On Mexico, The US Market, Port Security and Fracking

Enrique Peña Nieto and his wife Angélica Rivera on the campaign trail in Mexico

Leading candidate Enrique Pena and his TV Soap actress wife Angelica are injecting some glitz and celebrity ahead of this weekend’s presidential election in Mexico. Following so soon the recent G20 summit on the sundrenched beaches of Los Cabos, perceptions of the country, so damaged by a brutal drug war and crippling poverty, might just be shifting. Not to belittle the challenges that the new president will face, there are nevertheless encouraging signs of development to provide hope. Indeed the Mexican economy is outpacing Brazil, their factories exporting record quantities of TVs, cars, computers and appliances. The insurance market is on par with Brazil and significantly ahead of the rest of the region. However, unlike Brazil, there is a strong engagement with foreign reinsurers, especially in London; two-thirds of the non-motor business is ceded overseas. Unsurprisingly with $400 million of premiums traded into the Lloyd’s market, Mexico is by far the largest Latin American source of revenue and deserving of the attention it has at last been given by the senior team in the Corporation.

An attraction to reinsurers of Mexican business is its proximity to US with whom the country shares a common windstorm exposure, priced to a higher level than equivalent Latin business to the south. This week the Property Casualty Insurers Association of America (PCI) published its first quarter market statistics for the US and unsurprisingly, absent the catastrophe losses that had a major impact twelve months ago, companies are making good profits; the best start for five years. More than a blip, the US market is proving to be quite resilient; in general a disciplined market allowing the industry to achieve a fair margin, also in the long term interest of producers and buyers. With premium rates continuing to nudge up, international business development opportunities outside of US are looking quite uninspiring in comparison: a real challenge for those of us searching for broader portfolio diversification.

In an election year, time is running short for the Obama administration and it now looks likely that they will miss a deadline passed by Congress five years ago to mandate that all maritime cargo bound for US be scanned before it is loaded on ships. The high costs and the availability and accuracy of the technology required have deterred the Department of Homeland Security from implementing even a partial checking system. A terrorist attack on an American port could potentially have an impact on the global economy running into the many billions, aside from the direct human and infrastructure cost. The reticence of the authorities may be shared by the shipping industry that only have to look to their counterparts in the aviation sector where the commercial consequences of installing and maintaining preventative measures are all too apparent. However, our industry is very significantly exposed and if the next devastating threat to US is to arrive in a container, insurers will regret not lobbying harder for the government to comply with this law.

Fracking, the fracturing of shale rock under intense pressure of jets of water, sand and chemicals, is a highly controversial means to extract gas. However a report this week jointly published in UK by the Royal Academy of Engineering and the Royal Society mostly backed the methods employed and encouraged their expansion albeit with tighter monitoring. Insurers concerned that fracking causes seismic activity resulting in damage to property at surface level and contaminating the water table may be reassured that the experts view this possibility as low risk. Nevertheless, the debate is far from over and the wider impact on climate change and the consequences for the renewable sector by additional investment in fracking means that it will attract media attention for some time to come. All the while, the threat of litigation will loom on the horizon, and this should ensure that insurers will maintain more than half an eye on this topic as the months and years progress.

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