Earthquakes Unlikely to Impact Insurance Industry: Fitch Ratings

Nicaragua Earthquake-3

Fitch Ratings said it “believes that the insurance industry and the ratings currently assigned to P&C companies in Nicaragua will not be affected by the earthquakes that recently hit these countries.”

Nicaragua experienced an earthquake on Thursday, April 10, that shook the nation’s capital and was followed by strong aftershocks. According to the United States’ Geological Survey, the earthquake had an intensity of 6.2 on the Richter scale. Soon after, the earthquake was followed by a 5.1 aftershock. Yet, that was not the last of the tremors felt by Nicaraguans.

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Less than 24 hours after Thursday’s tremors, another earthquake measured to be 6.6 on the Richter scale occurred, and was centered about 35 miles south of the capital Managua at a depth of 86 miles. Due to the locations and depths of the quakes, no tsunamis were recorded. According to government officials’ preliminary data, the earthquakes had left some 800 homes damaged, 200 people injured and at least one fatality.

Fitch indicated that as of April 24, “it is still too early to have accurate insured losses estimates for any of these events; however, according to preliminary data it is known that there is mostly minor damage to dwellings and buildings (cracks in walls and broken windows) that in some cases probably will not even exceed the applicable policy deductibles. The relatively small expected losses from these events should easily be absorbed by the local insurance industry. Apart from this, Fitch notes that, in average, insurance companies in both countries have adequate reinsurance and catastrophic reserves coverage to mitigate potential catastrophic losses.

“Insurers in these countries commonly manage their exposure to catastrophe risk through the use of excess loss reinsurance contracts with conservative priority and capacity levels. Furthermore, Fitch believes insurers in both markets have accumulated ample catastrophic reserves over the years. The current regulatory framework in Mexico and Nicaragua follow a very conservative approach towards limits of catastrophic exposures not only requiring ample reinsurance protection, but also, requiring a sizable amount of catastrophic reserves to cope with events of this nature. In Nicaragua the catastrophic reserve is defined as no less than 40 percent of net premiums, and in the case of Mexico, the regulation requires to set separate catastrophic reserves sub-limits for earthquakes where the target regulation is to accumulate reserves until the companies are solvent for an event of 1,500 years recurrence.

“Considering the ample reinsurance and reserves coverage, and based on preliminary third party analysis on the damage caused to the infrastructure, roads, buildings and housing, Fitch believes it is unlikely that a significant impact on insurer’s solvency and ratings may arise from these events, especially considering the low insurance penetration levels in the affected areas. However, as noted, this commentary reflects Fitch’s initial and preliminary assessment, and there is a chance actual results could differ materially from these expectations. Fitch will provide additional comments should its views change for either the markets as a whole or for any individual company.”

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Source: Fitch Ratings

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