2022 Latam Outlook: Cat Markets
It is little wonder that brokers report that demand for political risk insurance has been on the rise in Latin America, and that underwriters have become wary of the risk.
Colombia and Brazil are going through polarizing election cycles this year. In 2021, Chile has sharply moved from right to left after months of social protests that often turned violent. Peru elected a left-wing populist government that is as wobbly as they come, and several former Peruvian presidents have been impeached, went to jail or, in one case, committed suicide in recent years.
In 2021, the risk managers of global companies in areas like retail and hospitality frequently complained that covers such as political violence or Strikes, Riots and Social Commotions (SRCC) have become hard to arrange for their Latin American units. When they could find the limits they needed, prices were steep, and conditions ever tighter.
“It is a cover that used to be silent and subsided by property rates. But, starting from the losses suffered in 2019 in Chile, insurer began to scrutinize the risk more thoroughly,” says Roman Mesuraca, head of P&C in América Latina at WTW.
The Chilean riots of 2019, which lasted several months and where millions of people took the streets of a country once seen as a safe haven for business, marked a change of perception about political risk in Latin America.
If even Chile, with its highly educated workforce and market-friendly economy, has become a riotous place, what about its less stable neighbours? Colombia provided an answer with its own set of violent riots in 2021. Other countries like Peru, Argentina, Ecuador, Bolivia and even Brazil seem to be permanently sitting on a powder keg, all of them with polarizing politics made worse by the ravages of Covid-19.
The insurance market has suffered the pain on the flesh. Insurance losses caused by riots in Chile were estimated at around $3bn by PCS, ranking among the highest SRCC losses ever suffered by the global insurance market.
The situation has somewhat improved in recent months, according to market sources, thanks to developments in Chile, where groups that were the most active in the protests of the past few years in practice got the power with the election of left wing president Gabriel Boric in December.
“Inherent risks of massive protests in Chile have almost disappeared, and we have started to see some insurers to include SRCC sublimits into property policies,” Mesuraca said.
Sublimits remain small, at $500,000 or $1mn, but at least the process has started and seems to be there to stay, he added.
Mesuraca also said that in Colombia, which will vote for president in May, inherent risk is high right now, and underwriters are paying close attention to what will happen there. A recent primary vote indicated that the main candidates come from the left and right side of the spectrum, with centrist candidates being far behind the two polarizing favourites to become the next president.
“Markets are not flat-out refusing coverage, but scrutiny is much higher, and there is a more detailed analysis of the exposures by each client,” he pointed out.
Mesuraca noted that retailers are finding it especially hard to get insurance at this point, and rates continues to rise for political risks in the Andes, sometimes reaching 20% hikes, or up to 50% if the renewals coincide with episodes of turbulence. In other regional markets, renewals have hovered between flat rates and 10% price hikes.
Underwriters remain wary because the root cause of social unrest, Latin America’s huge levels of social inequality, has not disappeared, noted Angelo Colombo, the CEO of Swiss Re Corporate Solutions in Brazil and Latin America.
“There has also been an agglutination of elections in the region, such as recently in Peru and Chile, or countries that will vote this year, like Brazil and Colombia, and those are factors of volatility in those economies,” he said. “There is therefore a worry that protests could resume, but right now we do not see problems for clients to transfer risks as they wish.”
The political risks market has been hard in Latin America, and particularly in those countries where they coincide with catastrophic exposures. All those factors combined have added pressure on recent renewals. The main catastrophic markets in the region are the Andes and Mexico.
“We are still noticing a hard market in all industries and business lines,” said Mauricio Acosta, the head of the Andean subregion at Aon. “The insurance and reinsurance markets continue to adjust conditions and prices, even though not by as much as in 2020 and 2021, and to demand higher deductibles, especially in catastrophic covers and frequency risks.”
He added that capacity remains restricted in a number of lines, including liability for civil service workers, bankers’ blanket bonds, civil liability, surety, aviation, sabotage and terrorism.
“Prices have gone up in basically all business lines, but at a slower pace,” Mesuraca added. “And we have seen insurers and reinsurers put more emphasis on the micromanagement of accounts.”
That means that insurers are increasingly demanding improved risk management practices from their Latin American clients, particularly in sectors like natural resources.
“We have seen insurers put more focus on generating improvements in operational risk management rather than on clients’ catastrophic exposures,” he said.
A mix of poor operational risk management with cat exposure can result in insurance programmes facing increases of over 20%, or between 10-20% if the catastrophic exposure is not relevant. Ironically, a large chunk of the pressure faced by mining companies and other natural resource players come from two large losses suffered in a non-catastrophic market, Brazil, where two tailing dam failures, in 2015 and 2019, caused huge loss of life and mammoth economic and insured losses.
“It does not mean we cannot find capacity,” Mesuraca said. “Mining buyers have looked for expert help and performed the improvements in risk management that the market requests today for tailing dams.”
In the case of industrial risks, buyers with catastrophic exposure have faced price increases of 10-15%, he said. Brokers remark that, as a rule, insurance lines that rely mostly on domestic capacity have hardened less than those where there is intense need for international reinsurance.
“Even though the panorama in our region has not been too different, increases have been moderate, compared to more developed markets,” said Ernesto Díaz, the regional Placement leader at Marsh.
He stressed that the highest average increase registered by Marsh’s global insurance index in Latin America was 9%, posted in the fourth quarter of 2020, when globally the ratio was 22%. Throughout the hard market, the index has been much lower in Latin America than the global benchmark.
It is probably not surprising, therefore, that the covers that have hardened the most are those that mirror more closely developments in the global market. And that is particularly the case with financial lines.
“What we have seen in recent months and until now is a lack of capacity for cyber and D&O risks,” Díaz said. “For example, in cyber, we have seen in the region rate increases in general around 40%. However, in some cases, we have seen hikes of 400%.”
That is particularly unfortunate because it has been only in the past couple of years that Latin American corporations and public entities have really woken up to their cyber exposures.
“We spend time explaining the product to our clients, and when we go to the market, it is only possible to buy lower limits for much higher prices and deductibles than when we started talking to them,” Mesuraca said.