Are there too few D&O insurers in Brazil?

After a series of domestic and international deals, the Chubb group closed 2015 with a 49% share of D&O premiums in Brazil, a market where demand for the product is solidly on the rise.

The concentration is a result of a number of transactions that first saw the merger of Itaú and Unibanco, two large players in the local D&O market, followed by the absorption by ACE, in 2014, of the resulting large risks unit. Last year, ACE, which also had its own D&O operations in Brazil, bought Chubb, which itself had the sixth largest D&O business in the country by the end of 2015.

If the next two largest players, AIG and Zurich, are added to the mix, the three top D&O insurers in Brazil have a combined market share of 80%.

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According to brokers, however, the concentration has not necessarily translated so far into higher prices. Rates and conditions attached to D&O policies have hardened in Brazil, but observers believe that this trend has more to do with a hike in losses, rather than with the configuration of the market.

“There is a trend for higher prices and tougher conditions for some sectors and companies,” said Mauricio Bandeira, the head of Financial Lines at Aon in Brazil. “In the case of companies that are not listed, the D&O market remains competitive. The same goes for firms that are listed, but work in sectors that are not suffering so much with the crisis.”

At the same time, brokers and insurers have reported a significant increase of interest for D&O policies. In 2015, according to SUSEP, Brazil’s insurance supervisor, D&O premiums increased by 34%, compared to the previous year.

Although some of the growth can be explained by the fact that many policies are priced in US dollars, which has appreciated considerably compared to the Brazilian real, the number shows a market that is growing solidly. To a large extent, this is due to a newly found willingness by Brazilian courts to send executives to jail for corruption, environmental liability and other irregularities.

The highest profile example is the so-called Operation Car Wash, which investigates a huge bribery scheme involving oil producer Petrobras, political parties and some of Brazil’s largest private companies. Several CEOs and presidents of companies have been incarcerated as a result of the investigations. Among the latest was billionaire Marcelo Odebrecht, the heir and CEO of Odebrecht, the multinational construction group.

“D&O insurance has grown fast in recent years across companies of different sizes and business sectors,” said Guilherme Perondi, the vice-president of Lockton in Brazil. According to him, prices have increased on average by 10%, although not all companies have been affected by the hikes. “Sectors such as construction have suffered the biggest hits,” Mr Perondi pointed out. Oil and gas is another segment where the market has hardened more than average, brokers said.

More than pushing prices up, however, the market has reacted to the scandals with the imposition of new exclusions into contracts. For example, some insurers are now refusing to pay legal costs for any bribery-related case before the courts issue a final ruling in favour of the policy holder. Brokers have also reported that it has become ever more common for underwriters to include specific Operation Car Wash-related exclusions into contracts.

“Companies that have the government as their main client have found it more difficult to renew their programmes,” Mr Bandeira added. “It is also known that state-owned companies have struggled of late to renew their policies or to buy new ones.”

He also noted that firms that have their shares listed in the US face similar problems, as Brazilian groups such as Petrobras, Braskem, Eletrobras and Vale have been the targets of class actions triggered by American investors. In the past 15 years, many Brazilian companies have issued American Depositary Receipts in order to fund expansion plans.

The conjunction of higher losses, strong demand and market concentration could therefore spell trouble for D&O insurance buyers in Brazil. But the analysts noted that new players are getting into the market, which is a relatively young one in the country, and competition should be able to keep the dominant underwriters on their toes.

“For some activities, such as financial institutions or companies that issued ADRs, there are few underwriters taking the risks, which can concern some clients,” said Juliana Casiradzi, the placement manager of Financial and Professional Liability at Marsh in Brazil. “On the other hand, we have noticed that insurers have aggressive targets, which can boost competition.”

There have been some new entrants, however. Tokio Marine is one of the latest companies to offer D&O insurance in Brazil, as well as AXA Corporate Solutions. Argo is investing in the sector, and Travelers is also bumping up its presence, after splitting its Brazilian corporate insurance operations from a joint venture with a local player last year.

“We plan to grow our D&O portfolio by 60% to 70% this year,” said Leonardo Semenovich, the CEO of Travelers in Brazil.