Mexican state Oaxaca's $21 million parametric policy likely triggered by Hurricane Erick

By Henry Gale

June 19 - (The Insurer) - The Mexican state of Oaxaca is likely to receive a multimillion-dollar payout on its hurricane insurance policy after Hurricane Erick appeared to breach the parametric trigger, analysis by Parametric Insurer shows.

Hurricane Erick made landfall as a category three hurricane in western Oaxaca on Thursday morning, after approaching the coast at category four strength. Reuters reported damage to roads, boats and buildings.

Oaxaca renewed its parametric insurance coverage for hurricanes and earthquakes in May, Mexican newspaper Milenio reported on Tuesday. The report said the policy provides 800 million pesos (around $42 million) of coverage: 400 million for hurricane losses and an additional 400 million for earthquake.

Hurricane Erick's track, as reported by the National Hurricane Center (NHC), entered the geographical area (or "polygon") specified in the policy's tender, seen by Parametric Insurer, in the early hours of Thursday morning. The storm's maximum sustained wind speeds were above the threshold required for a payout.

Oaxaca's State Coordination of Civil Protection and Risk Management did not immediately respond to a request for comment.

Under the structure in the policy tender, a storm with maximum sustained windspeeds of 215 kilometres per hour or greater would trigger a full payout of the hurricane limit, while lower windspeeds greater than or equal to 140 kph would result in a partial payout.

According to NHC's preliminary best track data, which provides information at six-hour intervals often used for parametric policies, Erick's maximum sustained windspeeds were 232 kph just before the storm entered the polygon. At the next reading, inside the polygon, its maximum windspeeds were 176 kph.

Without the full details of the policy wording, it is not clear exactly what value of payout this would trigger.

In some parametric policies, the maximum windspeed used to determine the payout is the highest of the last reading before the storm enters the polygon, any readings within and the first reading after it leaves the polygon. Another common approach interpolates windspeed values between the six-hour intervals to calculate the maximum windspeed while the storm was in the polygon.

The NHC's preliminary best track data is also subject to change in the coming days as more information becomes available, which could also affect the payout.

[Map including Hurricane Erick and Hurricane John.]

Oaxaca received a payout of 138.75 million pesos after its policy was triggered by Hurricane John in September last year. That was 50% of the hurricane limit of then-smaller policy, which provided 555 million pesos in limit split across hurricane and earthquake coverage.

The premiums Oaxaca paid each year suggest it was able to secure coverage at a reduced rate on line when it renewed this year. The state disclosed last year that it had paid 115,174,800 pesos including VAT for the coverage (a rate on line of more than 20%).

This year, it invested 140 million pesos, according to the Milenio report, in its 800 million worth of coverage, representing a rate on line of approximately 17.5%.

Mexico's federal government also has coverage against hurricane damage through insurance and catastrophe bonds. On Friday, ILS investment manager Twelve Securis said it did not expect that Erick would trigger any payout on the government of Mexico's $175 million parametric catastrophe bond.