Brazilian floods put focus on risk prevention failures as climate change hits

Unprecedented floods that hit southern Brazil in the past two weeks have killed more than 100 people and caused levels of property destruction unseen in a country once famous for being a large economy devoid of natural catastrophes.

It has been estimated that reconstruction of physical property damaged in the Rio Grande do Sul state will cost dozens of billions of dollars. The tragic events have also highlighted Brazil’s failure in preparing itself to face increasingly frequent climate events that have impacted the country over recent years.

However, low insurance penetration rates should limit the impact of the disaster on the local insurance and reinsurance industry. Aon estimates that insurance covers only 5% of the economic losses caused by natural disasters in Brazil, according to reports from the country’s media. The covered losses tend to be concentrated in crop insurance.

Research by FenSeg, a trade association, found that only 17% of all Brazilian residential buildings were protected by property insurance policies in 2021.

Rio Grande do Sul posted the highest levels of penetration, at almost 40%, but flooding in Brazil is a write-in cover that few, if any, policyholders opt to purchase.

Motor insurance penetration is also subdued because cover is not mandatory in Brazil. Flooding, meanwhile, is also a common exclusion on all-risks policies sold to small and medium-sized companies that make up most of the Brazilian economy.

The exception is likely to be crop insurance, which has generated large losses for Brazilian underwriters since 2021 and is set to be heavily hit once again. Rio Grande do Sul is both one of Brazil’s most important agricultural regions and where crop insurance is more widely used.

Last year, crop insurance premiums dropped almost 1% as underwriters reassessed their risk appetite after loss ratios reached 86% in 2021 and 92% in 2022, according to regulators Susep. The market paid almost 14 billion reais ($2.7bn) in crop insurance claims in each of those years.

The drop in crop premiums has taken place even though rates have gone up significantly in the past couple of years. A reduction of subsidies for insurance bought by the federal government has also contributed to a slowdown in the crop insurance market.

The lack of involvement from the insurance industry in transferring flooding exposures is one of the reasons why the risk is, in general, poorly managed in Brazil. This is despite more frequent river flooding and landslides caused by heavy rains in recent years. Nothing, though, on the scale of the past couple of weeks.

On 9 May, CNM, an association of local governments, reported that economic losses had reached R$7.5bn ($1.46bn), of which R$2bn were reported by government entities, R$1.1bn by private organisations, and R$4.4bn by 85,300 homeowners. Those numbers are expected to go up as the waters recede and losses are more thoroughly assessed.

The data was provided by 421 townships impacted by the floods, 397 of which have declared themselves in a state of calamity. This group includes Porto Alegre, Rio Grande do Sul’s capital and a metropolis with more than 1.3 million inhabitants. Seventeen of the state’s largest 20 towns and cities have declared a state of calamity.

Lacking a catastrophic regime to transfer part of the risk to the reinsurance market, reconstruction costs will fall squarely on the public purse, and they are likely to reach levels never seen before in South America’s largest economy.

The head of the Rio Grande do Sul government, Eduardo Leite, has asked the central administration for R$19bn ($3.7bn) to cover emergency assistance for more than 1.7 million people affected by the catastrophe. The federal government has already announced a R$50bn package of tax benefits and credit facilities to help rebuild the state’s economy.

But the long-term impact of the flooding will take the bill much higher. Analysts have estimated that the costs of reconstructing the state’s infrastructure and physical capital will reach between 1% and 1.5% of Brazil’s GDP. That is equivalent to between R$100bn ($19.5bn) and R$150bn ($29.3bn).

According to the Folha de S.Paulo newspaper, between 2015 and 2023, Brazil’s federal government designated between 0.01% and 0.03% of GDP per year to programmes aimed at fighting the impacts of climate change. In most years, a significant part of this budget was not actually invested.

Local governments do not fare much better. News portal UOL reported that the administration of Porto Alegre did not invest one single real in disaster prevention last year, despite having R$450m budgeted for the task. In 2022, investments totalled a miserly R$141,000.

A project to make catastrophic covers mandatory in home insurance policies has stalled in the Brazilian Congress since 2022. A new bill was filed in Congress to raise money for the reconstruction of Rio Grande do Sul, but approval will be difficult as it taps on resources that members can appropriate to their own voter bases.

The insurance industry is not covering itself in glory in this debate either. Invited by Congress to draft a plan to fight catastrophic risks in Brazil, CNSeg, the local insurance association, could only come up with the idea of creating a new flat tax to be charged on electricity bills.

The association made little effort to propose measures to mitigate risks like flooding and boost risk management and prevention in the country.