PCS starts Mexico industry loss index & estimates service

Property Claim Services (PCS) has launched Mexico as the latest addition to its range of industry loss data aggregation and index reporting services, teaming up with Asociación Mexicana de Instituciones de Seguros (AMIS) for PCS Mexico.

PCS, a Verisk Analytics business, will now cover four countries with loss aggregation and reporting solutions for property catastrophe risks, adding Mexico to the United States, Canada, and Turkey. PCS also offers a Japanese industry loss estimates & index, but using a slightly different methodology to its now four core country coverage, as well as global specialty lines solutions for non-elemental marine and energy, cyber and terror.

PCS Mexico will provide full coverage for both natural and man- made loss events across Mexico that cause total industry insured loss estimates of at least MX $300 million (approximately US $15 million).

PCS explained that Mexico’s catastrophe profile is relatively similar to the United States and Canada, with exposure to tropical storms, earthquake, and hail, among other perils. In addition the country experiences frequent and severe loss events, which the industry will benefit from enhanced data on, and a service through which they can create and trade index hedges such as industry loss warranties (ILW’s).

PCS Mexico launches with data going back to 2010 and has been developed with the close support of AMIS.

The data shows that there have been three recent catastrophe events that have caused major insurance and reinsurance industry wide losses, with estimates of at least MX $9.6 billion (approximately US $500 million), two of which occurred within the past 24 months.

PCS Mexico will use the same loss estimation methodology that PCS has used in the United States for nearly 70 years.

The only differences between the U.S. and new PCS Mexico service are the threshold for event designation (MX $300 million) and for initiating the resurvey process (MX $1 billion, approximately US $50 million).

PCS and AMIS believe PCS Mexico will have an impact on the global reinsurance and insurance-linked securities (ILS) market fairly quickly.

Eight catastrophe bonds have included Mexico risks since 2006 and the pair said that feedback from clients around the world suggests that pent-up risk-transfer demand has been “constrained by the lack of a reliable, independent loss aggregation solution.”

Tom Johansmeyer, head of PCS, explained that an independent catastrophe loss aggregation service for Mexico has been requested by the industry for some time.

“Mexico has been one of the top enhancement requests we’ve heard from clients since I joined PCS,” he says, “and interest has only grown over that time. Mexico is an important market, and there’s broad support throughout the global insurance and reinsurance community,” Johansmeyer said. “Unbiased tools are crucial to participating in a robust risk-transfer market, and we’re excited to be able to help our clients operate more effectively in managing risk and capital exposed to Mexico.”

He continued, “The launch of PCS Mexico took significant time and effort from everyone involved, including a wide range of industry stakeholders. In particular, we’d like to express our appreciation for the time and commitment from the AMIS team. Without their considerable contributions and collaboration, PCS Mexico would never have come to fruition. Throughout the development of PCS Mexico, we saw firsthand the strength and depth of AMIS’s commitment, not just to the Mexican insurance industry but to the global community that allocates reinsurance capacity to the region.”

We spoke with Johansmeyer to understand more about why Mexico was selected as a PCS service destination, “When we look for a new market to enter, a few factors are crucial. We look for a market with an insurance industry large enough to produce meaningful insured losses (within the context of reinsurance and retro), sufficient risk transfer sophistication for an industry loss index to be useful, and enough large catastrophe events for PCS to develop a historical data set and produce estimates on an ongoing basis. Some regions may have the occasional big catastrophe – like Romania in 1977 – but lack the frequency to be of day-to-day concern for the reinsurance sector. Others may have plenty of catastrophe activity but not produce large insured losses. Mexico is the sort of market that benefits from independent loss aggregation, as it clearly meets our criteria for market entry. Since our criteria are aligned with client needs, this means that the launch of PCS Mexico should be of direct and immediate value to the industry.

“Like Canada, part of the value of PCS Mexico is in the fact that it now allows for regional ILWs and catastrophe bonds. Several transactions use PCS for the United States and Canada, particularly for earthquake, and now the same is possible for United States and Mexico transactions. Along both borders, earthquake and tropical storm can be of concern. I’m curious to see whether any future catastrophe bonds include coverage for United States/Canada and United States/Mexico events.

“PCS Mexico is not limited to one or two perils. Rather, we take a full view of the region.”

Ted Gregory, director of operations, PCS, added, “The launch of PCS Mexico further solidifies PCS’s important role within the global insurance community. With Mexico susceptible to a multitude of significant perils, such as earthquakes, volcanic activity, and hurricanes on both coasts, PCS looks forward to serving our insurance community in Mexico and abroad with our collective efforts to provide exceptional service.”

Manuel Escobedo, AMIS president, also commented, “For many years, the insurance industry in Mexico has produced catastrophe loss estimates to inform our insureds, shareholders, and financial authorities. With this ISO/PCS agreement, our estimates will be more timely and consistent.”

Recaredo Arias, AMIS CEO, said, “The ISO/PCS platform will allow Mexican insurance companies to access robust information to calibrate their catastrophe risk models. This will benefit both insurers and insureds, while paving the way for product innovation.”

Dario Luna, managing partner at Akua Capital, an industry leader instrumental in the development of the loss index, also commented, “We are pleased to have partnered with PCS to bring Mexico into international standards for catastrophe loss information. PCS Mexico presents a range of innovation opportunities and will surely trigger the interest of other Latin American countries.”

We also discussed with Luna the potential for a local ILW market in Mexico to develop in future, now there is an index and loss estimate solution in place.

Luna said, “The medium term impact of PCS Mexico will not only be reflected in ILW transactions in the global market. Mexico is one of the leading countries to implement full Solvency II standards since 2013, which implies for local catastrophe insurance carriers that the true cost of their retention above excess of loss reinsurance is being measured more accurately.

“ILW contracts based on PCS triggers can be a fantastic instrument to protect against wide-ranging catastrophes that bite into that top retention, so we expect to see the development of local demand in the coming years thanks to PCS Mexico.”

Any developments such as this will be good for the Mexican re/insurance market and good for global ILS investors as well, given the diversification that perils in the country can offer.