Reinsurance ‘intensive’ for cat-prone Latin America

From hurricanes to droughts and the ‘fire belt’, the scale of cat exposure in LatAm creates intense demand for cat and operational reinsurance, says Eduardo Recinos Schonborn at Fitch Ratings.

From his office in El Salvador, with a backdrop of lush green vegetation outside his window, Eduardo Recinos Schonborn, senior director, LatAm regional group head, insurance, at Fitch Ratings, tells Intelligent Insurer that the main difference between Latin American re/insurance markets and other continental regions is that the reinsurance coverage in LatAm is “intensive”.

“Latin American insurers have, mainly, an intensive usage of reinsurance because it’s a very catastrophic region.”

“Direct insurers in LatAm need to acquire large amounts of cat reinsurance and operational reinsurance in many different business lines.” Eduardo Recinos Schonborn, Fitch Ratings

All countries on the Pacific side of LatAm are exposed to the cinturón de fuego, “fire belt” in English, part of the larger volcanic Pacific Ring of Fire. In the Americas the fire belt is a fault line of shifting tectonic plates and mountain ranges running from Alaska all the way to Patagonia on the Pacific coast, which causes earthquakes and volcanic eruptions.

On the other side of the continent, including the Caribbean, countries are exposed to hurricanes, floods and droughts caused by hydrometeorological catastrophic events.

Mexico, for example, runs the gamut of cat exposure as it experiences hydrometeorological catastrophic events, earthquakes, floods and the threat of volcanic eruptions from Popocatépetl near Mexico City.

Recinos Schonborn says that the scale of cat exposure across the continent makes it difficult for Latin American direct insurers to cover the cost of such potentially huge cat losses. As a result, he says, direct insurers in LatAm need to acquire large amounts of cat reinsurance and operational reinsurance in many different business lines, including life and non-life.

Brazil’s intensified exposure

Brazil is the largest LatAm economy, with Mexico a distant second in the region. “We can talk about the insurance markets in the same proportions,” says Recinos Schonborn.

In terms of markets and economies in the region, the Brazilian insurance market accounts for around 55 to 57 percent of the whole Latin American insurance market, he says.

When it comes to reinsurance exposure, Brazil is not as exposed to catastrophe as other LatAm markets, in part because it does not have a Pacific coast.

However, Recinos Schonborn says, in recent years there have been many insurance losses and economic losses in the country because of cat events such as the large-scale floods in September 2023. Those floods were caused by an extratropical cyclone that brought heavy rainfall, strong winds and hailstorms severely affecting the states of Santa Catarina and Rio Grande do Sul.

The country has faced severe droughts and heatwaves over the past decade with the mercury in Rio de Janeiro soaring to almost 60 degrees Celsius (140 degrees Fahrenheit) in November 2023.

“Brazil is not exposed to earthquakes because it’s not in the fire belt region. But it has been affected by hydrometeorological meteorological events such as droughts and climate-related events. The country has always been exposed to these events but climate change has intensified its exposure in recent years,” Recinos Schonborn explains.

Another potential factor in recent years has been the recurring weather patterns of El Niño and La Niña, although as with the fire belt, Brazil is not directly exposed because these patterns affect the Pacific area more. However, being such a geographically large country encompassing four timezones, it is affected by events in the Atlantic Ocean and the Caribbean and, he says: “Brazil is being exposed to more cat risk than ever.”

Mexico and central America

Mexico has always been vulnerable to every cat event, Recinos Schonborn says. It’s a large country in a part of the world that is exposed to everything from hurricanes and earthquakes to droughts and floods. As recently as February 14, 2024, a magnitude 5.0 earthquake shook the Mexican resort of Acapulco and set off earthquake warnings in the capital Mexico City.

South of Mexico lie the seven countries on the tapering isthmus of Central America. They share a similar reinsurance exposure to that of Mexico, he says.

From Guatemala in the north that borders Mexico and has the largest gross domestic product of this group, to Panama in the south that borders Colombia, with El Salvador, Belize, Honduras, Nicaragua and Costa Rica in between, this is “a very strange piece of land” says Recinos Schonborn. This is because the narrow strip is exposed to earthquakes on the Pacific side, as well as being home to the Sierra Madre de Chiapas mountain range, and is affected by hurricanes on the Atlantic side.

“In recent years, we have seen earthquakes that traditionally pass a bit further north having an effect further east, meaning that it has affected mainly the Caribbean islands or the Atlantic coast of the Central American countries.”

There have also been hurricanes that passed further south and west, affecting Honduras, Nicaragua and other countries in Central America, such as hurricanes Eta and Iota in 2020 and Hurricane Julia in 2022. Both brought widespread floods and damage.

South America

Recinos Schonborn says that while Colombia doesn’t have too much exposure to earthquakes, it is indirectly affected by hurricanes. “They don’t pass directly through Columbia, but they do bring intense and prolonged rains causing floods, and also droughts. There are earthquakes in certain areas of Colombia, while volcanic eruptions have affected the country, which has a very diverse geography.”

So-called Southern Cone countries such as Argentina, Bolivia, Paraguay, and Uruguay, are not affected by earthquakes, he says, but they are impacted by floods, droughts, heat waves, and that has intensified in recent years.

With such a wide and severe range of nat cats in the region, it’s no surprise Recinos Schonborn calls reinsurance use in Latin America “intensive”.

For more on market opportunities in the region read the companion article titled “How realistic are insurance growth prospects in Latin America?” 

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