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“Significant damage” from Mexico City earthquake: AIR

21st September 2017 - Author: Steve Evans

The magnitude 7.1 earthquake that struck Mexico two days ago around 75 miles from the capital city has caused “significant damage” according to catastrophe risk modeller AIR Worldwide. Once losses are tallied the international reinsurance market is expected to take a significant proportion of the claims.

mexico-quake-damageIt was the second major earthquake in as many weeks, following on from the magnitude 8.1 earthquake that struck off the coast of the Chiapas region of Mexico.

That 8.1 earthquake is estimated to have caused an insurance and reinsurance industry loss of between MXN14 billion (US$790 million) and MXN20 billion (US$1.13 billion), by AIR.

The magnitude 7.1 earthquake has caused so much damage in the Mexico City area that it is already assumed that the second quake will be much larger loss for the insurers and reinsurers to pay.

This week’s M7.1 quake caused “major damage and hundreds of fatalities have been reported” according to AIR, with the risk modeller highlighting that the quake was related to the subduction of the Cocos plate beneath the North American plate, but is not considered an aftershock of the M8.1 Chiapas quake.

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AIR explained the damage situation due to the earthquake:

According to AIR, the majority of residential buildings in Mexico are of masonry construction, falling into one of three classifications: reinforced masonry, confined masonry, and unreinforced masonry. Unreinforced masonry is the construction type most vulnerable to shake damage. Commercial buildings in Mexico are primarily of engineered masonry or concrete construction, and are better able to withstand ground motion. In Mexico City, most middle- to upper-class families live in five- to 15-story reinforced concrete commercial dwellings. These buildings are generally well designed and built with high quality materials. However, reinforced masonry and confined masonry buildings still account for a large portion of the building stock of Mexico City.

Building codes in Mexico are among the most comprehensive in the world, but there are no national codes (each of the more than 2,400 municipalities in Mexico enacts and enforces its own regulations); code enforcement can be weak, and designers and contractors often do not fully apply building regulations.

The President of Mexico has declared a state of emergency for areas impacted by yesterday’s quake. In Mexico City, dozens of buildings were toppled; about 2 million people have no electricity; telephone lines are down; gas mains may have ruptured; and at least 200 people have been killed in Mexico City and the states of Puebla, Mexico, and Morelos.

Ratings agency A.M. Best highlighted that Mexico City has much higher insurance penetration than the Chiapas region, where the 8.1 quake occurred, and is the centre of business and commerce for the country. Hence insurance losses will likely be much higher.

Business interruption could also be an issue, given the damage to the city has resulted in many roads being closed and power or gas lines being broken, the rating agency said.

For the re/insurance sector, A.M. Best predicts “a relevant increase in claims for the industry, especially in conjunction with insured losses from the earthquake that took place earlier in the month.”

The Mexican insurers maintain low retention levels, passing off the majority of the quake risk to the reinsurance sector. The reinsurers with the greatest market share in Mexico are the big four European players, Bermudian reinsurers and Lloyd’s of London syndicates.

In terms of insurers that are exposed, A.M. Best data shows that AXA Seguros writes the most earthquake risk, followed by Seguros Banorte Generali, Seguros Inbursa, Grupo Nacional Provincial and MAPFRE. Zurich, ACE, AIG, Allianz, QBE and FM Global will all take some of the loss as well, given they operate in Mexican primary property insurance markets

It remains too early for any estimates of losses from this second Mexico earthquake, but the market is expecting that it will be higher than for the previous 8.1 magnitude quake.

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