UAE insurers face ‘very severe’ impact from floods

Reuters/Amr Alfiky

• ‘Worse event’ for UAE insurance sector
• Losses depend on reinsurance cover
• Too early to estimate total damage cost

UAE insurers have been “badly hit” following April’s freak rains, a veteran industry executive warned on Tuesday, but the scale of companies’ losses from the floods will depend on their own reinsurance cover.

The UAE experienced its heaviest rains in 75 years last week. The downpour turned main roads, particularly in Dubai, into waterways, leaving motorists stranded and causing widespread damage to commercial and residential properties. 

Ranjay Verma, general manager of Armab, chief agents in the UAE for India’s state-owned Oriental Insurance Co, describes April’s floods as the worst event for the country’s insurance industry since he moved to Dubai in 2006.

“The impact is going to be very severe on the insurance sector,” he says. ”Most insurance companies have been badly hit.”

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Of the UAE’s 60 licensed insurers, about one-fifth have capital and liquidity buffers that are only slightly above, or even lower than, the regulatory minimums, S&P Global estimates.

“We could see some solvency and liquidity issues among some of the [less] capitalised companies in the market,” Emir Mujkic, director of insurance ratings at S&P Global in Dubai, told a Tuesday webinar.

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The number of claims arising from the floods is likely to rise substantially, says Verma. For example, many vehicle owners are still waiting for their vehicles to be towed. Motor claimants must also submit a police report, which can be obtained online.

Some parts of Dubai remain under water almost a week on, despite a massive clean-up operation, leaving many commercial or industrial facilities beyond the reach of their owners.

As such, insurers are braced for further buildings-related claims in addition to those already filed.

Mujkic says it is still too early to accurately estimate the total cost of flood damage and that it is likely to take another few weeks for insurers to gather all claims.

UAE insurers expect claims on 2-3 percent of their motor insurance policies, says Verma. But in terms of the aggregate value he says that property claims will be the biggest segment: “Residence towers, warehouses, factories – everything has been affected. Business interruption claims also will come into play.”

Reinsurance liabilities

Mujkic estimates that about half of the UAE insurance industry’s gross written premiums are sold to reinsurers (ie another insurer – typically a multinational insurance company – that takes on some or all of the risk).

As such, he says much of the insurance liabilities for the country’s major infrastructure and commercial buildings, such as malls, will be held by these reinsurers.

He says domestic insurers will bear the brunt of insurance claims for vehicles and residential buildings.

But Verma adds that as the UAE rarely experiences natural catastrophes, domestic insurance companies may not possess sufficient catastrophic loss protection with reinsurers.

“No company would absorb this kind of severity of claims and the volume of claims alone without the help of reinsurers,” he says. “It will all depend on how adequately they have kept themselves protected against unpredictable national calamities.”

Because of the floods, industry profitability will decline this year compared with 2023, he predicts.

Reuters/Abdel Hadi Ramahi

On Monday the UAE Central Bank, which regulates the country’s insurance industry, ordered banks and insurers to allow flood-affected customers to defer repayments on personal and car loans for six months.

It also reiterated that vehicles and homes suffering flood damage would only be covered by comprehensive insurance policies. Holders of third-party motor insurance will not be covered. S&P Global estimates a “significant number” of flood-damaged cars had such policies.

International reinsurers could demand higher rates when renewing agreements with local insurers. These costs will be passed onto policyholders, says Mujkic.

Similarly, Verma says policy prices and so-called deductibles (the amount a policyholder must themselves pay towards a claim) would rise.