Brazil’s LRS market expands risk options for ILS capital
Brazil’s developing insurance-linked securities (ILS) market could create a clear route for catastrophe exposures that historically have remained uninsured or concentrated on traditional balance sheets to access institutional capital, according to risk intelligence company Santé founder Mireille Pereira. The Brazilian Letra de Risco de Seguro (LRS) instrument is gaining traction as activity in the country picks up, offering a potential pathway for investors to diversify their portfolios with local risks.
Four LRS transactions had been completed by May 2026, including a R$126 million issuance by Galápagos Capital SSPE, which was the largest under the regime at the time, Pereira told Artemis. The potential scope extends beyond those initial deals, as drought, river flooding, extreme precipitation, wildfire, and agricultural exposures account for significant economic losses in Brazil. A large portion of this risk remains uninsured or retained by insurers, companies, and governments, though the main constraint is whether these exposures can be represented in a form that investors can understand, price, and assume.
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Data from the National Confederation of Insurers (CNseg) and Ernst & Young (EY) shows that 67 significant climate events generated approximately R$184 billion in economic losses in Brazil between 2022 and 2024. Only 9% of those losses were covered by insurance, a figure that drops to less than 2% in the North and Northeast regions. Pereira emphasized that these figures do not immediately represent potential ILS issuance, noting that a large economic loss does not automatically translate into a securitizable risk. The relevant opportunity lies in identifying portions of that exposure that can be clearly defined, independently measured, and structured at sufficient scale.
Brazil has an advantage in the availability of physical risk data, with decades of environmental and geospatial observations providing information on precipitation, river discharge, soil moisture, temperature, vegetation, and burned area. The more difficult task is establishing how those physical conditions relate to financial loss, a challenge that requires a coordinated system involving insurers and reinsurers with access to exposure data, brokers, structurers capable of designing transactions, modelling capabilities that connect physical events with financial losses, and SSPEs being able to issue the securities.
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For parametric structures, an independently observable trigger is only useful if it remains sufficiently representative of the underlying financial exposure. A rainfall or river-level index can accurately describe the physical event while still diverging from the losses experienced by a portfolio. That basis risk becomes more important for secondary and cumulative perils such as drought, flood, and wildfire, where losses may result from several interacting variables rather than a single extreme event. The opportunity is therefore not simply to create new indices, but to determine which exposures can be converted into transparent and investable risk with acceptable basis risk.
Brazil cannot be treated as a single catastrophe exposure. The variables associated with financial losses vary substantially by geography, sector, and portfolio. Pointing to El Niño as an example, Pereira highlights how the NOAA’s Climate Prediction Center sees a greater than 90% chance of a very strong event during the Northern Hemisphere fall and winter of 2026–27. In light of this, a number of Brazilian agencies are currently monitoring potentially varying regional impacts, such as above-average rainfall and heightened flood risks in certain areas of the South, as well as drier conditions in parts of the central-northern region of the country. However, for individual portfolios, the financial impact will be influenced by factors such as geography, sector, and exposure, meaning the intensity of the climate phenomenon by itself cannot serve as an indicator of portfolio loss.
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While agricultural drought benefits from long historical records of precipitation, temperature, and soil moisture, river flooding can also be assessed by using hydrological observations such as discharge and water levels. For catastrophe risk, further development will depend on finding portfolios with sufficient scale, credible historical relationships between physical events and losses, and structures that provide meaningful protection to sponsors while meeting investor requirements. Brazil’s LRS market is still at an early stage, but the infrastructure is now operational, and market participants are already considering its application beyond risks traditionally covered by insurance and reinsurance. If those conditions can be established, parts of the country’s currently retained or uninsured exposure could become a new source of risk for the growing global ILS market.
