Brazilian transport insurance: A dangerous course

Around 60 per cent of Brazil’s domestic transportation is done by trucks through highways and roads where thefts and accidents produce  losses of almost R$8 billion . But good risk management can help companies avoid more than 70 per cent of such losses. By John Rumsey.

 

Brazil’s GDP growth is picking up after a weak year. Last year’s growth was just 0.98 per cent with the International Monetary Fund predicting growth of 3 per cent this year. But there are still plenty of uncertainties facing the economy, including a rising interest rate cycle initiated in April to curb inflation that has been topping 6.5 per cent.

Transport growth in Brazil is highly correlated to that economic growth, but runs substantially higher as consumer goods are a key growth driver, notes Cleber Cuzziol, Technical Transport Manager at JLT Brazil in São Paulo. The recent trend of 10 per cent growth in transport of goods is sustainable, he believes.

The transport market is not only growing but becoming more sophisticated, and there is consolidation among transporters with the weakest going out of business. Yet Brazil’s transport market remains very different from developed countries’. Poor infrastructure and institutional weaknesses coupled with high levels of violence contribute to unusually high loss rates.

Although robberies grab the headlines, the biggest cause of losses is more prosaic. Accidents account for some R$6-7 billion (R$1 billion is equivalent to US$550,000,000) in losses per year, Cuzziol estimates. There are a number of factors behind Brazil’s depressingly high accident rate. The lack of well-trained drivers and long working hours is one, while roads are overly busy and very poorly maintained, and there are long lines for port facilities and too few weigh stations. The port of Santos near São Paulo is particularly notorious for hold-ups, which increase the risk for perishable goods in particular. Poorly protected overnight stops contribute to theft problems.

Losses are exacerbated by poor practices at transporters. Although transport of particularly sensitive goods such as electronics or expensive machinery tends to be professional, in other sectors, such as farm produce, practices can be precarious, says Luis Vitiritti, Marine Consultant and RE Customer Manager for Latin America at Zurich Brasil in São Paulo. Tropical storms during the rainy season and the large size of Brazil magnifies those risks: the northern port of Belém, from which goods from free trade zone Manaus are often transported, is close to 2500 kilometers from the chief commercial centre of São Paulo. Packaging is a particular bugbear of Zurich. The use of pallets to raise goods and avoid spoiling in the event of rainwater entering is erratic, Vitiritti says, and even the use of the most basic techniques such as boxes and adequate taping is not as widespread as it should be.

Robberies account for losses of some R$1 billion per year despite Brazil having very sophisticated intelligent tracking devices and sensors, says Cuzziol. One reason is weak legislation, especially in relation to sanctions on those receiving stolen goods, he notes. “It’s a constant game of cat and mouse between the transporters and thieves,” he sighs. The situation is made more complex as drivers and armed guards in the vehicle sometimes cooperate with criminals for financial gain.

Risk management

It is essential in any market to ensure the insurer and client understand and mitigate transport risks. This is particularly true of Brazil where systemically higher risks put the onus on insurers and brokers to vet clients thoroughly and carefully draft policies and exclusions.

The use of risk management in transport is becoming more accepted and widespread, say both Cuzziol and Vitiritti. Even so, less than 30 per cent of Brazilian logistics companies employ risk management techniques, Cuzziol estimates.

The first step for companies is to map out their risks, which involve the broker or insurer deputising a full-time staff member to go into the client’s organisation, explains Cuzziol. JLT and Zurich use detailed questionnaires with checklist points to identify and quantify risks. The questionnaires cover:

  • The sensitivity and cost of goods and their exposure to risks
  • The quality of company management, its practices and policies, and use of                    outsourcing
  • Documentation and route planning
  • The packing and preparation of goods and the monitoring of the vehicles and goods

en route

  • Storage issues.

The questionnaire in itself is not enough, however. “The more clients open up their operations and management to scrutiny and accept advice, the cheaper the price of their final insurance will be,” says Vitiritti.

The implementation of risk management solutions offers substantial cost savings for companies, says Cuzziol. In some cases, the effects are dramatic and losses can be reduced by 50 or 60 per cent, he says. An electronics company he had recently worked in introduced risk management techniques and saw its losses slashed from R$42 million to R$20 million in one year.

Insurance trends

Brazil’s insurance premium has been growing at about 20 per cent per year, although last year transport insurance grew by about 10 per cent, says Cuzziol. The market is already large with transport representing R$2.68 billion per year in premium. Brazil’s transport insurance is driven not just by market growth but innovation and the adoption of new products, Cuzziol notes.

“There is more receptivity from logistics companies to take out insurance,” Cuzziol says. “Until recently, many Brazilian transporters had little knowledge or understanding of risk management.” Consequently, insurers were unable to properly evaluate risks or provide realistic quotes as there was too little data, and many insurers were not specialised in transportation risks.

There is now more mutual trust between clients and insurers, and a growing willingness to work together in the insurance and transport industries. In fact, JLT in Brazil restructured its transport insurance area last year to allow the Brazilian arm to target more domestic companies, whereas before the Brazilian business was geared towards handling existing global accounts.

The other dynamic has been the entrance of new players in the market, which has affected pricing. “There are lots of players in the market but few with risk management experience,” says Cuzziol. Although the effect of adopting risk management on premium prices is greatly variable depending on the level of risk, Cuzziol estimates that it can bring down prices by between 30 to 50 per cent for clients. But the Brazilian market is still in a stage of transition, cautions Cuzziol. “There are at least five years to go before the majority of transporters have insurance in place.”


 

About admin

I've been researching and writing on Brazilian financial markets, industry and economy since 2006 for a wide range of specialist media, consultancies and investors. Before that I spent over 10 years in London and New York writing for and editing magazines and journals dedicated to finance, investment and economics in developing markets, mostly for the Euromoney Institutional Investor group and Thomson Financial. Areas of coverage Below are samples of areas that I cover and some of the common themes that I investigate. Capital markets BM&FBovespa markets *capital raising trends: via equities (IPOs and secondary issuance), debt and loans *the asset management industry: legislation and coverage of the key hedge, pension and investment funds * corporate governance: how the regulator is seeking to strengthen best practice and limitations * debt markets: the nascent corporate markets, attempts to boost liquidity and new insturments. * private equity market: why this market has been so successful, who’s involved. *electronic, high frequency trading and alternative trading platforms: what does the future hold? Banking *credit: the growth of consumer and business credit and competition between banks and models *Public versus private: the role and market share of public and private sector banks and the politicization of the industry * internationalization: which Brazilian banks are expanding overseas and where * investment banking: the growth of the domestic market and who’s winning which mandates *regional banks and development banks: what role they play in the industry and how they compete Mining *licensing: the complex process of obtaining environmental, water, land and operating licenses at a state and federal level. * capacity: the feasibility and sustainability of capacity increases * financing: how miners are raising finance in Brazil and abroad *competition: the interplay Vale, MMX and junior miners *logistics: rail, road and port connections Oil and gas: the fund raising issues related to the massive of pre-salt (link) Multilatinas: Who are they and how and where they are expanding Meatpacking: Are debt burdens sustainable, what are the different business models for areas such as branding and distrbution Agriculture: How are farms consolidating, what are environmental risks, how can foreign investors be involved. IT and software: Can Brazil take on India and build a viable long-term IT industry? For more information on clients and work, please see the media and consultancy sections.
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