Rural insurance in Brazil has seen a rapid acceleration in premium growth for property/casualty insurers, as it has become an increasingly important tool used by agricultural producers to mitigate the growing frequency and severity of extreme weather events that can pressure production levels and profitability, Fitch Ratings says.
Results are expected to remain pressured in the near term amid higher inflation, as the potential for increased extreme weather events may continue to put upward pressure on the sector's loss ratios. Higher rural insurance losses can also influence insurers' reinsurance costs, given the higher rates and deductibles and lower appetite for contracts. Additionally, the inclusion of greater probabilities of extreme weather events in the pricing of these risks by insurers may increase the cost of insurance for rural producers, underscoring the importance of risk management and the impact that climate change can increasingly have on the segment.
Agricultural insurance is the second largest non-life insurance segment in Brazil after auto insurance, accounting for nearly 11% of sector premiums. It is a risk-management tool that provides rural producers coverage for damages and losses caused to crops resulting from unforeseen climatic events, including flooding, drought, frost and hail, among others, which can result in lost production and lower profitability for producers.
Growth of rural insurance premiums has accelerated in recent years and is expected to continue. 1Q22 premiums of BRL2.7B1 were up 42% in 1Q22 from the prior year, building on the 40% YoY premium growth in 2021. However, claims also showed a significant increase, sharply outpacing net premiums earned in 1Q22 and resulting in a loss ratio for the segment of 236%. Claims for 1Q22 were approximately 90% of all claims posted for FY21.
Rural insurance mainly encompasses agricultural coverage, pledge, life of the rural producer, livestock, forestry and improvements and agricultural products. Agricultural coverage accounted for 53% of segment premiums for 1Q22.
Penetration rates as a percentage of total non-life insurance premiums in Brazil for 1Q22 were stable, with 2021 levels at 10.3%, up from of the 8.7% in 2020.
The Brazilian government’s Rural Insurance Premium Subsidy Program (PSR) subsidizes farmers’ insurance on production, offering coverage at a reduced cost. In 2021, 217,000 rural insurance policies were contracted, reaching 14 million hectares, nearly doubling the total insured area when compared to 2019, according to a report released by the Ministry of Agriculture, Livestock and Supply. The insured crop area in Brazil in 2021 was approximately 21% of the country’s 66 million hectares of crops (about 7.8% of the Brazilian territory), which demonstrates room for potential growth in the sector.
Fitch’s outlook for the Brazilian insurance sector is deteriorating, in line with the Negative Outlook on the sovereign rating. Brazilian insurance companies remain highly influenced by the sovereign, due to significant exposure to Brazilian government bonds and the concentration of operations in Brazil.
Source - https://www.fitchratings.com
