Latam Briefing: Transportation insurance in Brazil
With the vast majority of cargo carried by trucks in Brazil, the market could see strong rise of demand for insurance covers thanks to regulatory changes recently approved by the government.
A bill with amendments to the Road Traffic Code that was voted on by the Brazilian Congress in June implements fresh obligations for road freight companies to buy cargo insurance, as well as more stringent risk management requirements that could help the market to keep losses under control.
The new rules could prove to be a boon for a segment that is already performing strongly, where premium growth is estimated at between 15% and 20% a year, while loss ratios have been contained at around 60%.
The performance of the segment has been positive even though Brazil is widely known as one of the world’s most dangerous countries for the transportation of cargo by road.
Experts say that only 10% of Brazil’s 1.7 million km of highways is in a good state of conservation. Of the total, a mere 13% is paved, and even within that group, barely 40% of are deemed to be in a good state.
Crime is another big issue for the sector. NTC, an association of transportation and logistics companies, estimates that robberies and thefts caused losses of 1.2bn reais ($250 million) to the industry in 2022, resulting from more than 13,000 criminal acts recorded on Brazilian roads.
It is estimated that 70% of all cargo transported in Brazil is carried by trucks, with around 200,000 companies working in the sector. Roughly half of them is made out of individuals who own one or two vehicles and usually work under contract for larger outfits.
Despite all of that, insurance protection levels remain relatively low. Until June, truck companies were only required to purchase basic cover to protect that cargo against physical damage. Cargo owners were prevented from demanding broader insurance coverage from transporters.
The 14,599 bill, which was approved in mid-June, is set to change this situation. From now on, truck owners will have to purchase third party liability cover for damage caused by the truck during the transportation of cargo, and cover against the loss of the cargo due to theft, fraud or other reasons. They will also have to agree with their insurers the implementation of risk management plans to certify that they are doing all they can to protect the items carried by their trucks.
The changes are significant as until now, only cargo owners were mandated to purchase liability insurance, and the responsibility could be transferred to the cargo owner. The new law stipulates that this obligation will be transferred to truck owners, although brokers and lawyers believe that other pieces of legislation imply that cargo owners will have to carry on purchasing liability protection nonetheless.
As of 2022, the freight road transportation insurance amounted to a total of 2.67 billion reais ($558 million) in premiums, says Sergio Caron, the director of Marine & Cargo at Marsh Brasil. The market is almost evenly split between the policies bought by freight carriers and cargo owners, but the former’s share has been growing faster in the past few years. This is a trend that should be accentuated by the new rules.
“The new law will have a significant impact on road freight companies,” he points out.
To be fair, truck owners have already been under pressure to increase the level of protection for their vehicles. Not so long ago, many simply skipped the purchase of the mandatory cargo damage liability cover as enforcement was toothless, but bureaucratic changes have made it necessary for them report their compliance in recent years at the time of signing contracts with their clients. A growing number of companies have also opted to buy theft insurance due to spikes of cases of cargoes lost to criminals in the past two decades, and governance pressures from a strengthening ESG wave have driven firms to invest in risk management.
Non-compliance with the new rules will also prove expensive for transportation companies, as the new law establishes punishments of 10% of the value of the cargo if it is assessed that the truck does not have the mandatory cover.
The question is now whether the insurance market will deliver the cover that transportation companies will have to buy. Insurance against cargo theft may be particularly tricky, as not many underwriters have shown appetite for the risk in Brazil. And the implementation of risk management plans as required by the law will be challenging for dozens of thousands of small firms.
“Companies that have a higher investment capacity will surely be better prepared and will obtain better policies with higher limits and flexible terms,” Caron says. “But those with less financial muscle will not be able to present very robust risk management plans.”
Brokers say that technological improvements in areas such as the tracking of trucks and cargo and in the security of the most important highways have made insurers more amenable to road freight risk, and rates have been flat in recent years as a result. But the outcome of the changes may be unequal access to policies for different kinds of buyers, with some having to accept higher rates and tougher deductible demands in order to comply with the law.
“We do not have any restrictions to transportation insurance, but there is no doubt that the issue of cargo theft is a relevant problem for freight companies and cargo owners,” says Luciano Santos, the vice-president of P&C at Chubb Brasil. “Another subject of concern is the growth in the number of road accidents. Unfortunately, we still struggle to find detailed information about accidents in Brazil, but our numbers point to an important increase in the number of cases. Of course, all of that has an impact on loss levels and, consequently, adds pressure on prices.”
Both brokers and insurers are investing in technologies to meet the growing demand. Chubb, for instance, signed an agreement with insurtech Tryger and logistics data firm Tive to attach tracking systems to policies sold in Latin America. For its part, Aon offers risk management advisory and has built a tracking centre dedicated to its cargo clients where the movements of insured trucks can be monitored in real time.
“Telematic technologies require a learning process from the truck driver,” says Ricardo Guirão, the director of Transportation and Marine at Aon in São Paulo. “Issues such as braking and speeding points or the way that the driver takes curves will end up influencing the price of the coverage.”
Guirão believes that new capacity may be required for the largest road freight accounts, especially for companies that also take cargo outside of Brazil. It may well come from reinsurance markets, which could create opportunities for global reinsurers, especially those with a presence in the Brazilian market, either with a local subsidiary or a primary unit.
He says that there are 19 companies operating nowadays in the segment, although premiums are highly concentrated in the top four or five players. However, a couple of new companies have entered the market in recent years.
“The more traditional players have more careful subscription standards, and the newcomers are a tad more willing to take risks in order to gain market share,” he says. “There is an abundance of capacity for domestic risks, with limits up to $50 millon.”
If the cargo transported by road will likely become better protected thanks to the new law, the same cannot be said about the trucks that carry the products. Brazil’s mandatory insurance requirements for motor vehicles, never fully respected by truck owners, was dropped by the previous government, citing concerns about the cartelisation of the segment. As of today, according to Fabricio Palmas, the head of Automotive insurance at Aon in São Paulo, only around 6% of all the trucks circulating on Brazilian roads have some kind of insurance. A large share of the vehicles is owned by independent contractors who are unwilling to invest their meagre earnings in what is seen as an expensive insurance product.
He hopes, however, that the expansion of insurance obligations faced by transportation firms will help to boost the protection for trucks as well. On the other hand, transportation firms and their clients in sectors such as the powerful agribusiness industry are already fretting about the extra costs that they will have to endure. Which is sometimes a bad sign. In 2018, a strike of truck drivers was able to paralyze the Brazilian economy, making politicians all too careful when imposing new burdens on the category.