Insurance challenges for the road sector in a scenario of extreme weather events

por Ingrid Gregório 

Extreme weather events resulting from global warming are already a reality around the world, bringing a series of impacts for society.

Just to give you an idea of the magnitude of the challenge ahead of us, according to the latest report from the World Meteorological Organization (WMO), 2023 was the hottest year on the planet in the last 125,000 years and 2024 is on course to top that mark. We’re talking about a new climate normal.

The highway concessions sector is one of those directly impacted by this scenario, in which storms, floods and landslides result in major devastation of roads, reduced traffic and a consequent shrinkage in revenue at toll plazas, as well as high maintenance and repair costs on the affected stretches.

Not to mention the consequences for other sectors and for the economy, since road transport is responsible for around 75% of the country’s cargo transportation and in situations of this kind there is interruption of the most varied logistics chains.

Recent events have raised the alarm
In Brazil, recent events such as the heavy rains on the coast of São Paulo in 2023 and in Rio Grande do Sul in 2024 are examples of this severe scenario, which leaves a sad toll of lives lost and brings a series of damages to the affected regions and to the economy.

In the case of the São Paulo coast, the rainfall reached more than 600 millimeters in just 24 hours, according to data from the National Center for Monitoring and Alerts of Natural Disasters (Cemaden) and the National Institute of Meteorology (Inmet). A very high volume, much higher than what is considered normal, with destruction and the blocking of several stretches of highway.

In Rio Grande do Sul, which experienced the biggest climate catastrophe in its history, the rains washed 14.2 trillion liters of water into the Guaíba, a volume equivalent to almost half the reservoir of the Itaipu Hydroelectric Power Plant, according to data from the Hydraulic Research Institute (IPH) of the Federal University of Rio Grande do Sul (UFRGS). During the peak of the floods, more than 170 points on 79 highways were blocked.

The role of the insurance sector and the resilience of infrastructure
There is no doubt that extreme weather events such as these have raised the alarm about the need to give more importance to insurance in the financial engineering stage of infrastructure projects such as highways.

This is one of the steps we need to take in order to move towards balanced contracts, considering the sharing of risks and more adequate insurance cover to protect the business.

Another important step for the insurance sector, as it is an essential link in the context of climate risk management, is the challenge of innovating in insurance mechanisms and products that contribute to resilience of the infrastructure and the minimization of losses and damages connected with the effects of climate change.

The equation is not simple, and society, governments, regulatory bodies and companies need to work together to build effective measures to deal with this scenario.

Slope landslides: increased risk
One of the main challenges involving insurance for highway concessions is the risk of landslides. This is because the embankments are part of the road complex, but they are not part of the asset valuation and do not make up the value at risk declared in the insurance policy.

Furthermore, as the basic premise of an insurance policy is to compensate the repair of the affected property at the same level as it was immediately before the disaster, without alterations or improvements, repairing a post-disaster slope to an identical condition prior to the landslide is almost impossible and always causes discussions and deadlocks at the compensation stage.

Because of these factors, the risk ends up being misinterpreted by the insurance market, resulting in rate increases, increased deductibles, reduced limits and, in more extreme cases, exclusion of coverage.

The trend for insurers is to cascade their aversion to this risk across the board to the road sector, regardless of whether or not the road has had previous episodes of landslides, impacting the sector as a whole.

Parametric insurance: a tailor-made solution
As an alternative, parametric insurance can be especially useful in the face of this challenge.

As a complement to operational risk policies, a parametric insurance policy can be an interesting tool for covering any event that is directly connected with climatic parameters. An excellent example would be the risk of landslides on slopes caused by excessive rainfall.

In this type of insurance, the way claims are structured and regulated is very simple: if the defined triggers (group of climatic parameters) are met, compensation is eligible and is paid almost immediately to the insured.

The most complex and crucial stage is precisely to determine the direct relationship between climate parameter and loss, designing the triggers to represent the risk you want to transfer to the insurance market.

We can say that this challenge cannot be met without the help of probabilistic models and machine learning tools that are able to learn, from a history of climate and loss data, what the real relationship between these two factors is, simulating possible and probable scenarios in a future perspective.

After this stage where we define the models and validate their accuracy, we need to ensure that the input data for the models is robust and reliable, because only then we will have satisfactory results.

At Horiens, as we look at each challenge uniquely in support of our clients, we have developed highly customizable parametric insurance models based on data science to reflect the reality of each project.

This type of insurance is a solution applicable to various market segments where climate is a significant variable for business protection.

In the highway concessions sector, the impact is significant, so it is essential that the entire value chain works collaboratively and is committed to finding the best solutions for managing the increasingly common extreme weather risks.