Capacity of Latin American and Caribbean cats crushes fear as sector faces impact of drought in Brazil | New

  • The tightening of Cat hedging seen in mid-2022 will continue
  • Brokers prepare clients for rate hikes and tougher T&Cs
  • Reinsurers have withdrawn from the region or withdrawn entirely
  • Capacity for Caribbean cats already tight with hurricane crisis fears
  • Prices in Colombia to pick up after falling behind Chile and Peru
  • Uncertainty over extent of drought losses in Brazil

In late June, market sources polled by this publication said property damage reinsurers had pushed for rate hikes of up to 15% in the Caribbean, with programs in Chile and to a lesser extent Peru as well. face significant increases in the cost of hedging at mid-year renewals.

As one contact noted at the time, a general lack of available capacity for the Caribbean meant that the region’s reinsurance market was “quite difficult”.

Another contact described preparations for the Caribbean renewal mid-year as “a mess”, while a brokerage source said they had managed to get renewal lines placed – albeit at high prices – but trying to find an additional limit to replace the one that was out was a struggle.

Sources noted in June that renewals in Chile and Peru for earthquake-prone business had faced rate increases ranging from about 8% to 10%.

These market findings were supported by comments from Gallagher Re, which in its 1st View report analyzing mid-year reinsurance renewals stated that lossless catastrophe business in Latin America was renewed with pricing up 3-12%, while accounts hit by losses faced increases of 7%. -20 percent.

Real estate rate movements in Latin America in mid-2022

“The most significant factor causing reinsurers to reduce capacity was reduced appetite for wind exposure in the Caribbean and earthquake exposure in Chile, which led to increases in rates consistently above +7.5% in these regions,” said Gallagher Re.

As of July 1, Gallagher Re said the greatest impact was being felt in the most dire areas of Latin America and also for large placements where capacity supply and demand were most finely balanced.

As Gallagher Re noted at the time, the increases seen in mid-year reinsurance renewals in Latin America continued the trend seen in the January 1 and April 1 renewals.

Curing rate to continue

Latin America-focused executives the insurer spoke to in late August were confident that the price trends for cat coverage seen during mid-year renewals would continue for the foreseeable future, particularly in the Caribbean, while prices in Colombia are expected to rise at a potentially faster rate than Chile and Peru.

“We have seen a shortage of capacity, particularly in Chile and Peru in Latin America and then in the Caribbean,” a source said.

“I also anticipate that places like Colombia might catch up a bit as rates haven’t moved in a positive direction at all, and I think that depends on historical profitability,” the source added.

Another contact noted that a clear sign that the Caribbean market is contracting is concern among brokers in the region.

“They expect the market to really harden up,” said a source regarding Caribbean businesses.

“They now spend time prepping customers and telling them to forget their wish lists and think about what’s most important in their terms and conditions. What do they really care about the most and what are they willing to concede? they added.

As various sources have explained, the past year has seen many markets reduce capacity or pull out of the region entirely, with the Caribbean being a particularly difficult situation.

Hurricanes Irma and Maria in 2017 and Hurricane Dorian in 2019 all caused major losses in the Caribbean, with reinsurers taking heavy losses and raising prices in response.

AM Best noted in a recent report that although there has been a low level of claims activity in 2021 – and so far in 2022 – reinsurance pricing continues to tighten as insurers and reinsurers are feeling the effects of inflation.

Along with the broader reduction in appetite for real estate cat capacity that has seen companies such as Axis Re and Tokio Marine Kiln withdraw globally, Latin America, and in particular the Caribbean, has also seen companies like Everest Re, TransRe and Scor reduce their engagement.

“Over the past 12 months, so many people have withdrawn from the Caribbean that schedules will be tight. Brokers will struggle to get the last 15-20% of capacity they need,” a source predicted.

Another market contact summed it up by saying “not a very happy picture if you’re a buyer in the Caribbean”.

“God forbid there is a hurricane this year. The capacity in the Caribbean will not be sufficient at the end of the year, so if there is another hurricane, it will become quite serious because reinsurance is absolutely essential for the economies of these islands,” the source said.

“None of the insurance companies has the strength of capital. So if reinsurance capacity is insufficient, insurance companies cannot absorb it, so they have to reduce what they do. It then affects the banks and their lending, and it becomes a government economic problem,” they added.

Another concern for Caribbean insurers is their proximity to Florida, whose carriers are exposed to the same weather events. Reinsurers will focus where they can get the best returns, and given the limited resources of most Caribbean carriers, Florida insurers often find favor.

“Rates have gone up, but they can’t go up that much. Fares in the Caribbean now, you can’t push them much higher because customers won’t buy,” a source said.

As a result, the focus will be more on terms and conditions, the source explained.

“Caribbean ceding companies will need to understand that ceding commissions, profit commissions and event limits will all have to be reduced, and other restrictions will be placed on their contracts. This is a turning point,” they said. they stated.

Drought in Brazil hits hard

The catastrophic drought that has gripped the Paraná River Valley in Brazil since the end of last year has presented heavy losses to reinsurers, with IRB Brasil Re, Mapfre Re and Scor all revealing significant exposure to the event .

Sources have previously pegged the market exposure north of $1 billion.

Scor estimated first-half losses at 193 million euros ($192 million) from the drought and said it would cut its agricultural exposures by 50% next year in response. In addition to providing reinsurance to Brazilian agricultural insurers, Scor supports AgroBrasil Administração e Participações Ltda, an MGA that underwrites primary agricultural activities in the country.

At the end of June 2022, Mapfre Re had suffered a blow of 88 million euros.

However, the IRB is by far the most exposed, with the Rio de Janeiro-based reinsurer having paid or provisioned around 1.5 billion reais ($294 million) in drought losses in mid-2022, as it has revealed that he had exhausted his retro cover.

IRB is considering several options to address a 36% capital shortfall reported in its second quarter 2022 results, including an equity offering and sale of real estate assets and a potential loss portfolio transfer.

With the ongoing drought and claims still filed with insurers, the risks of increased reinsurance losses remain.

Sources said reinsurers are closely studying their agricultural books and considering how they will respond to losses, whether by staying in the market or pulling out. Either way, prices will rise for coverage that is essential to supporting Brazil’s vast agricultural industry.

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