Mexico's Hurricane Otis to cost insurers up to $4.5bn – Moody’s RMS

Moody’s RMS has estimated private market insured losses from Hurricane Otis to be between $2.5bn and $4.5bn.

The catastrophe risk modelling firm’s estimate represents insured losses associated primarily with wind damage in the devastating Category 5 hurricane that made landfall in Acapulco, Mexico on 25 October.

Insured losses from Otis will be driven by wind damage with minor contribution from storm surge and precipitation-induced flooding, according to Moody’s RMS.

Insured wind losses will be predominantly for commercial lines, including commercial multi-family dwellings, hotels, resorts, and high-rise buildings that have been severely affected in this event.

Moody’s RMS said its estimate reflected property damage and business interruption losses to residential, commercial, industrial, and automobile lines of business.

The estimate considers potential for post-event loss amplification, inflationary trends, and non-modelled sources of loss, including infrastructure damage, the cat modeller said.

The estimate does not include losses for any sovereign protection programs, Mexico’s “FONDEN”, as a result of this event, which include both traditional re/insurance and insurance-linked securities.

“Major Hurricane Otis was an unprecedented event across multiple fronts,” said Jeff Waters, staff product manager for North Atlantic hurricane models, Moody’s RMS.

“As a Category 5 storm with 165 mph sustained winds, it was the strongest landfalling hurricane on record in both the Acapulco region and Mexico as a whole, aided by a period of record rapid intensification in the 24 hours prior to landfall,” said Waters.

Hurricane Otis was the fifteenth named storm of the 2023 Pacific Hurricane Season, the tenth hurricane, and the eighth major hurricane. Otis was the first Category 5 hurricane to make landfall on the west coast of Mexico since recordkeeping began.

Waters continued: “Observational windspeed data – while limited - suggests a broad swath of exposure and population was affected by major hurricane-level wind gusts.

“Prior to Otis, this region of Mexico had never experienced a Category 5 hurricane landfall, underscoring the importance of using catastrophe models to fill in gaps associated with the historical record, understand the events that haven’t happened yet but could, and the potential impacts on present-day exposure at-risk,” he said.

Moody’s RMS used publicly available data, including wind station observations, web reconnaissance, and analysis of high-resolution aerial imagery.

Wind losses from Otis were based on analysis of ensemble footprints and stochastic events in Moody’s RMS Version 23 North Atlantic Hurricane Models that best reflect the characteristics and uncertainties of the event, the modelling firm said, and using an internal Moody’s RMS industry exposure database for Mexico.

Julie Serakos, senior vice president, Moody’s RMS, said: “In determining the overall damage estimates from this event, underinsurance is a common theme. Much of the damaged exposure is unlikely to be insured to the full value of the structure or insured at lower limits, especially in inland regions.

“We expect most of the insured losses to be driven by damage to coastal commercial and commercial residential exposure. Nevertheless, we expect Otis to be one of the costliest hurricanes in Mexico history from both an economic and insured loss perspective.”

After undergoing an unexpected period of rapid intensification in the 24-hours prior to landfall, in which the storm intensified by more than 110 mph (175 kph), Otis made landfall on Wednesday, 25 October, 2023, near Acapulco, Guerrero as a Category 5 hurricane on the Saffir-Simpson Hurricane Wind Scale.

At landfall, Otis had maximum sustained winds of 165 miles per hour (270 kph). The storm brought hurricane-force winds to coastal and inland portions of Guerrero and a small portion of Michoacan. Storm surge, heavy rainfall, and associated flooding were also reported to have impacted southwestern Mexico.

Rajkiran Vojjala, vice president, model development, Moody’s RMS, added: “The strongest winds from the event caused damage to a large stretch of modern, high-rise exposure along Acapulco Bay, including apartment complexes, hotels, and resorts.

“Aerial imagery and reconnaissance to date show that Otis caused some of the most incredible wind damage to modern-day high-rise structures we have ever seen, as observed winds well-exceeded prevalent design wind speeds for the region.

“While several tall buildings survived record gusts, thanks to well-designed structural systems in place for earthquake safety, their lightweight cladding and exterior that improves seismic performance, bore the brunt of high winds, and was destroyed. Recovery and reconstruction efforts could take years. During this time, we expect a high number of total constructive losses given the damage severity and complexity of repairs.”