Seismic activity in Mexico calls for improved insurance products and industry regulation

The two earthquakes that shook Mexico on September 7 and 19, 2017 had a considerable impact not only on the country, but on the insurance industry as well. The tragic events, the most significant of their kind since 1985, resulted in the death of upwards of hundreds of people and the large-scale destruction of infrastructure and homes in Mexico City and other regions. On top of their human and material costs, these incidents highlighted the extent to which the majority of private property remains uninsured against natural disasters. More importantly, the events exposed how many insurance products protecting property were inadequately designed for the country’s earthquake-prone cities.

Counting the Cost

Mexico City was particularly affected by the events, with several older structures collapsing. After the double tragedy, Miguel Ángel Mancera, then-mayor of Mexico City, estimated that restoration of the capital’s damaged buildings could take up to six years. According to Fitch Ratings, the total cost of the earthquakes to the insurance industry could reach $1bn, or about 5% of direct premium. Although the market has long been accustomed to low levels of penetration, the events highlighted the large proportion of middle- and high-income residents that were uninsured. While earthquakes of this magnitude are rare in the country, safety notices and drills are routine. Nevertheless, only 8% of homes in Mexico City were insured for earthquake damage in 2017, according to the Insurance and Surety National Commission (Comisión Nacional de Seguros y Fianzas, CNSF). The national average is even lower, at 6.5%. Furthermore, the earthquakes exposed that many of the homes that were insured were not fully protected, despite insurance being compulsory for any home acquired through a bank loan since the early 2000s. “Some insurance schemes only covered the loan itself, meaning the policy covers the outstanding amount on a home loan to the bank,” José López Hoyo, vice-president for analysis and sectoral studies at the CNSF, told OBG. “So when tragedy struck, people lost their homes. The bank will get their money from the insurance, but the person who lost their home will be left with nothing.” In other instances, insurance products only covered a person’s apartment, but not the building’s common areas.

Revised Design

Unlike earlier large-scale earthquakes, the 2017 events occurred in a country with an emerging middle class that had access to bank credit to acquire homes and insurance policies to protect their investments. Nevertheless, owing to inadequately regulated and marketed insurance products consumer expectations were not met. “Something terrible was revealed following the earthquakes; there was a difference in understanding in what people thought was covered by their home insurance and what was not,” Juan Ignacio Gil, vice-president of insurance at Peña Verde Group, told OBG. “As an industry, we sold products on unclear terms and that is not good for the industry.”

Efforts are now under way to ensure that this situation does not arise again in the future. The earthquakes and the issues regarding the insufficient coverage provided have led to the establishment of a working group that includes banks, insurers and sector regulators, with a view to improve housing insurance products, according to the CNSF. Insurance companies will likely increase the scope of the coverage provided and improve the information aspect of their sales strategies. Although in some countries insurance companies are required to present detailed market research before launching new products to justify how they improve protection for customers, this is currently not the case in Mexico. Making market research a compulsory basis for new products would be beneficial for insurance customers over the long term by regaining the confidence of consumers in insurance and increasing penetration rates.