LatAm and Caribbean cat capacity crunch fear as sector faces Brazil drought impact

The mid-year hardening of Latin America property catastrophe business will continue into 2023 as major players pull back from the region, with market sources warning of the potential for a severe Caribbean capacity shortage should a hurricane hit this year while uncertainty remains over the impact of the devastating drought in Brazil.

Brazil drought
  • Cat coverage hardening seen at mid-year 2022 to continue
  • Brokers preparing clients for rate rises and tightening of T&Cs
  • Reinsurers have pulled back from the region or withdrawn entirely
  • Caribbean cat capacity already tight with fears of crunch if hurricane hits
  • Pricing in Colombia to pick up having lagged behind Chile and Peru
  • Uncertainty over scale of Brazil drought losses

Back in late June, market sources canvassed by this publication said property cat reinsurers had pushed for rate rises of up to 15 percent in the Caribbean, with programs in Chile and to a lesser extent Peru also facing significant increases in the cost of cover at the mid-year renewals.

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

Another contact described the lead-up to the mid-year Caribbean renewal as “a mess”, while a broking source said they had managed to get renewal lines placed – albeit at elevated pricing – but trying to find additional limit to replace that which had exited was a struggle.

Sources noted in June that renewals in Chile and Peru for earthquake-exposed business had faced rate increases ranging from around 8 percent to 10 percent.

Those market takeaways were supported by commentary from Gallagher Re, which in its 1st View report analysing the mid-year reinsurance renewals said loss-free Latin America catastrophe business renewed with pricing up 3-12 percent, while loss-hit accounts faced increases of 7-20 percent.

Latin America mid-year 2022 property rate movements

“The largest factor driving reinsurers to reduce their capacity has been the reducing appetite for wind exposure in the Caribbean and earthquake exposure in Chile, which has led to rate increases consistently above +7.5 percent in those regions,” Gallagher Re said.

At 1 July, Gallagher Re said the greatest impact was felt in Latin America’s peak catastrophe zones and also for large placements where the supply and demand of capacity was most finely balanced.

As Gallagher Re noted at the time, the increases seen at Latin America’s mid-year reinsurance renewals were a continuation of the trend that was observed at both the 1 January and 1 April renewals.

Rate hardening to continue

Latin America-focused executives that The Insurer spoke to in late August were firm in their belief that the pricing trends for cat coverage seen at the mid-year renewals would be maintained for the foreseeable future, especially in the Caribbean, while pricing in Colombia is expected to tick up at a faster pace potentially than Chile and Peru.

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

“I’m also anticipating that places like Colombia may catch up a bit because rates there haven’t moved in a positive direction much at all, and I think that’s a function of historical profitability,” the source added.

Another contact noted that one clear sign the Caribbean market is contracting is the concern amongst the region’s brokers.

“They expect the market will really harden,” one source said regarding Caribbean business.

“They’re now spending time preparing the clients and telling them to forget their wish lists and to think about what is most important in their terms and conditions. What do they really care the most about, and what are they willing to concede?” they added.

As various sources explained, the past year has seen numerous markets pull back their capacity or withdraw entirely from the region, with the Caribbean being a particularly tough spot.

Hurricanes Irma and Maria in 2017 and Hurricane Dorian in 2019 all resulted in significant losses across the Caribbean, with reinsurers taking heavy hits and pushing up pricing in response.

AM Best noted in a recent report that while there was a low level of claims activity in 2021 – and so far in 2022 – reinsurance pricing continues to harden as insurers and reinsurers feel the effects of inflation.

Along with the broader reduction in appetite for property cat capacity that has seen companies such as Axis Re and Tokio Marine Kiln withdraw globally, Latin America, and particularly the Caribbean, has also seen companies including Everest Re, TransRe and Scor reduce their commitment.

“In the past 12 months so many people have pulled out of the Caribbean that programs will be tight. The brokers will struggle to get the last 15 to 20 percent of capacity they need,” one source predicted.

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

“God forbid there’s a hurricane this year. Caribbean capacity isn’t going to be adequate at year-end as it is, so if there’s another hurricane it’ll get pretty serious because reinsurance is absolutely critical to the economies of those islands,” the source said.

“None of the insurance companies have the capital strength. So if the reinsurance capacity is in shortfall, the insurance companies can’t absorb it so they have to cut what they do. That then affects the banks and their lending, and it becomes a governmental economic issue,” they added.

Another concern for Caribbean insurers is their proximity to Florida, whose carriers are exposed to the same weather events. Reinsurers will focus wherever they can get the best returns, and given the limited resources at most Caribbean carriers, the Floridian insurers frequently find favour.

“The rates have been going up, but there’s only so much they can go up. The rates in the Caribbean now, you can’t push it much higher because the clients won’t buy,” one source said.

As a result, there will be an increased focus on terms and conditions, the source explained.

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

Brazil drought hits hard

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

Sources have previously pegged the market’s exposure at north of $1bn.

Scor estimated H1 losses of €193mn ($192mn) from the drought, and has said it will cut back its agriculture exposures by 50 percent next year in response. As well as providing reinsurance to Brazil’s agriculture insurers, Scor supports AgroBrasil Administração e Participações Ltda, an MGA that writes primary agriculture business in the country.

As of the end of June 2022, Mapfre Re had suffered an €88mn hit.

By the far the biggest exposure lies with IRB however, with the Rio de Janeiro-headquartered reinsurer having paid or provisioned for approximately R$1.5bn ($294mn) of drought losses at the midpoint of 2022 as it revealed it had exhausted its retro cover.

IRB is considering several options to address a 36 percent capital shortfall it announced in its Q2 2022 results, including a share offering and the sale of real estate assets and a potential loss portfolio transfer.

With the drought ongoing and claims still being filed to insurers, the scope for reinsurance losses to rise further remains.

Sources said reinsurers are closely studying their agriculture books and contemplating how they will respond to the losses, whether by staying in the market or pulling back. Regardless, pricing will increase for coverage that is vital to supporting Brazil’s vast agriculture industry.