11/10/2024 – 7:30
Executive Pedro Farme, CEO of the American multinational Guy Carpenter, a reinsurance broker and risk consultancy, has closely followed the transformations in the insurance market in Brazil, especially after the rain catastrophe in Rio Grande do Sul. He helped to develop a new risk calculation equation for insurers, a predictive model of flooding, taking into account the greater incidence of extreme rainfall.
The proposal is to provide more security to companies and expand coverage in the country. The company manages US$61 billion in reinsurance contracts globally, with around R$5 billion in Brazil. Guy Carpenter is a Marsh McLennan company, a world-leading group in risk management, strategic management and people management. With annual revenue of US$23 billion, Marsh McLennan operates in 130 countries and employs more than 85,000 people.
+More than 70% of the global workforce is at risk from climate change, says ILO
In the executive’s assessment, climate catastrophes should generate an increase in demand for insurance in Brazil, both by companies and people seeking asset protection. But this increase will not put the country at levels equivalent to large economies in the short term.
Check out the interview:
Why was there a need to anticipate the review of current insurance models? Was this decision taken now because of worsening climate problems?
We have a history of launching models where large providers do not operate. There are outsourced companies that develop models for the insurance market, mainly in areas with recurring catastrophes, such as the Gulf of Mexico, Florida, hurricanes in the North Atlantic and typhoons in Asia.
In Brazil, there has never been a perception of risk by policyholders, nor by the market. There was no need for models for flooding, windstorms or other natural hazards. Now it does. Climate change will redefine the insurance sector in the country in the coming years.
But these extreme events are not limited to Brazil, right?
Undoubtedly. In many parts of the world, this was also not a reality. It became. For example, floods in Central Europe only began to be modeled in the early 2000s. The same goes for hail or forest fires, which had no mathematical models behind them.
In Brazil, we realized that climate change was changing this reality. The incidence of extratropical cyclones, for example, has increased substantially, as has economic damage. So, the scenario is changing in various parts of the world, but they attract more attention in places where there were no problems.
Do the floods in Rio Grande do Sul make this reality clearer?
Yes, it was an event with immense impact this year. In 2023, we already had the third biggest flood in the historical series in Rio Grande do Sul, which boosted this discussion. Therefore, we decided to launch a project to collect data and better understand this risk in Brazil.
So, did the event in Rio Grande do Sul accelerate this process?
Exactly. When the event took place in April, we spoke to our headquarters and accelerated development. Our initial priority was to support recovery, but we soon realized we needed to quantify this risk to better prepare. This led us to launch the flooding model in Brazil in August, as a response to the market. By collecting data and information, we use algorithms to predict locations that will be impacted and, thus, better calculate costs and risks, protecting insurers’ operations and offering customers more appropriate costs.
Does this model only apply to Brazil?
No. Guy Carpenter, the reinsurance arm of the Marsh McLennan group, operates globally, including here in Brazil, where we lead the segment. The strength of the group allowed us to accelerate the development of this flood model, similar to a predictive model that a portfolio manager uses to manage risk.
Now, with the model, we are able to know what the probability of flooding is at any point in the national territory and, thus, quantify the risk and better protect the market.
Doesn’t this make insurance more expensive? Couldn’t this modeling increase costs and drive people further away from coverage?
In truth no. The model does not represent new insurance or protection, but rather a way of quantifying and pricing risks. Until July this year, there was no model that indicated the probability of damage due to flooding in Brazil. Without this tool, flood insurance was more expensive because insurers didn’t know how to price it.
With the model, several regions can benefit from lower prices and a greater supply. What we hope is that insurers will feel more comfortable offering this protection, resulting in more supply and competition, which can benefit the insured.
Brazil has low insurance penetration compared to other economies, such as the United States and Europe. Does this calculation of risks and costs tend to increase or reduce the number of insured people, initially?
The objective is to increase, improving the protection gap. With more information, insurers will be able to charge less to those who live in regions with a low risk of flooding, such as the Cerrado, and charge a correct amount to those who live in areas more prone to flooding or in coastal areas. With global warming and rising ocean levels, the risks of losses are much greater on the coast.
But you mentioned the protection gap. Brazil has a 90% protection gap, right? What does this mean in practice?
The protection gap is the difference between the economic losses caused by an event and what is insured. Globally, this average is 60%.
In Brazil, it is above 90%, that is, of every US$100 of damage, only US$10 is covered by insurance. This reflects the low penetration of insurance in Brazil. In the case of flooding in Rio Grande do Sul, less than 10% of the damage was covered by insurance.
And can the model help to reduce this gap?
Yes. We want insurers to have more confidence in offering coverage and for policyholders to have more options at fair prices. Therefore, we hope that, in future events, the insurance market will be able to cover a greater portion of the economic damages.
In addition to flooding, Brazil faces other climate catastrophes, such as droughts and fires. Does this model adapt to these new scenarios?
The model is by type of risk. What we have just launched is specific to flooding, but obviously we will have to create new extreme events for other events. We are currently developing a model for fires, which already exists in other parts of the world, such as Europe and the United States.
These fires in the Amazon and Pantanal happen every year in California, for example. Just like there are hurricanes every year in the North Atlantic and the Caribbean.
Therefore, for Brazil, we also intend to develop a model for droughts, but this requires a specific database, which we are still building. The drought in the Amazon region, the record fires in the Pantanal and in the interior of São Paulo are generating data for the creation of this database.
What will be the most visible impact of climate change in the coming years on the Brazilian insurance market?
Climate change is altering the pattern of losses and the demand for insurance. Everyone in the chain, from insurers to customers, needs to understand that the severity of damage is increasing. A trader who has never needed insurance in 50 years may now face new risks. At first, the most visible effect is the increase in demand for insurance, but there will be others that need to be analyzed in the coming years.
Are there any predictions about the increase in demand for insurance in the coming years?
We expect growth above market inflation over the next five to ten years. However, it is still too early to imagine that Brazil will reach the level of maturity of markets such as the United States and Europe, where insurance penetration is much greater.
Here, the insurance sector covers around 4% of GDP. There, it exceeds 12%. There is a lot of room for growth in Brazil, but I do not believe that the country will be on par with more mature economies in the short or medium term. It will still take a long time.
Is current legislation in Brazil sufficient to meet this new climate reality in the insurance sector?
Brazilian regulation is modern and flexible, allowing the development of the insurance market in this changing scenario. However, it is important that the market continues to adapt to climate change, as we have seen with major hurricanes in the United States, which cause billions in losses. Hurricane Helene is expected to generate losses of US$10 billion to US$15 billion. Katrina in 2005 caused losses of more than US$100 billion.
What are the prospects for the insurance market in Brazil from now on?
The tendency is for the insurance market to continue growing. Brazil already has large multinational groups operating, but we believe that new players, both national and international, can also enter to operate in a segmented manner.
Which segment has the greatest growth potential?
The property market has great potential, especially for small businesses, homes and infrastructure assets. I have no doubt that all segments will see growth, some more, others less. But the fact is that penetration is still low, with less than 20% of homes covered. We believe this is a segment with a lot of room for growth.
Does this new model have a specific name?
No, for now we just call it a flooding predictive model.
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