Increased frequency and intensity of floods, droughts, hurricanes and fires call into question the role of the insurance industry
The global insurance industry has been discussing the effects of climate change on its activities for some time now. It began to question this as early as the 1970s. Since then, the questions on the subject have not changed – but the answers are increasingly pessimistic.
In 1973, Munich Re, a giant in the reinsurance business (protection that insurers take out in case they have to pay out too much to one or more insureds), published a report entitled “Possible Global Warming and its Consequences for the Insurance Industry”. It was probably the first major company in the world to take an interest in the subject.
Many factors come to mind when we hear news about, or are victims of, events linked to the climate crisis. Insurance should be one of them. Having some financial protection against the damage these events cause has become important. The problem is that there are already places and/or property on the planet for which insurance companies refuse to sell policies. Or they only do it at a very high price (called a premium in the business).
With the climate crisis becoming more intense every year, at some point it will make large parts of the planet uninsurable – in other words, impossible to cover with any kind of insurance. Not to mention the ever-increasing restrictions on cover in the contracts still available.
The effects of the increasingly intense climate crisis are clearly visible in the fires that have been ravaging Los Angeles. It is estimated that the losses will exceed 200 billion dollars. Goldman Sachs and Wells Fargo have estimated that the cost to insurers could be as much as $30 billion.
California, home to Los Angeles, has faced other destructive fires in recent years. According to “The Economist” magazine, in 2022 Allstate, which was the fourth largest home and accident insurer in California, stopped selling policies. In March of last year, State Farm, another insurer, canceled 30,000 home insurance policies in the state. Part of these cancellations are due to a 1988 Californian law that forbade insurers from including the costs of weather-related disasters in the price of their policies. This law has recently been repealed.
Considering tragedies such as the floods in Rio Grande do Sul in April and May 2024 (which left 182 people dead and losses of R$12.2 billion), there is a fear that in parts of Brazil, too, it will be unfeasible to buy insurance against damage to homes, industrial and commercial premises.
“Climate change represents a challenge for the global insurance industry, increasing the frequency and intensity of extreme events,” says Eduardo Toledo, president of the Brazilian Association of Reinsurance Brokerage Companies and vice-president of Alper Re Corretora de Reinsurance. “This increases claims costs, puts pressure on our business model and makes it difficult to price policies. Vulnerable regions are also becoming unsafe regions.”
The climate crisis goes far beyond an increase in the planet’s temperature. One of its effects is, for example, very strong cold waves in the US Midwest during the final and initial months of each year. Or flooding due to rains in places as unusual as parts of the Sahara in Africa, the largest desert on the globe. And also increasingly bad hurricanes in the Caribbean and on the American East Coast, while on the West Coast fires such as the current ones have proved almost uncontrollable.
There are other consequences of the increase in the Earth’s average temperature. In the far north of the planet, Greenland’s glaciers are melting. In the far south, Antarctica is turning green. Nasa satellites have indicated that between 1986 and 2021 the vegetation cover there increased from 0.863 km2 to 11,947 km2 – and that is not good news. The capacity of the Antarctic surface to reflect solar radiation is decreasing for this reason, thus reinforcing global warming in a destructive process that feeds back on itself.
The cost of the damage caused by climate change to the global insurance industry needs to be put into figures if it is to be properly assessed. “According to an estimate by the Swiss Re Institute, global insured losses from natural catastrophes reached US$60 billion in the first half of 2024,” says Evandro Baptistini, a partner at Flexa Consultoria and a professor at the School of Business and Insurance (ENS).
Munich Re, another reinsurance giant, released an estimate that losses caused by hurricanes, fires and other disasters totaled R$320 billion in 2023, of which US$140 billion was covered by insurance, according to the Financial Times.
There is no specific data on this cost in Brazil, where the sector has shown good growth. The Superintendence of Private Insurance (SUSEP) recently reported that from January to October 2024, the last month already accounted for, insurance company revenues totaled R$361 billion, an increase of 13.1% over the same period in 2023.
But the challenges are visible. They range from floods to water shortages. In 2024, five gigantic Brazilian river basins were officially declared in a “state of water scarcity” by the National Water and Sanitation Agency (ANA). It was the first time in over 100 years of volume measurements that this had happened. This shortage due to the lack of rainfall occurred on the Paraguay, Puris, Madeira, Tapajós and Xingu rivers. It was the longest drought ever recorded in the northern region of Brazil, where all these rivers are located, with the exception of the Paraguay.
Earlier, in November 2023, it was discovered that for the first time we had a desert on national territory. The area is located in the middle valley of the São Francisco River, in the center-north of Bahia, on the border with Pernambuco. It is a desert territory about four times the size of the city of São Paulo. Until then there were no deserts in Brazil, only semi-arid regions.
For the time being, this has not changed the coverage on offer in the country. “In Brazil, there are still no indications that insurance companies are limiting specific contracts due to climatic events,” says Alexandre Leal, Technical, Studies and Regulatory Relations Director and Sustainability Director of the National Confederation of General Insurance, Private Pension and Life, Supplementary Health and Capitalization Companies (CNseg). “However, climate catastrophes that we only predicted for the next few years are already happening today, here and abroad.”
This must have consequences. “There are currently legal debates about the liability of insurance companies due to the increase in extreme weather events and their growing predictability as a result of climate change,” says Gaya Schneider, a partner at Ernesto Borges Advogados and president of the Federal Bar Association’s National Commission on Insurance Law. “Fires in California in the recent past, in 2008 and 2009, reduced the supply of home insurance, led to the cancellation of contracts and an increase in the value of insurance by up to 50%, due to high claims and large financial losses on the part of insurance companies.”
Climate catastrophes that we only predicted for the next few years are already happening today.”
— Alexandre Leal
As weather anomalies become more frequent, they cease to be anomalies and become the “new normal” when it comes to the risks to be faced by insurance companies. As this happens, an already important figure in this industry becomes even more valuable: the insurance broker, who perhaps knows best how the sector works – and how to make it work in adverse conditions.
Ricardo Gomes dos Santos is a partner at Tunna Seguros, a brokerage firm that has been active in the insurance market in the Brazilian Midwest for 28 years. The company specializes in providing insurance for agribusiness. He can already see a sharp increase in the price to be paid by customers who want to buy certain policies – those linked in some way to the climate crisis.
“Climate change has directly affected insurance pricing, both in Brazil and in other parts of the world. This is especially true in areas of high vulnerability to extreme events, such as coastal regions in the south of the US,” he says. “The national agricultural sector has suffered prolonged droughts, excessive rainfall, hailstorms and frosts with greater frequency and intensity in recent years. These events cause major financial losses for producers. In order to balance its operations, the insurance market ends up having to increase its rates or reduce its coverage.”
In view of this, there are few options left. “There are already higher rates in the south and southeast of Brazil when it comes to the risk of hail and frost. This is a counterpoint to the Center-West, where these specific risks are almost non-existent and rates end up being low,” he says.
But Gomes dos Santos warns: “Rates have increased even in the Midwest in recent years because of the risk of excessive rainfall, especially during the soy harvest period [January to March]. There is also the opposite, the risk of a lack of rain during the periods when the main grains produced in the region, soybeans and corn, need water the most. This ends up making the premium more expensive for the agro-industry in Goiás, Mato Grosso and Mato Grosso do Sul”.
When it comes to national agribusiness, the challenge of providing insurance to the sector at a viable price is a delicate one in times of climate crisis. The weight of agribusiness in Brazil’s GDP is high: 21.8% in 2024, according to a calculation by the Center for Advanced Studies in Applied Economics (Cepea), of Esalq/USP, in partnership with the Confederation of Agriculture and Livestock of Brazil (CNA). Since most agricultural activity takes place outdoors, farms are especially vulnerable to bad weather. And farmers have no way of determining, although they can predict, the incidence of rain or sun on their crops.
This is an economic activity that is highly dependent on factors over which no one has any control. This is why insurance is so important. Brazil subsidizes agronomic insurance. This is financial support from the federal government to reduce the cost of rural insurance. The Rural Insurance Premium Subsidy Program (PSR) covers part of the cost of insurance.
The government can cover up to 60% of the total value of a policy, depending on the type of agricultural crop you want to insure and the government’s budget availability. The PSR seeks to help cover losses caused by events such as droughts, frosts and storms. In times of climate crisis, Brazilian agribusiness is anchored in the program. More specifically, the PSR operates in the agricultural, forestry and livestock segments, and focuses on export-oriented agribusiness.
In addition to the PSR, certain states (São Paulo and Paraná stand out) also offer subsidies to reduce the cost of agricultural insurance. The value of insurance for rural producers can vary between 3% and 15% of the total cost of crop production. Finally, there are a few municipalities that run rural insurance subsidy programs for farms within their municipal boundaries.
An alternative, still in its infancy in Brazil but already widely used abroad, is parametric insurance. Also known as weather index insurance, parametric insurance is a type of policy that is very suitable for agribusiness. It is based on recorded weather events compared to predetermined indexes or parameters (hence the name of this type of policy).
“The biggest problem facing the national agricultural insurance market is the low take-up of the product compared to other producing regions around the world, where almost 100% of crops are protected by policies,” says Ricardo Gomes. “The greatest adherence here is in regions with high climatic risk, thus concentrating these risks and increasing market losses. Ideally, all producers should take out agricultural insurance so that the funds raised by the market can cover the losses that occur every year in isolated regions,” he says.
“Low collection and high-risk concentration lead to ever higher premiums to be paid. They also lead to less willingness and appetite on the part of insurers and reinsurers to enter this niche of the insurance market, since our main characteristic is the low dispersion of risk.”
Glaucio Toyama raises other aspects of the issue. He is head of the Rural Insurance Commission of FenSeg (National Federation of General Insurance), which focuses on the development of specific activities with damage and liability insurance. “The debate on climate change and the clear perception of risks by producers, our main customers, provide a multitude of approaches,” says Toyama. “The country’s insurance program needs to grow to be viable, it needs to distribute its assumed risks and have more sustainable portfolios.”
For Toyama, the insurance industry can accelerate the use of technology, “making better use of natural resources and supporting existing socio-environmental policies and protocols”. “In addition, we have various production chains and new scenarios that should be on the segment’s radar, helping to manage health risks and natural resources on farms.”
Toyama says that the PSR’s resources are still not enough. “The penetration of rural insurance among us is still very low, less than 10% of VPB [Gross Production Value], which means that thousands of small and medium-sized rural producers do not have access to insurance in Brazil.”
Jarbas Medeiros, chairman of FenSeg’s Massified Property Risks Commission, brings another angle to the table. Insurance against mass property risks is aimed at protecting the assets of individuals and companies, including homes, residential and commercial condominiums or micro, small and medium-sized enterprises.
“The changes in the climate seen more strongly in the last ten years have increased the demand for mass insurance, as people and companies have become more exposed to the occurrence of climatic phenomena,” he says. There has been double-digit growth in recent years. Even so, he ponders, insurance participation is still very low among us: less than 17% of Brazilian households and 20% of Brazilian companies have insurance protection. “There is still plenty of room for growth in this market.”
Medeiros highlights Brazil’s peculiar situation: “Our country, which was already the world champion in lightning strikes, has also come to live with major storms and strong winds, which are occurring more and more frequently, especially in the South and Southeast. In property insurance, electrical damage cover accounts for the largest number of events, with claims characterized by lightning strikes and abnormal voltage variations that cause electrical and electronic goods to burn”.
Windstorm damage cover, he says, has seen a significant increase in recent years. “We have also noticed an increase in the number of people taking out flood policies throughout Brazil. Faced with this scenario, insurers need to sophisticate their pricing models in order to capture the recent changes that have taken place. And they must redesign policies to offer the most appropriate protection to customers in these times of climate crisis.”
In the case of one of the most widely used insurances in the country, car insurance, there are no reports of a change in the way insurers deal with claims caused by floods. “Damage to a vehicle due to flooding is covered if the vehicle has what is known as comprehensive or total insurance cover,” says Baptistini, from the Business and Insurance School.
But he does make a point: “It is quite likely that this type of car insurance will become more expensive due to the increase in claims on cars caused by floods as a result of the climate crisis.”
There is a consensus that insurance companies will have to recreate themselves, at least to some extent, in order to be able to offer policies to individuals and companies in the face of climate change. “In a broader approach, we can say that climate effects do not affect everyone equally. The poorest regions and populations are hardest hit and feel the impacts the most, both in terms of health and material losses, which are often irreparable, as well as the loss of life,” says Baptistini.
“However, these poorer populations are on the margins of the insurance sector. They have no protection through policies, however basic they may be. By the way, I believe this is a great opportunity for the sector to promote the inclusion of this part of the population through the development of specific products that are accessible to this audience.”
The problem is tackled at various levels. In April last year, insurance organizations and executives presented proposals to the Chamber of Deputies for rapid protection against claims caused by extreme events such as droughts and floods, in the context of climate change. “The fact is there, it is no longer mere speculation. In recent years, we have been living with a greater frequency and intensity of climatic events and distortions,” says Rogério Gomes.
“It has become common for us to hear from clients that they have been planting for 30 years in a region and have never seen such a large accumulation of rainfall or a drought go on for so long,” says Gomes. The perception of risk has increased greatly, he says, in all segments that serve agriculture, such as insurance brokers.
“But we are still at the beginning of this journey, and a cultural change is needed, as many still believe that these are passing, isolated events.” For Gomes, the change in culture and perception of risks related to climate change has begun. “What will determine its speed are the events to come.”
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Autor: Gaya Lehn Schneider Paulino • email: gaya@ernestoborges.com.br • Tel.: +55 67 3389 0123
