Brazil floods increases insurance losses and demand for cat risk coverage

AM Best has noted that the impact on most re/insurers will be contained as they retain smaller exposures and have exited volatile business lines.

Porto Alegre, the state’s capital, experienced extreme flooding, with the Guaíba River reaching a record level of 5.33 meters, surpassing previous historical records. Only two of the city’s six water treatment plants remain operational, affecting the water supply for approximately 1.4 million residents, according to Al Jazeera.

Heavy rains started in Rio Grande do Sul, Brazil’s fifth-largest economic state, on April 28, and amounted to 400 mm in just the first five days of May, according to the Instituto Nacional de Meteorologia.

With losses due to floods estimated at BRL 7.5 billion. Of this figure, the Confedereção Nacional de Municipios observed BRL 2 billion in public sector losses and BRL 1.1 billion in private sector losses, with the bulk of the losses -BRL 4.4 billion- in personal property damages.

Brazil floods increases insurance losses

The floods significantly disrupted the state’s industrial and agricultural sectors, resulting in approximately 147 fatalities and displacing hundreds of thousands. S&P identified the most affected segments in the re/insurance sector as loss of profit insurance and property and residential insurance.

AM Best noted that the full extent of the damage will remain uncertain until the waters recede, as companies continue to assess the flood’s impact.

Agribusiness is of high importance for the Brazilian economy, and Rio Grande do Sul is an agricultural centre that supplies approximately 60% of the country’s rice, but insurance and reinsurance companies have learned from experience to cope with climate-related events by retaining a smaller share of exposures and developing more accurate probable maximum loss models.

Ricardo Rodriguez Perez, financial analyst, AM Best

S&P stated there are a range of factors mitigating the repercussions for local insurers, including the fact that Brazilian SMEs don’t typically insure for catastrophic risk.

The floods also had a significant economic impact, particularly on the agricultural sector, which accounts for a substantial part of the region’s economy. Many crops and livestock were lost, and major agribusinesses had to halt operations.

This disruption is expected to affect Brazil’s overall food supply and export capabilities​, according to Insurance Journal.

Brazil floods increases insurance losses

Also, flood coverage is optional for car insurance, which S&P believes it’s relatively low, while local insurers don’t typically cover major risks such as airports and stadiums and agricultural insurance coverage for rice and corn is generally very low.

S&P noted that the floods might drive higher demand for catastrophic risk coverage, leading to increased prices and premiums for this type of insurance.

While the full impact of the recent extreme flooding on Rio Grande do Sul’s economy remains uncertain, S&P believes the damage will be substantial, potentially affecting the asset quality of Brazilian banks. They expect local insurers to experience limited losses.

Brazil floods increases insurance losses

S&P foresees significant repercussions for the state’s agricultural sector, services industry, private property, and public infrastructure. They also predict heightened risks for SME loans, consumer loans, and credit cards.

Efforts to provide aid and support are ongoing, with the Brazilian government and various organizations actively involved in rescue operations and providing temporary shelters for those displaced. President Luiz Inácio Lula da Silva has assured that necessary resources will be made available to support recovery and rebuilding efforts.

Nataly Kramer   by Nataly Kramer