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Catastrophic floods are a wake-up call for insurers

Regional insurance penetration needs to be higher and policies must be overhauled

A car is stranded in flood water caused by heavy rains, in Dubai, United Arab Emirates, April 17, 2024. REUTERS/Amr Alfiky Amr Alfiky/Reuters
Drivers faced a dilemma after the floods: roadside assistance companies were overwhelmed but if they tried to drive when their car was under water, insurance claims were rejected

Gulf superstorms have battered the region – and its insurance industry. At the time of writing insurers have yet to estimate the severity of the damage. This tells us that the sector needs better processes and risk assessment models.

Last month’s floods showed that it is time that stakeholders – government, investors, insurance companies and premium-payers – in the GCC insurance business focus on three main areas: 

  1. Developing the takaful (sharia-compliant) insurance market and boosting insurance penetration – premia gathered in a year set against GDP. In the GCC, insurance penetration is 1.5 percent, while the global average is 6.8 percent
  2. Using advanced tech to communicate the urgency and seriousness of climate threats
  3. Exploring “insuretech” partnerships to develop catastrophe-specific insurance products 


For decades insurers have assessed and assumed risks based on historical data, assuming climate to be constant. But as natural disasters grow more frequent, insurers should focus on creating risk models that account for climate change.

Last month the floodwaters exposed cracks in the UAE’s motor insurance system. Though car insurance is mandatory in most GCC countries, the UAE’s motor policies do not cover natural disasters. So, insurers generally offer an add-on option to cover loss by floods as part of comprehensive policies. 

But who is going to take out a full flood policy in a desert that seeds clouds to induce rain? It is easy to see why residents have generally preferred cheaper third-party liability coverage. 

But even those policy holders who took out comprehensive cover faced hardships. When their cars floated away, drivers faced challenges locating them. 

Who is going to take out a full flood policy in a desert that seeds clouds to induce rain?

Once found, the customers had to rely on roadside assistance agencies to tow their vehicles to the right garages. But those garages were quickly overwhelmed and customers had no choice but to move their cars.  

That is where the problem began. According to Ashmy Arackal, an operations manager at InsuranceMarket.ae: “If cars were just towed from flooded areas, insurers paid the maintenance costs. But if owners tried to start their car engines or purposely drive while their cars were underwater, their claims were rejected.” 

The mass of claims reportedly delayed processing times from one day to a week on average. Over the weeks, agencies started leasing land and assembling temporary workshops to inspect and assess car damage. 

So how do flood-prone regions such as Latin America, Europe and the US protect themselves? The more progressive governments in these regions are investing in preventative construction and green projects to create natural and artificial buffers.

They are also investing in real-time data monitoring, giving all parties time to prepare for disasters, thus reducing losses and claims.

Parametric insurance also seems to be catching on in Asia-Pacific and Europe. Here insurers watch a specific parameter (such as rainfall, temperature or wind speed) and decide on a threshold.

When the disaster occurs and crosses the threshold, insurers pay the insured a set amount. For example, Lloyds of London pays €1,000 per hectare to Spanish olive farmers when temperatures in the region cross 36 degrees. 

But flood-prone countries have also seen serious incremental re-pricing in insurance premiums.

As a case in point Miami has been upgrading its drainage infrastructure and creating strict building codes (which include raising critical infrastructure and home foundations above flood levels). Nevertheless, worsening floods have caused insurance premiums to shoot up by 100 percent over the last three years. 

As insurance has become unaffordable for homeowners, both residents and insurers have slowly exited. In cases like these, there is a risk of affected regions being tagged as “uninsurable”.

That brings us to the question: will parts of the GCC simply become uninsurable? Maybe not immediately. But in 10 years, who knows?

To conclude, rising disasters mean that it’s time to start paying our climate bills.

The government has already set aside AED 2 billion to rebuild homes damaged by floods and AED80 billion to create better drainage systems.

Businesses and residents may have to pay a price by shelling out on higher insurance premiums and switching from cheap third-party coverage to comprehensive policies that cover natural disasters. 

But there is a silver lining: we can expect a more robust insurance industry that offers a wider variety of insurance products and grows faster than expected. 

Akshata Kamath is an Abu Dhabi-based business and finance journalist

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