Gallagher Re has released a report noting that hurricane Otis insured losses will reach into the billions of dollars (USD) and will become one of the most expensive events (if not the highest) on record for the Mexican insurance market.
As per Gallagher Re’s report, Hurricane Otis rapidly intensified on October 24 to become a Category 5 hurricane on approach towards the coast of Mexico.
The storm made landfall in the state of Guerrero and the City of Acapulco during the early morning hours of October 25, and became the strongest hurricane in the modern record to hit Mexico’s Pacific Coast.
“Otis exhibited an extended period of explosive intensification as it strengthened from a tropical storm to a Category 5 hurricane in less than 24 hours. Once coming ashore, Otis brought hurricane-force wind gusts, torrential rainfall, and life-threatening storm surge to the southwestern Mexican coast,” Gallagher Re explained.
Preliminary reports on the morning of October 26 indicated at least 27 deaths occurred while several people also remain missing. Gallagher Re’s report also observed “extensive and catastrophic damage” recorded to residential and commercial property in Acapulco.
According to the firm, Otis is anticipated to result in an economic loss exceeding USD 10 billion. This includes direct damage and presumed net-loss business interruption resulting from impacts to physical properties, infrastructure, and agriculture.
Gallagher Re said that Otis is expected to be one of the costliest natural catastrophe events in Mexico’s history, adding that an event of this magnitude typically requires a longer-than-normal period of assessment and insurance claim processing.
Elsewhere in the report, it was also highlighted that 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 firm continued, “The four potential payouts range from USD 60 million to USD 125 million, and each has parametric triggers in place that need to be met to be initiated. The overall size of the bond is USD 485 million.
“However, 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.
“Such a change means that some municipalities and states are not able to receive funds to complete reconstruction to damaged public infrastructure.”