April storms mean claims and increased reinsurance costs for GCC insurers, according to a rating agency report.

Storms that hit the United Arab Emirates, Oman, Saudi Arabia and other Gulf Cooperation Council (GCC) countries in April 2024, causing heavy floods, will push up local insurers’ claims and reinsurance costs and weigh on capital adequacy for some smaller insurers.

Four Seasons Dubai DIFC view

That’s according to Moody’s Investors Service, in a report about the consequences of recent floodwaters, which notably left parts of Dubai underwater.

Smaller insurers with more marginal profitability will be most impacted, Moody’s warned.

While insurers will only bear a small fraction of the total economic loss for this event, increasing insurance penetration coupled with the rising frequency of severe weather events could over time pressure some companies’ profitability and capital adequacy, the rating agency said.

Net losses “subdued” for most

The storms brought the region’s heaviest rainfall since records began 75 years ago, causing severe flooding and leading to about 20 deaths, according to press reports.

The total economic cost is likely to be significant, Moody’s thinks.

The insurance claims bill, which the industry is still estimating, will span commercial and consumer lines including motor, property, business and travel interruption, the report said.

“However, we expect the total cost to insurers to amount to only a small proportion of the total economic loss caused by the storms,” Moody’s said.

“This is because insurance penetration is still relatively low in the GCC region, while compulsory insurance cover such as motor third party excludes damage to the policyholder’s vehicle and thus also weather related losses,” the report said.

The impact on insurers’ profitability will also be limited by the sector’s generally strong reinsurance cover, including excess of loss protection, which Moody’s expects “will be activated by this event”, the ratings firm said.

“Larger insurers with a high degree of diversification by geography and business line will be least affected. This was borne out by heavy storms and flooding in the northern parts of the UAE in July 2022 which significantly increased the loss ratio of domestically focused insurers,” Moody’s said.

“In contrast, larger insurers active in that region with greater business and geographic diversification, were not significantly affected by higher storm and flood claims,” the report added.

Reinsurance costs will rise

The April storm confirms a recent trend toward more frequent and severe weather events in the GCC region, according to Moody’s.

The GCC region has experienced seven storms and cyclones over the past five years, up from four over the previous five year period, the report noted.

“We expect GCC insurers to face higher reinsurance costs and more restrictive reinsurance policy terms as a result,” Moody’s said.

This will put financial pressure on the primary insurance sector, which operates in a competitive and price sensitive market, and has limited ability to pass on higher reinsurance costs to customers, the rating agency warned.

“In some cases, rising reinsurance costs have contributed to insurers shifting towards using lower quality, less expensive, reinsurers which increases counterparty risk,” the paper said.

Reinsurance costs have already been rising globally and reinsurers have reduced their capacity to cover secondary perils such as floods, which contribute to earnings volatility.

“These floods, which also highlight rising water risk management challenges in otherwise arid areas that have urbanized quickly, could contribute to reinsurers reducing capacity and raising prices to the extent that GCC insurers will face greater risk of earnings volatility in the future,” Moody’s added.

Weak capital buffers exposed

Some small to medium-sized GCC insurers are at risk of capital erosion as a result of the April storms, Moody’s suggested.

“Many of these companies have weak profitability and already operate with low solvency buffers, with, for example, five UAE insurers were already falling short of their minimum solvency criteria and two UAE insurers had marginal buffers reported of between 100-120% for their minimum solvency criteria before the storm,” Moody’s said.

“Furthermore, the five UAE insurers who at year end 2023 reported to have fallen short of their regulatory minimum solvency criteria and the two UAE insurers who reported nominal buffers for the same, all of whom are small to medium-sized insurers and have persisting underwriting profitability pressures, had already seen on average a 14 percentage points and 9 percentage points increase respectively in their combined ratios in 2023 and could face further deterioration from the storms as claims and reinsurance costs rise as noted above,” the report continued.

Moody’s listed the top five insurers in the UAE market: Sukoon Insurance; Abu Dhabi National Insurance Company; Orient Insurance; Dubai Insurance Company; and Al-Ain Ahlia Insurance.

At year-end 2023 these firms had continued to maintain significant capital buffers reporting regulatory minimum solvency ratios of over 170%, Moody’s noted.

As such they “tend to face lower volatility in their underwriting”, with their average combined ratio deteriorating by a much lower 4 percentage points in 2023, the rating agency said.

“As a result, given the expectation of increased claims and reinsurance costs, we expect more of the small to medium-sized entities to be at a higher risk of capital erosion that would negatively impact their credit profiles,” Moody’s added.