Risks Spur Reinsurance Market

Q: How would you rate Mexico’s reinsurance culture?

A: Mexico is a seismic country between two oceans, which increases risks of flooding, hurricanes and earthquakes and everyone in the value chain understands this. Considering that the technology used in the renewable-energy sector is newer compared to more traditional generation technologies, it is in a company’s best interest to insure projects against any potential catastrophe or technical failure. In Mexico projects are insured mostly because property owners and investors request it, which makes the market similar to any country where Swiss Re operates and where the insurance culture may be more developed. So far, we have not found any distinction between the reinsurance cultures of national and international companies.

Swiss Re supports insurance companies that take on large, specific and complex risks as well as risks related to natural catastrophes. Swiss Re has a very well diversified worldwide book of businesses. We reinsure all types of risk across all continents. This diversification enables us to reinsure our clients—the insurance companies—at a lower capital cost than other local and less-diversified companies could.

Q: What kind of reinsurance services do you offer in Mexico?

A: As reinsurers, our purpose is two-fold. Firstly, we reinsure our client’s risks, which allows our clients to write more insurance business without having to increase their capital base. Secondly, we provide them with knowledge, expertise and experience. Insurance companies contact us with questions and given that our underwriters know every segment of an energy project’s value chain, from the construction of a new power plant to its day-to-day operation, they visualize what risks are present and help the insurance company provide the best coverage option for its client.

Swiss Re offers the traditional types of coverage as well as newly developed, more innovative insurance policies. Traditional coverage insures the assets of an insurer. If, for example, a natural catastrophe forces an insurer to pay for lost assets, such as windmills or solar panels, we support our client in paying the loss. Another common reinsurance product we offer is for the construction of new power plants. Because projects in the energy sector are often complex and they need to begin operation on a scheduled date, this insurance is essential for developers who have to start paying for the acquired debt. We analyse the specific construction project, define terms and conditions and together with our clients reinsure it so they can offer an insurance product.

One innovative product we have started to offer, and that we are pushing for implementation in Mexico, is parametric coverage. Parametric coverage takes on the risk of reduced production resulting from a lack of resources. Take a wind park, for example, for which a study indicates the expected amount of wind. If weather conditions do not meet expectations and less energy is produced as a result, we cover the gap to allow the company to meet its energy production commitments. This insurance product has been adopted by some power companies in the US because they realize the need for it. Parametric coverage can be adapted to the type of plant, so it can cover water, sun and wind; it just needs to be adapted accordingly.

Q: How do you expect the reinsurance market for the energy sector to evolve in Mexico?

A: In general, our expectations in terms of investments to be made because of the Energy Reform have not been met. This is mainly due to the high expectations that the government set out, as well as to external factors such as oil price, devaluation, security and so on. This does not mean that the results have been negative. On the contrary, the market has been growing and we are expanding our activities in the country. Government institutions, as well as every other player in the market, have a lot to learn and it will take time for the Energy Reform to show its full potential. Swiss Re will be present in Mexico when that happens. We are here for the long term.