Brazil’s Shocking Failure to Prepare for Worsening Weather Disasters – Will it Survive?

For a long time considered a market not exposed to climatic catastrophes, Brazil has suffered from the increase in the frequency of extreme events. One of the most recent examples is the extratropical cyclone that has hit part of Rio Grande do Sul since early Friday morning (16), causing storms and winds and leaving floods, blocked roads, lack of electricity and canceled flights in cities in the region. Porto Alegre metropolitan area. In addition to the material damage, according to the state Civil Defense, as of Sunday night (18), the cyclone had already left 13 dead and three missing, in addition to 3,700 homeless people and 697 displaced.

Climate change has also been impacting variations in the dry and rainy periods, aggravated by the The girl, which ended in March 2023 after three years. One of its reflections was the drought that affected the south of the country and impacted the production of soybeans and corn, resulting in $1 billion insured loss in 2022according to data from the global insurance and reinsurance company Swiss Re.

For the remainder of 2023, the horizon remains unfavorable, with the formation of the climatic phenomenon The boy and its gradual strengthening between late autumn and winter, information confirmed by the Climate Prediction Center of the United States Oceanic and Atmospheric Administration (NOAA). In April of this year, the National Institute of Meteorology (Inmet) had already warned about the possible arrival of the phenomenon in a few months. El Niño is characterized by abnormal and persistent warming of the surface of the Pacific Ocean in the Equator region, which can extend from the coast of South America to the middle of the equatorial Pacific, explains Inmet. In Brazil, its impact increases the risk of drought in the northern part of the North and Northeast regions and of large volumes of rain in the South of the country.

In the analysis of Pedro Farme, general director in Brazil of the global reinsurance broker Guy Carpenter, the Brazilian insurance market is not prepared to absorb the losses generated by a greater frequency of extratropical cyclones. This is because a weather event of this magnitude tends to affect much larger areas, hitting, for example, two to five factories in the same occurrence.

“And that’s when the reality of the market begins to come together with the new climate reality, that is, a market that has had regulation, capital requirements and reinsurance purchases all its life aimed at a perspective that we did not have naturally, whether or not it is exposed. to a great event of nature, today he needs to adapt”, he points out. According to him, the country lacks predictive models (systems that analyze specific data sets to predict scenarios or trends) adequate to this new Brazilian “climate reality”, like the one that already exists in places like Florida, in the United States, with a job in relation to the common hurricanes on its coast. However, he says the company has already started developing a model for Brazil focused on wind storms.

Through the CNseg (National Confederation of Insurance Companies), insurers are moving in that direction, with a project that aims to develop tools to map climate risks in all states, including a heat map (heat map) that will measure the Brazilian exposure to 12 physical climate risks. The program was initially developed globally by United Nations Environment Program Financing Initiative (UNEP-FI), the financial arm of the UN for climate issues, and the tool has already been used in the United States and in some European countries. In Latin America, Brazil was the country chosen for the project, which should be completed in 2023.

Insurers will be able to assess the states and capitals most affected by the following risks: heat and cold waves, droughts, chronic temperature changes, river, coastal and urban flooding, sea level rise, water stress, seasonal variability, wind intensity and fires. In terms of intensity, the impact of each of the risks on the states and capitals can be classified as: high, medium, low or indeterminate.

“oh heat map offers a simplified view of the Brazilian geographic exposure, considering two climate scenarios, an increase of 2ºC and 4ºC, and two different time horizons, 2030 and 2050”, says Ana Paula Almeida Santos, Director of Sustainability and Consumer Relations at CNseg . The tool will be used to help underwriting, that is, in setting the prices of the most appropriate insurance products for the risk. In addition, Ana Paula points out that the tool “can be of great help in the construction of public policies”, contributing to the mitigation of risks and a more adequate allocation of funds, for example, to the regions most susceptible to climatic events. .

What are the most affected areas?

Considering the impacts of extreme weather events on the insurance market, the rural segment tends to be the most directly affected. In 2022, insurers operating in the field collected around R$ 13.4 billion and paid R$ 10.5 billion in compensation. It is a sector that depends on the government subsidy which, this year, announced the amount of R$ 1 billion to help producers.

However, industry sources consulted for the report point to several other areas that are increasingly affected. Car insurance is one of them, as is the 6,500 vehicles rescued by insurers after the rains that hit São Sebastião, on the São Paulo coast, in February.

Still thinking of the coastal region, Farme, by Guy Carpenter, warns about the damage to exports that a strong gale could cause by knocking down, for example, a crane in the port of Santos, eventually causing the paralysis of activities in the largest port from Latin America. It’s the kind of situation that would have a huge negative impact on the transportation industry, which is always very concerned about theft. “The transportation market, which is perceived to be remote from climate risk, has to worry about that, because now you have regions that are important centers Logistics facilities in Brazil are also much more exposed to bad weather”, he stresses.

Not to mention the possible cases of climatic catastrophes that result in the interdiction of highways, also as happened with Rio-Santos, which had several interdictions in the section in the São Sebastião region. “There is even a great discussion in the market about how, for example, a highway under public concession is going to be protected. Today, the limits required by the bidding and concession notices are very low, because they do not imagine damage, for example, that will block a stretch of many kilometers of the Dutra. How will the government have to act, because these claims can return to the government, the financial balance of the concession contracts can be discussed again due to risks that were not measured in the first estimate of the public notices, and the market today does not foresee this kind of limit. It is a very different market when you are looking for a catastrophic protection cap,” observes Farme.

Ana Paula, from CNseg, highlights other long-term impacts generated by the increase in the frequency and intensity of phenomena such as The boy Is The girl. According to her, there are reflections on complementary health and life insurance. “Because in the North and Northeast the The boy causes low humidity, forest fires and desertification process. The greater the amount of carbon and air pollution, the greater the tendency of hospitalizations for respiratory diseases, the executive highlights.

How can risk be shared between the public and private sectors?

It is a consensus among the experts consulted that the risk must be shared between the private sector and the government. “Overall, the global average is 30-36% of paid insurance claims representing total economic loss. So, if a hurricane causes an economic loss of 100 million dollars, it is estimated that the insurance market will pay between 30 and 40 million dollars of all this loss. In other words, the remaining 70 or 60 billion dollars is what we call ‘gap(gap) of coverage, which ends up remaining a little in civil society and a lot in the hands of the government. Especially when we talk about public goods, such as streets, schools, roads, etc. ”, exemplifies Farme.

In other words, they are public goods that will have to be reconstructed with government funds obtained from the taxes paid by all civil society. In the case of Brazil, he estimates that this ‘gap’ is much bigger “If we look at history, especially the events in São Paulo this year, Angra dos Reis three years ago and Serra do Rio de Janeiro in 2011, in these examples, the average insurance indemnity was below 9%, I mean, O’gap‘ is over 90%,” he says.

“What is defended is that insurance has to be increasingly part of national planning and climate risk must be shared. There is an international consensus that the private sector cannot assume this bill alone”, reinforces Ana Paula, from CNseg.

The interviewees point out that many countries, each in their own way, already share the story of the consequences generated by climate risk between the public and private sectors. The examples cited go beyond more developed countries such as the United States and European countries (such as France and Germany), and even include Mexico and Chile.

“Without a doubt it is an initiative of which we have already seen several positive examples in the world with a plurality of models, either through a fully outsourced private purchase, or through a state vehicle that manages the distribution of resources and purchases reinsurance from the private market”, says the CEO of Guy Carpenter.

The lawyer Cassio Gama Amaral, a partner in the insurance area of ​​Machado Meyer Advogados, agrees that the “gap” in the coverage of climatic catastrophes is one of the great problems in Brazil today. “Unfortunately, in Brazil, the insurance market will be less affected (for The boy) than it should,” he says, precisely because of the lack of security protection, and even because of the fund for natural catastrophes that has been debated in the country for years, “which is an empty fund.”

The lawyer points out that in the current scenario of fiscal restrictions that Brazil is going through, as well as much of the world, it is difficult for this fund to really start to work. Therefore, the ideal would be a “mixed structure of insurance and state protection”. “I think that here in Brazil there is a lack of more proactive action in the insurance market, proposing mixed solutions that necessarily involve instruments that generate efficiency, that generate results for the insurers and that reduce the cost for the State and taxpayers,” he said. comments

Amaral also suggests that the capital market could contribute more by raising financial resources to face catastrophic risks, the so-called ‘cat ties. He says that in Brazil it is relatively new, but abroad it is already very common and the market reaches 40 to 70 billion dollars worldwide. “It is widely used abroad and today we have regulations in Brazil that allow something like this,” adds Machado Meyer’s partner.

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