Big brash Dubai has finally had its confidence knocked. The downturn has hit hard and what’s needed now is less flash and more cash. Global Reinsurance asks if it is still a go-to destination for reinsurers or if it’s time to set sail for calmer shores

It was the promised land. Dubai, the flashiest of the United Arab Emirates, burst onto the reinsurance scene in characteristically flamboyant style in 2002 with the launch of the Dubai International Financial Centre. Its huge construction boom offered a wealth of business opportunities and the growing reinsurance sector there was only too happy to be swept up in Dubai fever.

But by the end of last year, deep fault lines had appeared in the desert landscape. The shock news that state-sponsored property developer Dubai World needed an extension on its multibillion-dollar debts marked a new chapter in the story of the Middle East. Brash confidence and showy exhibition stands were no longer enough; the region realised that promises had to be backed up by cold, hard cash.

As the global economy comes to terms with events in Dubai, reinsurers must ask: it is still a good place to set up shop? Should they be looking to alternative territories in the Middle East, such as Qatar and Abu Dhabi, which stepped in to bail out its ailing neighbour? How exposed are reinsurers to the crash? And what does this mean for business already written out there, specifically property and construction risks, and trade credit?

Cloudy with chance of rain

There are serious concerns about doing business in Dubai, despite its attempts to keep the economy going. In a regular sector comment on banking in the UAE, Moody’s says that while Abu Dhabi’s support to Dubai provides temporary relief, it does not address “underlying problems”. “We are concerned about the longer-term repercussions of the reduced market confidence on the banks’ ability to tap market confidence at reasonable cost,” the report says, predicting a further rise in distressed loans, which would test banks’ credit quality even further.

Standard & Poor’s has also taken a tough line. Credit analyst Nigel Bond says: “The December bail-out from Abu Dhabi removed one cloud over Dubai but others remain. It’s possible that Dubai taken on its own is in recession, but the UAE is not as the country continues to have positive GDP growth.”

On 25 January, Dubai suffered a further blow when Standard & Poor’s downgraded the flagship Dubai Holding Commercial Operations Group owned by Dubai’s ruler Sheikh Mohammed Bin Rashid Al Maktoum, from BB+ to B. S&P then withdrew its rating altogether due to lack of transparency from the company.

Bond supports this need for more transparency in insurance, plus greater supervision from the UAE Insurance Commission and an awareness of rising moral hazard. “Moral hazard increases in a downturn and there is a lot more talk about fraud and detection of it. Having said that, there is no database that tracks fraud and no way of measuring the frequency or cost of fraud or arson.”

So the prospects for Dubai aren’t looking pretty, but what of the risks that have already been written there? Property and construction is, of course, the biggest business. Yet dozens of other companies have reined back their ambitions and more than 500 projects, worth over $80bn, have been cancelled or postponed.

Lockton Dubai’s executive director, Salah El Kadiri, says the upheavals have led to long-running discussions between contractors and developers. “They are trying to find solutions but it is likely that some contractors working on these projects will run into some financial difficulties,” he says. As such, he said losses will “probably” be incurred by the insurers of those contractors.

Jardine Lloyd Thompson (JLT)’s Dubai office head, Lloyd Stewart, says that many construction insurance deals are being rewritten to reflect delays and cancellations. “The insurance cost would increase in the long term because the pricing of the policy is based essentially on the value and the time involved.”

But Stewart adds that insurance and reinsurance costs for Dubai construction and property are still low by international standards. For example, a $100m multi-storey tower block in the UAE might require a complete project premium of $60,000-$70,000. By comparison, the total premium for building a similar block in London could be 10 times the price. Premiums remain low because the market has traditionally been so competitive and there are few major natural hazards, such as earthquakes.

Trade credit insurance is also big business. It has been affected by the downturn and rates have increased sharply. Atradius manager Peter Boberg holds a cautious outlook on the quality of trade credit risk in Dubai. “We are looking carefully at sectors with a high number of payment defaults, such as construction.”

Due to the uncertainties in the market, Boberg says Atradius assesses Dubai risks differently from other neighbouring trading centres. “We had to implement firmer buyer underwriting strategies to addresses this situation, as there have been a number of reported payment defaults, and credit in general has eroded considerably. As Abu Dhabi and Qatar have been less-affected and better-performing markets, we assess credit risks differently from a buyer risk underwriting perspective.”

In contrast, Euler Hermes’ Anil Berry says Dubai should be priced just like the rest of the UAE. “We always took the view that Dubai is part of the UAE because it is so linked to Abu Dhabi,” he says. “That proved to be true in the way Abu Dhabi supported Dubai companies. It is like separating Californian trade credit from US trade credit.” He says many aspects of the trade credit landscape have become more positive as a result of the economic problems. Dubai’s trade credit insurers rely heavily on the emirate’s reputation as an import/export hub, which has survived despite the slowdown of the local property and construction market.

Disassociation

Major reinsurers have been quick to distance themselves from the problems in Dubai. SCOR and Swiss Re say they have no investment exposure, while Hannover Re mentions “negligible” investment as well as a small potential for political risk claims in the region of $1m.

Some US insurance companies have an estimated $590m investment exposure to Dubai World in bonds issued by Dubai Ports World. A report by Moody’s says that of about 25 insurers and reinsurers, those with the largest bond holdings are Mutual US Life ($83m); CNA Insurance ($58m); and Lincoln National ($57m). But Moody’s adds that there is not thought to be any meaningful exposure to equity or structured securities.

As far as underwriting exposure is concerned, political risk and contract cancellations among construction and development companies are expected to be the main source of claims. So the reinsurance market seems to have got off relatively lightly from the crisis. But could it still be the new home for reinsurance in the Middle East? Don’t count on it. GR

What went wrong?

Arabian property giant Dubai World sparked fears of financial contagion around the world when it called for more time to pay its multibillion-dollar debts.

Having assumed an identity of untold wealth and boundless ambition, this flagship UAE company was going cap in hand to its mainly European lenders, who faced a combined exposure of $40bn.

Stock markets tumbled and share prices of the banks in question – The Royal Bank of Scotland, HSBC, Lloyds Banking Group, ING, Calyon and Barclays – took a dent until financiers in the neighbouring capital, Abu Dhabi, stepped in.

Although fears of financial shockwaves were temporarily assuaged, doubts persist about Dubai as a whole and questions are still surfacing about international exposure to its over-zealous development plans.

Insurers have multiple links to Dubai’s economy through underwriting, investments and regional offices, but banks are considered to have the greatest exposure to the emirate and particularly any risks associated with the Dubai World group.

The wider view

It is important to view the market in Dubai in the context of a wider national picture, JLT’s Dubai office head, Lloyd Stewart, believes. “Most people in Dubai will say that the market, particularly in property, is extremely quiet. But if you go down the road to Abu Dhabi, it is a somewhat different situation. There’s an argument to say that being a federation, it would not be in Abu Dhabi’s interests to see Dubai suffer.”

Bahrain-based reinsurer Arig’s chief executive, Yassir Albaharna, is also taking a broader view. “The GCC [Gulf Co-operation Council] continues to be a competitive front, with no noticeable hardening in reinsurance rates seen on 1 January 2010, despite the economic crisis in Dubai.

“This is primarily due to the fact that supply of insurance and reinsurance capacity remains abundant. The demand for insurance has levelled out in construction and marine, which has put even more pressure on the already depressed property market.”

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