Demand set to increase, yet loss ratios due to rise


The Petrobras corruption scandal is forcing the insurance industry in Brazil to rethink how it supplies directors and officers liability insurance (D&O) cover amid fears that loss ratios could rise.

D&O insurance has been under the spotlight in Brazil after the disclosure of a bribe scheme at Petrobras, the country’s state-owned oil company, allegedly between 2004 and 2012.

The scheme, which is believed to have moved hundreds of millions dollars in bribes to the bank accounts of executives of Petrobras, public officials and political parties, has triggered the payment of several hundred million dollars in legal costs covered by D&O policies.

Public opinion has reacted negatively to the payment of costs for executives accused of involvement in corruption crimes.

Many insurance experts suspect that a new push by Brazil’s courts to fight corruption could uncover similar cases in other public and private companies.

These factors combined indicate that demand for D&O may soar in the country at the same time that loss ratios go up and higher limits could become the norm, marking a sea change in the segment in Brazil.

“We have always seen D&O as an opportunity in Brazil, but for a long time there were no major events,” says Allied World active underwriter Darren Powell.

“Pricing, therefore, was not at the same levels of the United States or Europe. The volume of inquiries we get from Brazilian clients has increased enormously off the back of the Petrobras scandal. The market is much more aware of the need for coverage.”

According to Powell, the market should move towards higher underwriting discipline and technical expertise, and demand for higher limits should create opportunities for international reinsurers in the country.

D&O premiums increased by 140% between 2009 and 2014 in Brazil. For a long time, insurers and brokers marketed the product as offering broader coverages at lower prices than their equivalents in foreign markets.

That tactic might come back to haunt underwriters due to the aftershocks of the Petrobras scandal. Unsurprisingly, the crossroads where the D&O market finds itself today in Brazil was one of the main themes of the 4th Reinsurance Meeting organised in April by CNSEG, Brazil’s insurance association, in Rio de Janeiro.

“Very often, the analysis of the risk does not reflect the needs of clients,” said IRB Brasil Re manager of financial risks Rosangela Tito, during the event. “It feels like D&O has been trivialized by the market, when it is actually a very specific product.”

The relaxed underwriting practices have become evident as debates take place in Brazil on whether D&O policies should cover legal costs incurred by directors who have publicly acknowledged their involvement in bribery. The Petrobras scandal, for instance, has triggered a wave of plea bargains by companies’ executives, as they try to reduce their punishments by providing the authorities with the names of other participants in the scheme.

An insurance lawyer, TM Law partner Fabio Torres, says that insurers should refuse to pay legal costs for clients who confessed crimes.

But the situation is more nuanced regarding executives who have been denounced by plea bargainers and who have been arrested by the Brazilian authorities.

“Insurance is not meant to deliver judgements,” he says. “But it does not exist to provide coverage for public and notorious acts of corruption either.”

He urged the market to include a new clause in D&O contracts to exclude any trials involving the alleged payment of briberies or frauds in operations with public entities.

What nobody disputes is that loss ratios at D&O are on the rise, and that the trend is there to stay. Argo superintendent of financial lines and liabilities in Brazil Gustavo Galrão notes that companies that take part in public tenders in Brazil are more subject to the risk of corruption than ever before.

As a result, they will request increasingly higher limits from their insurance providers, who will have to find capacity somewhere to meet the demand.

Carriers will also have to up their game when it comes to assessing the risks that they are likely to take. In 2014 Brazil’s loss ratios reached the highest levels ever at 53%, according to Galrão, and the trend looks unlikely to change in the near future.

“There are risks that are so big that the Brazilian market does not have the capacity to pay,” he says. “It is not mature enough for that. But the situation is improving, and some insurers have been more careful with the underwriting of D&O risks.”

Powell believes that buyers will request capacities that the Brazilian market is not able to meet. Consequently, insurers will have to look at the global reinsurance market, which creates opportunities for global reinsurers, but also poses its own challenges due to Brazil’s reinsurance rules.

Brazilian regulator Superintendência de Seguros Privados demands that 40% of all premiums are placed with local reinsurers.

So the future of D&O in Brazil looks turbulent. Demand will increase, yet higher loss ratios could also become the norm. Insurers and reinsurers alike will need to tread carefully to balance these two factors.