2022 Latam Outlook: Non-Cat Markets
Brazil is a country famous for its biodiversity. These days, one can even find a really rare species there: insurance underwriters that must fight tooth and nail for a clients’ business.
That is because South America’s largest economy also hosts one that most unusual current habitats in the financial industry, to wit, a soft insurance market.
We are talking here about the legal surety bond segment, a segment that took Brazil’s market by storm in the past decade and which, today, looks like an Amazon River of insurance capacity.
“Legal surety bond is a very particular Brazilian cover,” says Ricardo Ciardella, director of specialty at Marsh Brasil. “It has become a commodity that has replaced letters of credit provided by banks in litigation.”
More than 30 companies offer the cover, which Brazilian companies use to replace banking guarantees demanded by the courts during litigation cases. It is particularly useful in tax disputes with the government, which are both plentiful and long running, courtesy of a complex and obscure tax system.
Organizations can buy the policy for one, two or even five-year periods, and losses are basically non-existent, as the financial guarantees are returned to the parties once the courts reach a final decision. It is an example of a business line that makes underwriters salivate and, unsurprisingly, has helped to boost the results posted by many a local player and subsidiary of global insurers.
“It is a shot of premium straight in the vein of an insurer,” says Ciardella. “In theory at least, legal surety bonds can subsidise other lines that an insurer does not have much appetite for retention.”
He notes that the Covid has put the legal surety market in a standstill for some time already, but market players expect that the tax courts will start resuming cases and starting new ones by mid-2022. When that happens, the market will surely get going with gusto.
By the end of 2020, Susep, the insurance supervisors, reported that the broader surety market amounted to over 3 billion reais in premiums, and losses reached 210 million reais ($590mn and $41mn respectively). Brokers estimate that around 80% of the segment is made of legal surety bonds.
“When a client with solid financial health demands this cover, insurers fight for the business,” Ciardella explains.
Legal surety bonds constitute an extreme but not unique case in the Brazilian market, where local insurers and reinsurers maintain plenty of capacity available to clients. And where, as a result, the global hard market has been less dramatic than in other parts of the world.
Mauricio Masferrer, the head of Commercial Risk in Brazil at Aon, notes that the fluctuations of the global P&C market are somewhat mitigated in Brazil not only due to a lack of traditional catastrophic exposures, but also because there is fewer insurance loss-causing litigation than in countries like the US.
As a result, trends in important lines for local underwriters, such as property, terrestrial cargo and liability, have suffered significantly lower increases than in the US or the main European markets. The situation is different, however, in the case of covers that rely on international capacity, such as the highest layers D&O and cyber.
“In cyber insurance, there are not even a dozen carriers, and if you talk about real players in the market that offer primary capacity, there are only two or three,” Ciardella says. “And this situation has coincided with clients waking up for the need to have much higher cyber limits in place.”
Building towers can also be hard for energy companies, airlines and some maritiime groups, as well as port operators, which require limits that can reach hundreds of millions of reais, which goes beyond the abilities of local underwriters.
“Capacity can be found abroad, but at a price that is not in line with the reality of Brazilian buyers,” Ciardella says.
Masferrer, for his part, noticed that a large number of international groups have invested in Brazil’s P&C market in recent years and now occupy leadership positions in the country. They include the likes of Mapfre, Chubb, Zurich and Swiss Re Corporate Solutions.
“It approaches the local market to some extent to the fluctuations of the global market,” he says.
A recent regulatory development could help such players to expand their operations in the country. Last year, CNSP, the highest insurance regulatory body, approved a new rule that authorizes underwriters to sell tailor-made large risks covers for their clients. Before that, the wordings of all covers sold in Brazil needed to be pre-approved by Susep, which stifled innovation in the market.
Analysts expect that, as a result, insurers will be able to introduce new covers and offer bundles of insurance products that will be more efficient for buyers and more profitable for underwriters. It will take a while, however, for the changes to be felt during renewing periods.
“The development has been slow, and that is how it must be,” says Angelo Colombo, the CEO of Swiss Re Corporate Solutions for Brazil and Latin America. “We are now in a period of much negotiation with clients, as we need to remove the restraints and understand their needs. But clients are enthusiastic with this change.”
Colombo believes, for instance, that the integration of local policies to global insurance programmes, an old nightmare for multinationals in Brazil, will be much facilitated by the new wordings flexibility allowed by the new rules.
Masferrer agrees that changes will only take place gradually in the market.
“In a first stage, it will be possible to provide more clarity to wordings and make some policies more fluid, for instance, at the time of settling a claim. In a second stage, we should see wordings specifically drafted for each industry, and eventually to bring some clauses from global programmes that still do not exist in Brazil,” he says. “A third stage could be more transformational. It may make it possible to bundle products and to assemble a number of lines into a single policy, and even to devise specific wordings for a single client.”
“There is some resistance from the insurance market, especially because reinsurance treaties do not contemplate this kind of change,” says Roman Mesuraca, the head of P&C in América Latina at WTW. “But the new rules enable us to create tailor made covers, and in a country like Brazil, that is a demand not met for many years both from local clients and for global programme owners.”
International groups have shown interest in Brazil, despite its frequent economic slumps, because it is Latin America’s largest non-catastrophic market – at least if we take human-made catastrophes out of the equation. In fact, the local insurance market has tabbed two major man-made catastrophes in the past few years, with the overflowing of tailing dams in the Minas Gerais state that caused hundreds of deaths and billions of dollars of losses.
But Brazil is not the only one to produce its own catastrophes. Argentina, another big regional economy, has had its share of catastrophic policy decisions that have hampered the activity of insurers in the country. The most glaring were capital controls implemented during the government of former president Cristina Kirchner that prevented insurers from sending profits and transferring reinsurance premiums abroad.
The restrictions were removed in the late 2010s by a liberal government, but some capital controls were reinstated, in a less aggressive mould, in the past couple of years, as the Argentine government has tried to prevent capital to flee from the embattled economy.
“The challenge in Argentina is to attract capital and capacity,” Mesuraca said. “The restrictions cause some carriers to choose not to cover Argentine risks.”