Brazilian risk managers seek alternatives as hard market bites

The hard insurance market has belatedly arrived in Latin America, where prices and capacity continue to be under pressure, despite a relative loosening in global markets in recent months.

As a result, risk managers are increasingly looking at alternative risk transfer solutions such as captives in order to optimise their risk transfer strategies. However, the process remains a fledging one, according to participants in the Latin American chapter of the Global Risk Frontiers survey.

“Captives are a great solution, and not only for higher deductibles,” said Mellina Senra, a coordinator of the electricity sector committee at ABGR, Brazil’s risk management association.

“It is also a means to turn the insurance department into a source of revenue for the company, rather than a cemetery for losses,” she added.

During ABGR’s latest conference, which took place in October in São Paulo, reinsurers and brokers took turns to explain the benefits and challenges of having a captive during a hard market.

The fact is that few Brazilian companies, estimated at something like half a dozen by participants, have captives at the moment. But the topic is ever-more involved in discussions about risk transfer strategies, leading Brazilian risk managers told Commercial Risk for our survey.

“Our company is 100% Brazilian, we do not operate in foreign markets. Normally, a reinsurance captive is more adequate for groups that have subsidiaries abroad and need to retain risks there,” said Livia Mello, the risk manager at Eletrobras CGT Eletrosul, the electricity group. “But in our planning, we may consider the option of a captive broker in the long run.”

“I believe that in the future, tech companies will have a captive for cyber, so that they can better manage and retain their frequency risks,” added Thiago Amorim, the head of procurement and risk manager at iFood and secretary general at ABGR. “Then they will only transfer the higher severity risks to the market.”

Captives and other risk retention strategies should remain in the agenda as Latin American corporate insurance buyers increasingly look abroad for insurance capacity.

Senra, for example, sees parametric insurance playing a role in the local market, once some hurdles to its development are overcome.

“Parametrics are a possible solution, but Brazil is a volatile market where we still do not have enough loss data to generate trend curves,” she said. “Perhaps it has not made much progress here yet because of that difficulty.”

And this quest is set to continue as companies face ever-higher deductibles to place their programmes.

“Insurers have sometimes demanded deductibles that make it hard for us to give continuity to our insurance strategies,” said Haroldo Alves de Araújo, risks and insurance analyst at electricity firm Cemig and chairman of the board at ABGR. “We understand that the deductible is how we participate in an eventual loss. But it has been often a heavy-handed approach. We are looking for a middle way that is good for both sides.”

He noted that as Cemig is a state-owned company, it is hard for it to set up something like a captive. But the company is looking at other financial tools to optimise risk retention.

“Deductibles have been too high, which really makes the management of the company unhappy. But I believe there is a way to obtain a better balance in future renewals,” Mello said.

For his part, Leonardo de Castro Beto, the risk manager at energy firm Energisa and director and vice-president at ABGR, believes that the market took too long to adjust, and is now forcing buyers to move fast and adjust to their retention demands.

“I don’t think deductibles have gone up disproportionally. But this process should have happened a while ago, in which case we would not have endured this hard market,” he said. “When it comes to deductibles, one has to consider the impact on the company’s balance sheet, and not to haggle with insurers for lower values.”

“Adjustments to deductibles should be demanded by risk managers, not by insurers,” agreed Wilnner Eduardo Silva, the global treasury andi manager at machinery group Iochpe-Maxion and the CFO of ABGR. “Once the owners of the risk say they accept a higher deductible, it means they know the risk appetite of their companies.”

But Beto stresses that the worst part of the hard market is the imposition of new restrictions and lower limits by underwriters.

“What bothers me the most right now are the restrictions to the limits offered by insurers. For example, if I want to buy a cover for our transmission towers, it is often hard to find the limits we need,” he said. “And sometimes there are standard exclusions that impact risks that we were not used to facing. Some places that did not have flooding events suddenly started to flood. So we need to be very careful with the covers that we choose,” added Beto.

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