The building sector is currently experiencing a boom in Brazil thanks to large-scale infrastructure projects that are being generated by the FIFA World Cup 2014, PAC (Growth Acceleration Programme) and the 2016 Olympics. According to the Sebrae, a Brazilian agency dedicated to the support of micro and small enterprises, high growth in the construction sector is also driven mainly by mortgage lending, which rose from $2 billion in 2003 to $70 billion in 2010.
The Brazilian Insurance Confederation, known as CNSeg, says that the growth explosion in the construction sector is directly related to the growth of the economy. According to the confederation there’s always been a demand for construction cover, however, when there is a greater volume of infrastructure projects, there is a greater volume of premiums in the insurance market.
Construction Industry Grows Nearly 100% in Three Years
The Annual Survey of Construction (PAIC) by the Brazilian Institute of Geography and Statistics (IBGE) shows that between 2007 and 2010 the gross construction revenue grew 96.3% from R$134 billion to R$263,1 billion. Projections from the Brazilian Development Bank (BNDES) predict that construction investment will rise to USD $475 billion by 2013.
The first seven months of 2011 also saw considerable growth in insurance for Risk Engineering, from R$460.9 million in 2010 to USD $455.3 million through to July 2011, according to data provided by CNSeg. CNSeg says that total Liability Insurance in 2010 amounted to R$504.4 million and that in 2011 that number reached R$301.1 million by June!
Local Insurance Market Up For the Challenge
All this growth develops local insurance capacity to mitigate the high risks involved and to compete with foreign prices, creating great opportunities for insurers. But although the Brazilian construction industry still needs international capacity for the largest and most complex projects, the local market can often rise to the challenge providing excellent terms, conditions and prices for insurance risk engineering, along with cover for advanced technologies.
As the number of building projects increases, the local market is aware of the danger of accumulation and their clients’ vulnerability to risks such as fires, explosion, errors in project execution, riots and strikes, among others.
The end of 2011 and beginning of 2012 was marked by several incidents in the southeast, south and north such as explosions, floods and landslides. These always cause great concern in the insurance market, but despite these claims, the Brazilian market remains soft due to fierce competition from both domestic and international insurers. Looking ahead to the Olympics and the World Cup, one of big issues is the threat of strikes and riots that could cause major losses for the country.
Key Construction Risks in Brazil
The main risks involved in construction include:
- Risk Engineering, which includes civil works, installation and assembly, breakage of machinery, electronic equipment, damage to manufacturing;
- Guarantee Insurance, which involves the insurer, the contractor (insured) and the contractor (borrower) and covers any damage caused by the breach of this agreement;
- Rules relating to insurance guarantees, which includes real estate, competitors, performer builder, advance payments and retention payments.
Prevent a Risk before it Happens
According to market professionals, investment in insurance to avoid possible inconvenience and losses during the construction really does pay off. Depending on the value of the coverage and the policy terms and conditions, the cost of insurance represents only around 0.08% to 0.15% of the total project cost.
In the preliminary stages of projects, Willis Brazil’s Construction team works with investors to help them identify all possible risks, both insurable and uninsurable. The local team then calls in Willis’ Global Construction Practice Group (GCPG) to help them create an insurance solution with the best possible price, terms and conditions based on its experience around the world.
For example, if a project is being carried out in Brazil that has already been done in China, Willis will know the risk profile and can advise clients on the necessary coverage. This helps prevent risks materialising before they even reach the insurance market.
In a deadline-driven industry such as Construction, a fire or a flood can have a massive negative impact on a project. Insurance is there to prevent the risk from occurring in the first instance, and to quickly pick up the pieces when the unexpected does happen.