Latam Briefing: Nat Cat in Brazil
Recent climate events have dented Brazil’s reputation as a non-catastrophic market, a perception that is set to have an impact on the country’s insurance market.
Unlike traditional catastrophic markets like Florida or Japan, the perils that worry Brazilian insurers are not hurricanes or earthquakes, but extreme weather events such as droughts and floods.
In 2021, the Brazilian market faced the worst drought in 91 years, according to the local meteorological service. Regions that have suffered with the lack of rain include some of the largest producers of agricultural products, mainly in the Southern parts of the country.
Brazil is one of the world’s largest exporters of crops like soybeans and corn, as well as of beef and poultry. It was not surprising, then, that crop insurance losses shot up in the past couple of years with the deterioration of weather conditions.
According to data compiled by CNSeg, an insurance trade association, agricultural insurance claims reached 10.3 billion reais ($2 billion) in the first eleven months of 2022, a 44% increase over the number posted in the full year of 2021. The 2022 number was almost three times as high as in 2020. Those are significant growth rates even discounting inflation, which peaked at 10.06% in 2021.
“The past couple of years hit agricultural insurance very hard. It reached a very high severity level that has much to do with changes in climate events, especially in Southern Brazil,” says Dyogo Oliveira, the president of CNSeg.
The losses have pushed some players to rethink their commercial strategies for one of Brazil’s most important insurance segments. Bruno Freire, the CEO of Austral Re, a Brazilian reinsurer, says that the company has left the agricultural insurance market. The decision came as the company was also readjusting its exposures to catastrophic events outside of Brazil.
The question now is whether Brazil’s catastrophic losses are here to stay.
“The jury is still debating what the long-term trend is for the recent weather conditions,” says Andrew Siffert, a senior meteorologist at reinsurance brokers BMS. “The El Nino and Southern Oscillation is a huge control knob on global weather patterns, and it has been in a negative phase, that we call La Nina, for three years in a row now, which is rare.”
Meteorologists have correlated La Nina with dry conditions over large swathes of Brazilian territory. Siffert also notes that similar patterns happened in 1973-1976 and in 1998-2001, when agricultural production was much smaller than today. Therefore, the impact on crop insurers was much less dramatic than it has been in the past two years.
But droughts are not the only threat faced by the country. Siffert says that Brazil is also often hit by violent flooding episodes, sometimes with dramatic consequences such as the bursting of the Brumadinho dam in 2019, which killed 270 people and caused hundreds of millions of dollars in losses for the insurance industry.
Landslides are also common in Brazil’s sprawling metropoles like Rio de Janeiro, and insured losses resulting from such tragedies could go up as insurance penetration increases in the country. A similar process seems to be already taking place in the crop insurance market. The droughts of the past two years seem to have boosted the interest of farmers for covers.
According to CNSeg, agricultural insurance premiums reached more than 12.6bn reais ($2.43bn) between January and November 2022, the latest data available. It amounts to twice as much as in 2020 and five times more than in 2018, but still represents less than 15% of all cultivated area.
Reinsurance cessions are on the rise as well, having increased by 50% in 2022, 45.3% in 2020 and 41.4% in 2021, CNSeg data shows. Total cessions amounted to 4.45 billion reais ($861mn) last year.
The market leader is Brasilseg, the insurance arm of state-owned Banco do Brasil bank, with a 54% share of the market in May 2022. It is followed by Mafpre, with 8.7%, Essor, a local insurer, with 6.9%, Swiss Re (3.5%) and Fairfax (3%).
Higher premium volumes may generate another difficult year in terms of losses for the industry. Experts say that factors such as climate change and the deforestation of the Amazon are increasing the exposure of Brazil to extreme weather events, and RMS, a risk analysis firm, has forecast that La Nina will continue apace in 2023, which could result in further dry conditions in the Southern part of the country.
The consultancy stressed in a report that producers in Brazil’s Southern states answer for half of the total soybeans production, one of the country’s main exports. Eighty-seven percent of the cultivated area relies on rainfall for water.
Even when La Nina runs its course, agricultural producers may have to face new flooding events, which have often hit the country. Again, the wealthy Southern states are the most likely to bear the brunt of it, according to Siffert. And Brazil has such a big territory, with agricultural production spread out across several regions, that at any given moment a large loss event may worry crop insurers.
“One part of the country can easily be in drought while the other areas see devastating flooding,” Siffert says. “This has been the case over the past three years, when much of the country has been in a drought. Of course, this can come from severe thunderstorm activity that can cause damage to crops and structures.”
“Brazil is very much a growing area of the catastrophic market for insurance and reinsurance purposes as grain planting grows,” he adds.
Oliveira says that the market is aware of the exposures and is starting to move towards adapting itself to it. CNSeg, for example, is proposing the creation of cat pool-like vehicle to guarantee that crop insurance capacity is available for the sector.
The pool would take the shape of a stabilization fund and would update an already existing, but inoperative, instrument created by law some years ago. The project was presented to candidates in last year’s presidential election, finally won by Luis Inácio Lula da Silva, a left-winger.
The concern with extreme weather events goes beyond agricultural insurance though. Another proposal by CNSeg is the creation of a social insurance vehicle to protect vulnerable populations against flooding, landslides and other disasters, with costs shared by all home insurance buyers.
The association also wants to promote the development of parametric insurance, which could boost coverage both among low-income families and agricultural producers. That would require, however, much public investment in the deployment of a countrywide network of meteorological stations. Oliveira says that the country today has only 2,000 meteorological stations in place, which is plainly insufficient for its more than 5,800 municipalities.
Susep, Brazil’s insurance supervisor, has also tried to equip the market with new tools to deal with catastrophic exposures. For example, two years ago it approved the introduction of insurance-linked securities which enable risk owners established in the country to issue cat bonds and other alternative risk transfer products in the global market.