Climate crisis forces insurers to rethink risk calculations

The impact of two months of rain in Rio Grande do Sul was comparable to the more than R$7bn in losses seen over two years of the pandemic

08/13/2024

Pasture burned by fire in the Campinas region, São Paulo: Insurers’ risk assessment models, based on historical series, are becoming less effective in the face of climate extremes — Foto: Luciano Claudino/Código 19/Agência O Globo

Pasture burned by fire in the Campinas region, São Paulo: Insurers’ risk assessment models, based on historical series, are becoming less effective in the face of climate extremes — Foto: Luciano Claudino/Código 19/Agência O Globo

Climate change, with its increasing frequency and intensity of events such as heavy rainfall, heatwaves, and droughts, is pushing the insurance industry to rethink how it manages risk. The growing realization is that this is the “elephant in the room” that insurers must address with urgency.

This shift is essential because what seems to be the new normal is challenging the sector’s traditional business model. “We’re witnessing events that used to occur once every hundred or 200 years happening more frequently. That’s an increase in risk, and when risk increases, insurance premiums rise. As a result, people stop purchasing insurance because it’s become more expensive—precisely at a time when insurance is more critical than ever,” said Marcos Falcão, CEO of IRB(Re), in an interview with Valor. He added that reinsurers will need to improve their valuation and pricing models to adapt. “This is a significant challenge for the entire industry.”

Earlier this year, IRB(Re) established a dedicated research and development unit to focus on climate risks. One of its first actions was hosting a forum in Rio de Janeiro, bringing together public and private sector leaders and researchers to discuss the current situation and explore ways to mitigate and adapt to the effects of climate change.

Not long ago, Brazil was considered relatively free from extreme natural events, unlike other countries, but “now they’ve learned the way here,” said BrasilSeg president Amauri Vasconcelos.

A striking example of this was the heavy rains that battered Rio Grande do Sul between April and May, causing devastation comparable to the impact of the two-year COVID-19 pandemic on insurers. For Mr. Vasconcelos, this highlights the immense destructive power of climate-related phenomena. “An isolated two-month event is nearing the scale of the largest disaster ever covered by the sector,” he noted.

Insurance companies in Brazil have paid out around R$7 billion in compensation related to COVID-19, with BrasilSeg alone disbursing around R$2 billion. In response to the floods in Rio Grande do Sul, the insurance market has paid out R$5.6 billion in claims as of the end of July, with estimates from the National Confederation of Insurers (CNSeg) suggesting that total compensation could reach between R$6 and R$8 billion.

This evolving climate landscape demands that the industry rethink how it assesses catastrophic risk. “We continue to rely on historical data models for risk assessment, but with the climate crisis, it’s clear that we’ve experienced a break in those historical patterns,” said Dyogo Oliveira, president of CNSeg. “This industry has an unmatched ability to manage risk, but we must make a significant effort to prepare the market for this increasing and inevitable challenge.”

Climate scientist Carlos Nobre underscored the urgency of the situation. “Current climate change is widespread, accelerating, and growing more severe. We are seeing record droughts, heatwaves, and wildfires,” he stated.

Mr. Nobre, president of the Brazilian Panel on Climate Change, warned that global temperatures have already risen more than 1.5 degrees Celsius, threatening the long-term survival of the Amazon. He also highlighted the rapid melting of glaciers and rising sea levels, with some areas of the Pacific seeing an increase of 20 to 25 centimeters.

Paulo Miller, an advisor to the directorate of prudential regulation and economic studies at the Superintendence of Private Insurance (SUSEP), described the climate crisis as the “elephant in the room” for the insurance industry. He emphasized that the sector must not approach this with an “extractive mentality”—seeking to exploit the market until it becomes uninsurable—but rather focus on keeping risks insurable by promoting sound risk management practices. “Beyond pricing and selling protection, insurance has a critical regulatory role in fostering good risk management among policyholders,” Mr. Miller explained.

One strategy proposed by insurers to address these challenges is to strengthen collaboration with academia, which generates scientific knowledge, and public authorities, while also promoting a broader insurance culture in the country. “The low penetration of insurance and the insufficient growth rate in Brazil, which falls short of what’s needed to protect our population, businesses, and assets, is a serious concern,” said Mr. Vasconcelos of BrasilSeg. He noted that in Rio Grande do Sul, estimated insurance payouts represented less than 10% of the R$97 billion in economic losses calculated from the recent floods.

In rural areas, losses from climate-related events over the past decade have totaled R$287 billion, with only a fraction, R$56 billion, covered by agricultural insurance or government reimbursements through the Agricultural Activity Guarantee Program (PROAGRO), a 50-year-old agricultural insurance program designed to protect farmers against uncontrollable natural losses. The rest of the losses were absorbed by producers, many of whom were driven to bankruptcy. “Ultimately, the burden falls on civil society. When climate risks intensify, and the insurance culture remains well below the global average, the entire society is affected,” Mr. Vasconcelos emphasized.

Source: Valor International

https://valorinternational.globo.com/
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Central Bank nears interest rate hike, managers say

Professionals anticipate COPOM will actualize monetary tightening following communication adjustments

08/13/2024

Genoa’s André Raduan, Itaú Asset’s Bruno Serra Fernandes, and Verde’s Luiz Parreiras — Foto: Divulgação

Genoa’s André Raduan, Itaú Asset’s Bruno Serra Fernandes, and Verde’s Luiz Parreiras — Foto: Divulgação

Central Bank’s Monetary Policy Committee (COPOM) is anticipated to consider an increase in the Selic, the policy interest rate, during its next session. Leading asset managers, including André Raduan from Genoa Capital, Bruno Serra Fernandes from Itaú Asset, and Luiz Parreiras from Verde Asset, suggest that this is in light of recent adjustments in the committee’s communications aimed at bolstering credibility as a leadership change looms at the Central Bank.

Speaking at a Warren Investimentos event, they noted that since last week’s remarks by Gabriel Galípolo, the director of monetary policy—including his latest speech—domestic assets have responded to the anticipation that the Central Bank’s new leadership in 2025 will adhere to a strict inflation targeting regime, potentially at the cost of higher interest rates.

Recent IPCA data (Brazil’s benchmark inflation index) indicating an uptick in the expected rate for next year suggests that the COPOM may have no alternative but to enact the discussed austerity measures.

The employment figures are better than anticipated, impacting wages and income, while economic activity has shown unexpected robustness. The Central Bank’s models indicate inflation trending above target, per André Raduan. Mr. Raduan elaborated, “There’s a general consensus that interest rates need to be increased. It’s a prudent measure to stabilize expectations and diminish the risk premium.” He added, “This sets the stage for more substantial rate cuts next year.”

If the exchange rate was stabilized between R$4.90 and R$5.00 per year, the Central Bank might maintain the current Selic rate of 10.5% for a more extended period. However, with a robust economy, historically low unemployment rates, and significant fiscal stimuli provided last year and this year, rising inflation beyond target could elevate expectations, suggests Mr. Parreiras.

“The exchange rate has complicated an already complex situation. It might necessitate a more assertive response from the Central Bank. The exchange rate, having risen from R$5 per dollar at the end of 2023 to R$5.70 recently, almost inevitably impacts expectations significantly,” Mr. Parreiras commented. “An interest rate hike seems increasingly necessary to regain control over inflation.”

Mr. Serra, a former director of monetary policy at the Central Bank, noted that investors have been concerned about potential restrictions on the Central Bank’s institutional role. “Central banks adjust interest rates as necessary—raising them when required and lowering them when possible. There can be no stable currency environment if there are constraints on these actions.” As the valve for uncertainty was currency depreciation, inflationary expectations rose. “The exchange rate would probably be much closer to R$5 [per dollar] than R$6 if we hadn’t had this doubt. The fact is that this doubt will gradually be cleared up in due course.”

When the market perceived that the Central Bank would maintain its usual approach, long-term interest rates quickly rebounded, suggesting that the next likely move would be to raise interest rates due to a more challenging economic environment, Mr. Serra explained.

Despite recent easing, he does not believe this will deter the COPOM from pursuing a rate hike. Echoing remarks made by Mr. Galípolo in a previous discussion, he emphasized that the Central Bank cannot simply revel in robust economic performance; it must remain vigilant “and remove the punch bowl just as the party gets going.”

Mr. Parreiras noted that even the stock market has rallied because of the decline in long-term interest rates, reflecting “an almost instantaneous gain in credibility.” The risk premiums monitored by Central Banks also declined. “The difference between being caught in a vicious cycle and entering a virtuous one appears almost magical, a matter of credibility. The market reacts swiftly once it shifts its perception.”

While the Brazilian Central Bank is leaning towards raising interest rates, the U.S. Federal Reserve is expected to begin reducing its rates. Mr. Serra contends that Jerome Powell’s Fed should not cut its benchmark rates too hastily but should proceed cautiously to avoid advocating for rapid reductions. “By allowing the market to anticipate a longer cycle, it achieves a more favorable outcome,” he noted, adding that in the U.S., the impact of monetary policy on economic activity is more immediate, unlike the delayed effects often observed in Brazil.

Mr. Raduan of Genoa Capital expressed that his firm is not anticipating a high likelihood of a recession, noting that both American consumers and companies are relatively deleveraged.

Conversely, Mr. Parreiras from Verde Asset highlighted the historical unpredictability of U.S. unemployment rates, which do not tend to rise gradually but rather in sudden spikes, posing a significant risk. “The economy is so robust that it overshadows the microeconomic conditions; it’s more about the prevailing attitudes, making it challenging to predict when unemployment will rise,” he explained.

Mr. Parreiras also speculated that the U.S. Federal Reserve is likely to enact up to three interest rate cuts by 2025. “In my view, the cuts could come sooner rather than later. The U.S. Federal Reserve was close to reducing rates by 0.50 percentage points in July but ultimately held back,” he noted.

*Por Adriana Cotias — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Central Bank raises key interest rate by 50bp, to 13.75%

Committee hinted possibility of new hike in September

08/04/2022

Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

The Central Bank’s Monetary Policy Committee (Copom) raised the Selic policy interest rate by 50 basis points on Wednesday, to 13.75% per year, and hinted that it will evaluate the need for a “residual adjustment, of lower magnitude,” in its next meeting, to be held on September 20 and 21. Another novelty was the 12-month projection for inflation until the beginning of 2024, presented because of the impacts of elections on prices.

“The Committee will evaluate the need for a residual adjustment, of lower magnitude, in its next meeting,” it said in a statement released after the unanimous decision. The Copom stated, however, that it “it will remain vigilant and that future policy steps could be adjusted to ensure the convergence of inflation towards its targets.” Another highlight is that “the uncertainty of the current scenario, both domestic and foreign ones”, coupled with “the advanced stage of the current monetary policy cycle, and its cumulative impacts yet to be observed, require additional caution in its actions.”

According to the Copom, it was noted that inflation projections for the years of 2022 and 2023 “were heavily impacted by temporary tax measures across calendar years.”

“Therefore, the Committee decided at this moment to emphasize the projections for 12-month inflation in the first quarter of 2024, which reflects the relevant horizon, smoothens out the primary effects from tax changes, but incorporates their second-round effects on the relevant inflation projections for monetary policy decisions.”

The Copom stated that the decision to raise the Selic rate by 50 basis points, taken unanimously, reflects “the uncertainty around its scenarios for prospective inflation, an even higher-than-usual variance in the balance of risks and is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon,” which includes 2023 and, to a lesser extent, 2024. The last time the rate was at its current level was in December 2016 and early January 2017.

“The Committee considers that, given its inflation projections and the risk of a deanchoring of long-term expectations, it is appropriate to continue advancing in the process of monetary tightening significantly into even more restrictive territory,” said the Central Bank in the statement.

The monetary authority also pointed out that the external environment remains “adverse and volatile,” citing “marked downward revisions on prospective global growth in an environment of inflationary pressures.”

“The process of normalization of monetary policy in advanced economies has accelerated, affecting the prospective scenario and increasing the volatility of assets,” says the statement.

Regarding the Brazilian economic activity, the Copom wrote that the set of indicators released since the last meeting “continues to suggest that the economy grew throughout the second quarter, with the labor market recovery stronger than expected by the committee.”

“Consumer inflation remains high in volatile components and items associated with core inflation,” it stated. And concluded: “The various measures of underlying inflation are above the range compatible with meeting the inflation target.”

Copom’s inflation projections in the baseline scenario stand at 6.8% for 2022, 4.6% for 2023 and 2.7% for 2024, according to the Central Bank. For regulated prices, inflation projections are -1.3% for 2022, 8.4% for 2023 and 3.6% for 2024.

“The projections based on the reference scenario incorporate the tax measures recently approved,” highlighted the Copom in the statement. “For the six-quarter-ahead horizon, which mitigates the calendar-year impact but incorporates the second-round effects of the tax measures that occur in 2022 and the first quarter of 2023, the 12-month inflation projection stands at 3.5%. The Committee judges that the uncertainty in its assumptions and projections is higher than usual.”

*By Estevão Taiar, Guilherme Pimenta — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Bets on appreciation of bank, commodity stocks lose steam

The strategy of betting on the appreciation of bank stocks and commodity-related companies – which yielded substantial returns in the first quarter – is slowly losing steam. As foreigners decrease the volume of their purchases in Brazil in April, local investors report a more uncertain scenario and fewer alternatives for the continuity of the Ibovespa rally, since the macroeconomic fundamentals of the country do not bring much comfort to the allocation in domestic issues.

Higher uncertainties are also reflected in the larger cash position of local funds. According to a survey conducted by Bank of America (BofA) with Latin American asset managers, cash levels remained at 7.7% in April, the highest since records began, in 2018, and well above the survey’s historical average of 4.4%.

The lower confidence of financial agents stems, among other reasons, from the question mark about the growth of the global economy. With the indication of the U.S Federal Reserve that it is expected to speed up tapering, fears have also grown that further monetary tightening could lead the U.S. economy into a recessionary period. At the same time, China’s tough policies to contain the Covid-19 pandemic could also weaken demand in the world’s second-largest economy.

In this sense, the notion that global growth would remain healthy despite the normalization of monetary policy in the United States started to be, if not entirely questioned, at least considered by many global agents. Thus, after a substantial appreciation of the most liquid stocks on the Brazilian stock exchange – both in local currency and in dollars – the foreign flow has shown signs of stabilizing in April.

This month, shares of the mining and steel industries, as well as banks, went south, in contrast to the first three months of the year. Vale ON falls 15,98%, CSN ON drops 15,41% and Usiminas PNA loses 15,03 %. Bradesco PN, Itaú PN and Santander units have declined 5,12%, 6,97% and 6,21%, respectively.

The problem, analysts told Valor, is that the rotation to other sectors of the Brazilian stock market has not convinced financial agents either.

Ricardo Peretti — Foto: Anna Carolina Negri/Valor

Ricardo Peretti — Foto: Anna Carolina Negri/Valor

“My opinion is that holding commodity [stocks] is no longer a novelty as it was a few months ago, and the whole market ended up doing it. However, I don’t feel as comfortable migrating to more technology-related stocks or to assets that are more exposed to the domestic scenario. I would still stay from neutral to slightly overweight on commodities,” said Ricardo Peretti, an equity strategist at Santander Corretora.

The view is similar to that of XP’s chief strategist Fernando Ferreira. According to him, the firm still tends, at the moment, to be upbeat with stocks linked to commodities in relation to assets more dependent on the local economy, since the macroeconomic fundamentals are still bad, with weak activity and high inflation. But the conviction about commodities of early 2022 no longer seems to be the same.

“We think it is too early to rotate into growth assets, as the macro environment is still not good and commodity companies continue to generate a lot of cash, with strong dividend yields. The asset prices also remain historically low, which, in theory, is a good entry point indicator, but it can also suggest that the shares may face a correction soon,” he said.

In addition, the strategist said he is concerned about a potential change in the behavior of foreign investors, who “propped up” the local stock market in the first quarter by buying, precisely, stocks linked to commodities and the financial sector, but put negative pressure on the index in April.

“The slowdown in the flow draws attention, and a possible reversal of this movement would be a major concern for the [stock index] Ibovespa, precisely because the local institutional investors are still dealing with redemptions. If international investors start selling their positions in Brazil, who will be the marginal buyer? I don’t think the factors that brought these investors here have changed, but we can see additional pressure,” he said.

Jorge Oliveira, an equities manager at BlueLine Asset Management, also ponders that the local market may be experiencing a turning point, assuming that foreign investments, focused mainly on commodities and the financial industry, have no longer shown the same strength as before.

“With Petrobras stocks slowly gaining ground and China’s slowdown affecting metal commodities, the narrative that had Brazil as a destination for international investors has been put to the test. Valuations are cheap, but the Chinese government is still propping up the economy there. In case the stimulus expected by the market does not come, there may still be a downward revision of companies’ profits, making them not seem so cheap anymore,” he said.

Along these lines, between February and March this year, the asset manager considerably reduced its positions in stocks in its Blue Alpha B hedge fund, privileging exchange and interest rate products.

There are, on the other hand, those who still feel more comfortable with commodity-linked assets. Victor Nehmi, manager of Sparta’s commodities fund, points out that when commodity prices move uniformly, it is a sign that macroeconomic imbalances are occurring.

“We see no signs that prices have peaked and that they will start to fall from here on out. There is no prospect of an increase in the supply of the main commodities and this gives us conviction that prices are likely to remain high at least until next year,” he said.

According to him, the high prices of commodities are likely to still be reflected in the corporate results of companies over the next 12 months. Mr. Nehmi’s only caveat that the recent appreciation of the real reduces exporters’ margins.

Lucas Brunetti, a commodities analyst at Garde Asset, also sees the worsening of the industry as unlikely. He is upbeat about the fact that China has seen such a flagrant slowdown in the economy, since this is expected to stimulate more forceful government action.

“The Chinese government was restricting credit, now it is expanding it. Also, with the lockdown, services naturally fall. And if the third sector is not advancing, the state apparatus, which seeks to deliver a GDP growth close to the 5.5% estimated for 2022, will need to invest in infrastructure,” he said.

Source: Valor International

https://valorinternational.globo.com

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Post-pandemic green recovery may attract foreign investments

Green Recovery', recuperação económica é verde - Iberdrola

A post-pandemic green recovery can bring to emerging countries much more than a return to economic activity, but to attract companies and promoting sustainable development, especially in Brazil.

This was one of the conclusions of a study by the Global Wind Energy Council (GWEC). On the other hand, the agency also warns that the country risks losing hundreds of thousands of green jobs, billions of dollars and billions of tonnes of saved emissions if it chooses another path.

In an interview with Valor, the GWEC’s CEO Ben Backwell and the executive president of the Brazilian Wind Energy Association (Abeeólica), Elbia Gannoum, emphasize that a political commitment is needed to mobilize private investment.

In total, Brazil could add an additional $8 billion of gross value added (GVA) to national economies in the recovery scenario. “This is an activity in which most of the investments come from the private sector. In addition, the industry is a huge job creator,” says Mr. Backwell.

In GWEC’s calculations, Brazil could see 575,000 green jobs over the lifetime of the wind farms if it opted for a green recovery rather than a business-as-usual approach.

Ms. Gannoum adds that more companies could land in Brazil because of the attractiveness of the business. Today, there are only six wind turbine manufacturers and two wind blade companies, but this number could grow more.

She recalls that, unlike what happened in developed countries that made billion-dollar recovery plans, in the case of developing countries, government does not have the capacity for the recovery.

“The renewable energy sector has a strong attraction for private investment and Brazil, in this scenario, should look at the situation as an opportunity. We have an abundance of renewable resources, so the energy transition is a great business opportunity for companies.”

From 2022 to 2026, the report calculates a 40% reduction in carbon emissions, helping the country accelerate progress in meeting its Paris Climate Agreement targets.

The report focuses on five countries – Brazil, India, Mexico, the Philippines and South Africa – each of which face specific challenges due to Covid-19 but which have significant untapped wind energy resources that can unlock rapid economic growth under green recovery measures.

“Unlike Mexico, where the government has practically stopped investments in the wind sector, Brazil has better conditions to develop the wind industry”, compares Mr. Backwell.

The executive says that this energy source grows significantly in the world, but it should be between three and four times bigger to reach the decarbonization goals. “We should be installing around 400 GW a year, but we are installing just under 100 GW.”

Source: Valor International

https://valorinternational.globo.com

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