the largest insurance companies in Mexico. As a result of this sale, reinsurance decisions towards their catastrophic programs were absorbed or allocated in worldwide treaties, leaving the market with an excess supply.

The following chart based on Guy Carpenter sources, shows the average Rate on Line (ROL) for the Mexican market. ROLs have now declined for three years in a row. However, rates are still above levels experienced a decade ago.

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