Managing natural disaster risks in Brazil

A recent study conducted by Swiss Re in Brazil suggests that insurance professionals would support a new regulatory framework for flood risk management, as well as greater collaboration on the issue between public and private players. BNamericas spoke to Florian Kummer, head of the company's reinsurance property and casualty underwriting hub for Latin America, about rising natural disaster risk in Brazil and actions which could be taken by the insurance industry and government to manage this risk.

BNamericas: The study suggests that a new regulatory framework and greater public-private collaboration is necessary for flood risk management. What is your view on this issue?

Kummer: In Latin America, I'm quite sure that flood is the coming risk. We are clearly in a trend scenario, and there are two types of trend. One is a natural hazard trend, where you can see that climate-related events are increasing in frequency and in severity. I'm talking about floods, drought and hurricanes. If you take Brazil, between 2000 and 2010 we observed over 50% more large flood events than in the 1990s, and they were also more severe. This coincides with all these socioeconomic developments in Latin America, so you have a socioeconomic trend scenario as well. That has to do with economic growth; the region has grown a lot so there are more economic assets at risk. The structure of the economy has changed over the last 10 or 20 years, we have much more infrastructure density and investment, we have more energy risks, we have a new middle class with new assets, we have quite a high geographic concentration in the south east in Brazil. If you look at the critical infrastructure, there is very high asset value in flood exposed areas. So taking the two trends together, there is a clear expectation of far higher expected losses and more extreme numbers. In terms of the economy or society, that simply means that the adaptation costs to climate change will be very high. You need integrated risk management to deal with these phenomena.

BNamericas: Has this been accompanied by increased awareness among the population or businesses of the need to insure assets?

Kummer: That is where the problem lies. You have these trends, but on the other hand awareness is relatively low and there are no well-functioning insurance markets. A well-functioning private insurance market against flood, for example, is a really important tool for climate change adaptation. We had floods in Brazil in 2008 in the state of Santa Catarina and in Rio in 2011 with very high economic costs or damages, and the insurance penetration was around or below 3% in these events. This gap shows you how unprepared we are, and how inefficient the insurance markets are at the moment.

BNamericas: What steps could be taken in Brazil to implement a country risk management strategy or change the current regulatory framework for natural disaster insurance?

Kummer: I'll take the example of flood. Flood is a complex risk, and if we want a functioning mass flood insurance market, I think Brazil should start talking about what other countries already have in place, for example, differentiating between the mass consumer flood market and the more industrial market. Because of the complexity of the risk, in the mass consumer market you may have a standardized simple wording that people understand, then for professional buyers you may have tailor-made products; that is one regulatory aspect to take into account. The price mechanism is a second; it's very important that prices are free. The price mechanism guides behavior; if you are living next to a river and pay a very high price for flood policies, you may consider moving away. The price mechanism influences millions of these individual decisions and overall society becomes more resilient. Also, regulation needs to take into account having a high competitive intensity for more innovation. We need innovative products and software for risk assessment. This discussion has to start in Brazil, also in Chile, Colombia and Mexico.

About Florian Kummer

Kummer is responsible for leading the underwriting teams serving the Latin America region, as well as actively participating in the planning and execution of Swiss Re's high-growth market strategy.

Prior to joining Swiss Re, the executive served as general manager of Liberty's Latin America operations, and held a number of underwriting positions at Gen Re. Kummer holds a degree in economics, Spanish, Portuguese and politics from Eberhard Karls Universität in Germany and Universidade Federal de Pernambuco in Brazil.

Source: BNamericas | By Andrew Rogers | Thursday, October 30, 2014.

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