Government must reformulate rural insurance after rising weather costs and even suspicions of fraud – 02/10/2024 – Market

After the cost almost doubled in a single year and reached R$9.4 billion in 2023, Proagro —a rural insurance program funded with a subsidy from the federal government— must undergo a reformulation.

The objective is to address the increase in claims caused by the effects of climate change on crops and correct errors that may be leading to irregularities and even fraud.

A task force created by the government’s economic area is in the field to make a detailed diagnosis of the reasons behind the explosive trajectory of Proagro costs, especially in the last two years.

The technicians’ assessment is that of a perfect storm scenario, due to a combination of an outdated design (the program was created 50 years ago), conflicts of interest and the negative impact of climate change.

One of the program’s flaws is that the banks that grant financing are the same agents that judge whether or not the insurance should be paid.

The Secretary of the National Treasury, Rogério Ceron, told Sheet that the growth of these expenses is worrying, as it is a bill that arrives practically in real time for the government to pay.

Last December, in the final stretch of 2023, an unforeseen bill of R$1 billion arrived at the last minute and required changes in the execution of the Budget.

According to him, the new climate cycle — with more intense rains, floods, tornadoes, heat waves and prolonged droughts — may require the abandonment of certain crops in the places most affected by changes related to global warming.

“We want to understand the details. There are some issues in this program that need to be looked at carefully, whether there is abuse or fraud. There is a task force trying to understand the data,” said Ceron.

According to the secretary, there are concentrations of accidents that attract attention and “need to be looked at carefully”. The task force is being carried out with the Central Bank, which is the program’s managing body.

“We are going to make a clear diagnosis to support the minister [Fernando Haddad] and take it to the president [Luiz Inácio Lula da Silva (PT)] the situation,” he said.

Last year, of the 330,000 loan operations that were insured by Proagro, 75,000 suffered losses due to claims, according to BC data.

From 2020 to 2022, the cost to government coffers rose from R$1.9 billion to R$5 billion. Last year, it jumped to a level close to R$10 billion — a value well above the approximately R$3 billion originally foreseen in the Budget. In 2008, the value was just R$58 million.

The increase in expenses with Proagro, due to greater agricultural losses generated by climate events, explains the increase in expenses with subsidies and subsidies. According to data from the Treasury, there was a real increase of 34.4% compared to 2022, from R$16.4 billion to R$22 billion.

Last year, the BC transferred R$10.4 billion to pay for insurance — R$9.4 billion paid with Treasury money and the rest covered by amounts collected from producers. Payments have been made by the BC, on average, 11 days after the banks reported the loss.

Ceron considered, however, that the most relevant and difficult to measure impact comes from climate change.

The secretary advocates discussing structural changes involving agricultural production sites with recurring incidences of accidents. “The climate cycle will require some regions to change the type of culture. There’s no way around it, it’s a reality.”

The issue of rural insurance is sensitive not only due to the importance of agriculture for GDP (Gross Domestic Product), but also due to the weight of the agribusiness bench in the National Congress.

Another relevant aspect is the fact that Proagro serves family farming, small and medium-sized farmers, with credit operations of up to R$335 thousand. For those who meet the rules, the government is obliged to guarantee insurance.

Last year, when the CMN (National Monetary Council) approved a restriction on the program’s rules, more than 40 deputies knocked on the BC’s door to complain.

The rule was not reversed, but it showed the size of the resistance to a broader change in the modality, as defended by the Treasury and the BC.

One of the difficulties is that the more you use insurance, the more expensive your premium becomes. The program also does not have any reserve cushion to face times of greater crop losses.

The diagnosis of the technicians who work with Proagro management is the need to correct the program’s operational flaw, which means that the financial institutions that grant credit are the same ones that present the loss amounts. This means that whoever inspects the site to identify losses for insurance coverage is a party interested in receiving reimbursement for the loss.

When identifying problems, the BC informs the Public Ministry and the Federal Police for investigation. The BC cannot interfere in the expert’s performance because it does not have the legal autonomy to do so.

One of the proposals under study is to create a fund and establish extra participation for all Proagro policyholders, in a model that technicians call “mutualism”. For example, everyone contributes additional value if the loss exceeds the historical average.

Increasing restrictions on access to the program, including for those who lose a lot due to misuse of crops, is also being studied, but the measure faces resistance.

The president of CNSeg (National Confederation of Insurers), Dyogo Oliveira, said that there is interest from insurers in participating in Proagro in the work of validating losses.

“Today, it is the bank that lends the money that carries out the evaluation. This is a problem,” he stated.

He also considered that the government needs to improve the PSR (Rural Insurance Premium Subsidy Program), whose percentage of subsidy paid by the federal Executive varies according to the priorities of the agricultural policy formulated by the Ministry of Agriculture.

“More than 90% of the PSR subsidy is for small and medium-sized producers”, highlighted Oliveira.

The Treasury’s net spending on Proagro was 9.2 times the PSR’s final budget in 2023, a reason for criticism among sector representatives. While the cost of Proagro was R$9.4 billion (R$1,960 per hectare), that of the PSR was R$933 million (R$150 per hectare).

Oliveira, who was once Minister of Planning, warns that the area covered by rural insurance in Brazil has been decreasing — according to him, today less than half of what it was in the past. “Out of 14 million hectares served, today it stands at 6 million,” he stated.

This scenario has led to a situation in which insurance is concentrated only in regions with the highest risk of losses, such as the South of Brazil.

The president of CNSeg proposes the creation of a private stabilization fund for rural insurance in general, to act as a buffer for periods with greater losses.

The fund would be formed with the participation of private insurers and the Treasury. The suggestion is R$2 billion for each party.