Lessons for the Gulf’s insurance industry from April’s extreme weather 

Reuters

The severe weather that struck the Arabian Gulf in April raises important questions for the insurance industry.

The month that followed the record-breaking rainfall has been one of the busiest many of us in the industry can remember.

This should be no surprise, given that up to 50,000 cars were damaged by the rainfall, with estimated preliminary insured loss for affected vehicles likely to exceed $150 million.

When you consider the damage to infrastructure, including roads, buildings and public facilities and residential properties, and then factor in financial losses from interrupted operations, the true total cost is still being calculated. 

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Set against this financial loss and disruption caused by the storms is the fact that insurance penetration in the Middle East remains low compared with global standards.

The rate in Saudi Arabia stands at around 1.5 percent, about 1 percent in Qatar, and 2.75 percent in the UAE. These figures indicate the vast majority of the population does not have adequate insurance coverage. 

The Gulf’s low insurance penetration rate can be attributed to several factors.

Many people are still unfamiliar with the different types of insurance available or how they can protect their assets and mitigate risks. Although the region has witnessed significant economic growth the insurance sector has struggled to keep pace, suggesting a major education effort is needed. 

It is vital for everyone to heed a lesson from the recent flooding and raise awareness of the importance of maintaining sufficient insurance coverage. 

In addition, insurers may need to review their pricing models following the storms. Because of the historic low frequency of weather-related events in desert climates, high levels of competition and a shortage of models to estimate catastrophic (CAT) risks, the industry has not factored weather-related risk into insurance tariff rates across most lines of business. 

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With the frequency and severity of weather events likely to increase as a result of climate change, insurers and reinsurers will need to review their risk appetite, revise their underwriting guidelines and reassess their exposure and accumulation control.

This, in turn, will affect pricing and competition. We may see prices rise or insurance companies consider CAT exclusions, where CAT risks would be covered separately at an additional cost.

Regulators are also likely to re-assess the situation, as central authorities look to enforce best practices in risk management and ensure sustainable insurance support for communities and the economy. Supporting these efforts will help raise standards across the sector. 

Recent events underscore the need for the industry to innovate, improve modelling, and better anticipate extreme weather events and their subsequent impact. 

More countries are establishing national CAT insurance pools, which use reinsurance solutions to transfer the risk outside the home nation

Climate change is likely to increase extreme precipitation, as a warmer world allows the atmosphere to hold more moisture, increasing the likelihood of intense thunderstorms and extreme rainfall. Clearer insights into these phenomena will help enable organisations to prepare and protect themselves. 

This expertise can be deployed to support a range of solutions. For example, we are seeing more countries protect insured and non-insured populations by establishing national CAT insurance pools, which use reinsurance solutions to transfer the risk outside the home nation. 

With a commitment to innovation and a recognition of the challenges of the changing world, the insurance sector can position itself as an essential partner in global efforts to prepare for, and mitigate against, the impact of climate change. 

If the April storms encourage insurance companies in the GCC to make that imaginative leap, we will have created something positive out of the crisis.

Atish Suri is CEO of Guy Carpenter IMEA