Construction insurance market trends: Brazil

Construction All Risks

Construction All Risks

The insurance market is still consolidating following the merger of major insurance companies in Brazil.

Following the merger of Swiss Corso and Bradesco, locally AXA has merged with XL and Zurich has bought QBE’s operations in Latin America.

For this class of insurance, we do not expect rate increases for two key reasons. QBE did not have a strong footprint in construction business meaning they would have provided additional (new) capacity – such capacity not eventuating is no expected to have an impact on rates. XL has a technical approach to underwriting and as a result, similarly, their capacity was not impacting rates.

Despite the mergers, the level of capacity available is still greater than the demand within the region. For this reason low rates are expected to remain over the short term.

That said, some specific types of construction projects are facing capacity issues, for example PCH (Small Hydro Power Plants), as a result of losses impacting the insurance and reinsurance markets in the recent past years (mainly as a result of overtopping claims). Rates for these projects are consequently still high.

The investment in infrastructure and energy projects has been increasing recently. There is a potential for this to increase the demand on capacity and may push rates higher over the medium term.

Construction Liability

Construction Liability

Brazil does not have a litigious culture. As a result, despite the high risk exposure to third parties within engineering projects, construction liability is still considered favourably by insurance markets.

This, together with low demand for insurance and a significant amount of capacity available, is expected to continue to result in low rates for the middle and long term.

Professional Indemnity

Professional Indemnity

Pricing has become slightly more aggressive as more insurers enter the market with the capacity and appetite for what has traditionally been considered a niche product, particularly on larger project placements.

While construction companies appear to understand the relevance of the product and the protection it provides cost continues to be a driver and influence the purchase decision for this class of insurance.

Motor, Plant & Equipment

Motor, Plant & Equipment

The motor, plant and equipment insurance should be analysed in two distinct ways.

From the perspective of motor insurance, there are a few markets with appetite for this risk. They are very technical but compete against each other in a manner which stabilises premium rates.

The plant and equipment market remains competitive as the claims ratio within this class of insurance has been more positive for insurers.

Marine

Marine

The trend towards recovery of the construction sector in Brazil has not changed the purchasing behaviour of construction companies. Traditionally, DSU is an insurance required by construction contracts, but it is a major risk for assembly installation projects – especially when considering the potential loss amounts involved.

Historically in Brazil, EPC companies have been responsible for the project insurances. An emerging trend locally is for the owner of the project to take responsibility for the insurances. This has made it possible to extend the marine policy to cover the DSU risk.

This trend is mainly being pushed by foreign investors in Brazil, who are bringing new expectations and preconceptions of the risks of the project and insurance protection.

D&O Liability

D&O Liability

The majority of the Brazilian construction companies are privately owned, significantly reducing insurers exposure as coverage for the shareholders (side C) is not required.

The losses which have been experienced (e.g. defence costs were paid on the ‘Car Wash’ investigation) mean that the capacity for this class of insurance is very limited and is concentrated amongst the larger insurers (i.e. AIG, Zurich, Chubb). In addition the premium/pricing for this class of insurance is also higher.

The release of 553 Rule by SUSEP (Brazilian Insurance Agency), means coverage can be provided for fines and penalties (for both defense cost and losses). Indeed fines/penalties for non-compliance with any Regulator or fines for tax miscalculation (IRS claims) are the major exposure for most businesses. As a result, inclusion of this coverage is resulting in double-digit premium increases.