Key Takeaways
- Property insurance claims in Brazil peaked in June due to severe floods in the state of Rio Grande do Sul.
- However, limited flood coverage, adequate risk-sharing through reinsurance and retrocession, and geographical diversification cushioned property/casualty technical results for local insurers and reinsurers.
- We don't expect the floods to significantly dent the profits of Brazilian insurers and reinsurers. Still, the floods have brought attention to the issue of natural disasters in Brazil. While insurers and reinsurers have been taking extra care in their exposure, some could benefit from the blooming catastrophic risk coverage market in Brazil, which has plenty of room to develop.
Property/casualty claims rose notably in the months that succeeded the devastating floods that hit the southern Brazilian state of Rio Grande do Sul. However, the effects on insurers' and local reinsurers' net income were relatively soft due to:
- Limited coverage of catastrophic risk in Brazil;
- Insurers' and reinsurers' geographical diversification; and
- The use of reinsurance and retrocession, which helped absorb excess claims.
While there may be some outstanding claims to be booked, we believe the majority have already been accounted for and gross claims should stabilize. We therefore predict a return on equity of 20%-25% for the Brazilian property/casualty (P/C) insurance sector in 2024--lower than in 2023, but higher than the sector's historical average.
We expect modest growth in gross premiums written this year, primarily driven by 0% to 5% expansion in auto and agribusiness insurance. However, we think solid net claims ratios will contribute to strong technical results. Furthermore, robust investment yields have bolstered profits, which we expect to continue given we forecast the Brazilian policy rate to increase until the end of 2024.
Floods Hit Rio Grande do Sul In April And May
Heavy rainfall hit southern Brazil in late April and early May, leading to severe floods in the state of Rio Grande do Sul.
The state is home to about 11 million people and contributes roughly 5.9% of Brazil's GDP. Its agricultural sector contributes about 69% of the country's rice production and 8.6% of soy production. In addition, dairy products from the state represent 12.9% of Brazil's production and livestock 4.6%.
The floods were the most severe in the state in at least 80 years. Numerous densely populated cities--including Porto Alegre, the state capital and most populous city--experienced significant damage. The floods displaced hundreds of thousands of people, temporarily disrupted electricity and transportation services, and damaged property and infrastructure.
P/C Insurers' Profits To Remain Healthy In 2024
We anticipate that the P/C insurance sector will maintain solid profitability for the remainder of 2024, with a return on equity of 20%-25%.
We expect that flood-related claims will stabilize and that key insurance sectors--such as auto--will continue to perform well. Furthermore, we believe high interest rates in Brazil will continue to benefit insurers' investment yields, as we currently expect two more hikes in the Brazilian policy rate this year.
Despite the floods, P/C insurers in Brazil maintained sound profits in the first half of the year, with a return on equity of about 24% on an annualized basis. Several factors contributed to these positive results:
- The net claims impact from the floods in Rio Grande do Sul was relatively limited.
- The auto and agribusiness insurance sectors in Brazil have performed well, driven by adequate pricing, a decline in car prices, and limited agribusiness claims events. These trends have helped offset below-inflation premium growth for these two sectors in 2024.
- High interest rates in Brazil have continued to benefit investment yields, further enhancing insurers' profits.
Local Brazilian reinsurers should also report stable profitability in 2024, as retrocession arrangements and geographical diversification within Brazil have softened the impacts of the floods.
There were no flood-related ratings impacts on Brazilian insurers and reinsurers, as their creditworthiness remained stable.
Chart 1
Limited Catastrophic Risk Coverage And Appropriate Reinsurance Use Mitigated The Floods' Impact For Most P/C Insurers
Overall, we estimate that full-year claims in Brazil will be 10%-15% higher due to the floods in Rio Grande do Sul. Therefore, claims should represent less than 10% of the estimated Brazilian real (R$) 90 billion of economic damage caused by the floods.
Despite the severity of the floods and the resulting damage, limited flood insurance coverage softened the impact on insurers' gross claims. According to the Brazilian Insurance Confederation (CNseg), claim requests related to the floods reached R$6.0 billion by the end of September-equivalent to approximately 10% of the total P/C claims reported in 2023.
Flood-related claims peaked in June before retracting in July, according to data released by the Brazilian regulator for P/C and life insurance (Superintendencia de Seguros Privados, or SUSEP). While we believe that most claims were already made by July, there may be some residual claims to process in the second half of 2024. However, we don't expect these to have a significant impact.
Chart 2
Chart 3
The property insurance sector was the most affected by the floods. Large risks were the primary source of claims within this segment, for which larger companies are the main customers. This is because smaller companies and individuals often have either no property insurance or limited coverage.
The auto insurance segment, which represents about 50% of P/C premiums issued in Brazil, also saw higher claims from the floods. However, these claims were much milder compared with property claims, because auto policies typically don't cover car damage caused by floods.
Furthermore, the state of Rio Grande do Sul accounted for less than 8% of premiums issued for auto insurance policies this year. As a result, the nationwide aggregate auto insurance claims ratio remained relatively stable during the first half of 2024.
Additionally, claims rose for agribusiness insurance, although the impact was much less pronounced compared to the rise in property claims.
Despite a significant spike in the gross claims ratio, Brazilian insurers maintained a relatively stable net claims ratio due to risk-sharing arrangements with reinsurers. This was also the case in early 2022, when a severe drought resulted in a substantial increase in claims for agribusiness insurance in Brazil that was largely absorbed by reinsurers.
Thanks to this risk-sharing mechanism, the net claims ratio reached a peak of just 54% in May 2024 during the Rio Grande do Sul floods, only slightly above the sector's historical average of 45%-50%. Even insurers that had to pay substantial amounts in flood-related claims maintained healthy net claims ratios due to their reinsurance coverage.
Chart 4
Demand For Catastrophic Risk Coverage Could Increase
While we don't expect the floods to significantly dent Brazilian insurers' profits, they have brought attention to the issue of natural catastrophes in Brazil. The severity of the floods in southern Brazil was unprecedented, and natural disasters could become more frequent in the country. While insurers have been taking extra care in their exposure, some could benefit from the blooming catastrophic risk market in Brazil.
Brazilian insurers may have to deal with severe climate events. As a result, insurers have become more cautious about their exposure, with some reducing coverage for sectors that are more vulnerable to climate-related events, such as agribusiness. At the same time, increasing concerns regarding natural disasters could boost demand for coverage against catastrophic risks in Brazil.
The natural catastrophe insurance market in Brazil is less developed than in some other developing countries. This can be attributed, in part, to the historically lower severity of natural events in Brazil. Relative to other countries, Brazil usually experiences lower seismic activity and fewer tropical cyclones, for example.
Considering this, insurers and reinsurers with growth appetite could increase their exposure to catastrophic risk in Brazil if demand increased and if pricing and terms are sufficiently attractive. We therefore anticipate that the floods in Rio Grande do Sul could lead to higher property insurance prices--even in other states--as insurers raise prices to compensate for the higher perceived risk.
Related Research
- Your Three Minutes In Banking: Brazil Floods Could Take A Toll On Local Banks, Less So On Insurers, May 13, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Henrique Sznirer, Sao Paulo + 55 11 3039 9723; henrique.sznirer@spglobal.com |
| Secondary Contact: | Guilherme Machado, Sao Paulo + 30399700; guilherme.machado@spglobal.com |
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