09/30/2023 – 9:01
It was more than 39 degrees in Rio de Janeiro last Sunday, the 24th, well above the average of 26 degrees for the maximum temperature in the city for this time of year. Executives coming from all over Latin America were prepared for the summer heat in the middle of spring, but not so much. “It’s not always like that, right?” one of them asked Broadcast.
The heat wave, which occurred not only in Rio but in a large part of the country, reinforced one of the main themes of the 38th Hemispheric Insurance Conference (Fides), scheduled more than a year ago and which took a large part of the Latin American insurance market to Rio: the impact of climate change on the world and also on the sector.
It was a coincidence, but a coincidence that is happening more and more frequently”, said the president of the National Confederation of Insurance Companies (CNSeg), Dyogo Oliveira. “Phenomena that happened with a certain frequency are happening with a greater frequency and also with a greater severity.”
On the American continent, the losses for insurance companies due to climate change are real. In the Caribbean, the traditional route for hurricanes, changes in ocean temperatures are making storms more intense. Last year, Hurricane Ian, which passed through the Caribbean region and also Florida, in the United States, became the third most damaging in history: around US$115 billion.
The reinsurer Swiss Re estimated that of this amount, up to US$65 billion was covered by insurance. This made Ian the second biggest loss to the market in history, behind only Hurricane Katrina in 2005.
In Brazil
Brazil does not have hurricanes, but it is also affected. Between mid-2021 and the beginning of 2022, the occurrence of the La Niña climate phenomenon led to a drought in the southern region of the country, which led to losses in a series of agricultural crops. The result was that rural insurance compensation claims jumped from R$7.2 billion in 2021 to R$10.5 billion last year. In “insurance insurance”, reinsurance, it went from R$2.2 billion in 2021 to R$5 billion.
“It was the first time that Brazil had a market loss, which is a loss of billions in which everyone is affected,” said the CEO of reinsurance for Brazil at the risk management company Aon, Antônio Jorge Rodrigues. “This made the market open its eyes [para os impactos da mudança climática].”
The director of insurance at Fitch Ratings in Brazil, Alexandre Chang, stated that other events are beginning to show the effects that the climate crisis could have on Brazil and the insurance market. “In the south of Brazil, some events that were not seen so frequently, such as winds and floods, have become more frequent.”
In the risk rating agency’s view, the country has not yet become a catastrophic market, but the effects of climate change are undeniable. “Climate change is already having effects by bringing catastrophic events to areas that were not, such as Brazil, Argentina, Uruguay and Colombia,” said senior director of insurance in Latin America, Eduardo Recinos.
One more year
The losses caused by the increase in the planet’s temperature occur at a time when the insurance market is dealing with higher prices. This is what the sector calls hardening, or hard market: due to lack of capital, the prices charged for policies become higher, coverage drops or both.
Rodrigues, from Aon, stated that a set of factors explains this context: the covid-19 pandemic, the war in Ukraine and the rise in inflation around the world since last year, led central banks to increase interest rates.
The insurance sector competes for capital with other investment alternatives available to large investors, which means that in times of high interest rates, it loses its attractiveness compared to fixed income. The effect is greater if inflation continues accelerating, because it is inflation that dictates the correction of the value of compensation owed to customers.
This tightening generates a cascade effect: retrocession lines (the technical name for contracts in which reinsurers transfer a policy to another agent) become more expensive, and reinsurers and insurers are forced to increase prices and reduce certain coverage. “The last time we had a market hardening cycle was in the 1980s,” said Rodrigues. According to him, in Brazil, they have become common on lines for [clientes do] agribusiness loss limits, which mean that reinsurers only cover losses up to a certain percentage of the insurers’ portfolio.
Recinos, from Fitch, foresees an improvement from 2025. “Reinsurers’ return on invested capital returned to 10%, which we consider a good result. We believe that this will lead institutional investors to return to the reinsurance industry, and should lead the market to lower prices”, he said.
According to Rodrigues, from Aon, the worsening conditions are beginning to ease, and 2024 should be a year of stability. “If we don’t have any major natural catastrophes next year, perhaps the cycle will reverse by 2025,” said the executive.
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