Reinsurance rates are being driven by increased claims and exposures, but the insurance industry has the data in its power to incentivise construction practices that will in turn reduce insureds’ exposure to climate change, and the prices paid for protection.

Middle East region

The Middle East is increasingly exposed to extreme weather effects of climate change, but the re/insurance industry can drive resilience through exposure data and analytics, encouraging governments and corporations to build better if they want to avoid higher insurance costs.

That was the message from Mathias Jungen, global head of technical underwriting and analytics, SCOR, speaking at this week’s General Arab Insurance Federation (GAIF34) conference.

Oman has played host to the 34th GAIF event this week, with more than two thousand delegates descending on Muscat, more than two decades after Oman last hosted GAIF to a fraction of that audience in 2002.

Jungen emphasised that the insurance industry, while usually positioning itself as conservative, had been “too optimistic” about the natural catastrophe claims costs in recent years, as the context for a hard market pricing correction seen at recent renewals.

“The sheer volume of large claims is a lot more than what we expected, and if we’re being completely frank, it’s been a loss-making business for the reinsurers,” Jungen said.

Every region has been hit by nat cat events that “surprised them” in recent years, he stressed.

“Even in the MENA region, the trend has been clearly going up over the past couple of decades…there were elements of big surprises in this part of the world,” Jungen said.

“As a result, you’ve seen prices going up. They went up nominally, and the deductibles went up as well, so there is a double effect. And we see no end to that in the foreseeable future. If things continue as they have, prices will go up. So how do our societies manage this?”

Some aspects of building resilience are beyond insurers’ control, he suggested, such as building codes, that governments and construction firms will need to address to reduce exposures to perils, such as earthquakes or floods.

“Where do we build? Do we build houses near a river or do we build on the top of the hill? How do we build them? You have examples of choice of masonry, which is a lot more vulnerable to earthquake than steel construction,” he said.

However, insurers and reinsurers can play a big role in influencing construction to be more disaster resilient, he emphasised.

“A critical thing that we can influence as insurance and reinsurance companies, is the quality of exposure data, because it’s only that way, that we can make sure fair prices are being paid for the exposure,” said Jungen.

“If we look at the insurers, one thing is having to pay the right price. And the other thing is having the right deductibles, and there is no formula that suits everybody, every situation,” Jungen said.

“We can drive behaviours, so it’s not going to be the same price, if the individual home is built on the waterfront than further away from the water. And it is only if the exposure data is transparent, that can we really make that differentiation,” he continued.

“One great example within the region of mitigation is right here, the Oman drainage system, which was completed a few years ago, and is a very, very impressive piece of work,” Jungen added.

He noted that there is another huge project underway in Saudi Arabia to transform Jeddah’s drainage system, and that construction plans in the region will need to keep drainage in mind to be resilient to increasing flood risk due to extreme weather in the Middle East related to climate change.

“That’s exactly the kind of work that helps us as a society to be able to manage the risk,” Jungen said.

Property developers are in firm control of how many homes they build and where they choose to build them, he suggested, and they can carry a higher deductible than a single family dealing with a mortgage.

“But what is really important is that the insured bears a part of the risk, because that will drive the right behaviours, it will drive people to build in the right places, it will drive all of us to be in the right places, the right way to make sure when water is coming, we’re prepared, and we have these mitigation systems,” Jungen added.