April storms will increase claims, costs for GCC insurers: Moody’s

Storms that hit the UAE, Oman, Saudi Arabia and other GCC countries in April 2024, causing heavy floods, will push up local insurers’ claims and reinsurance costs, according to global credit rating agency Moody's.

Moody's expects that smaller insurers with more marginal profitability will be most impacted. '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 in a report.

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

'The total economic cost is likely to be significant. The insurance claims bill, which the industry is still estimating, will span commercial and consumer lines including motor, property, business and travel interruption,' Moody's noted.

However, Moody's expects the total cost to the GCC insurers to amount to only a small proportion of the total economic loss caused by the storms. 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 impact on insurers’ profitability is also expected to 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 rating agency noted that larger insurers with a high degree of diversification by geography and business line will be least affected.

Reinsurance costs set to rise

As per Moody's observation, the April storm confirms a recent trend toward more frequent and severe weather events in the GCC region, which has experienced seven storms and cyclones over the past five years, up from four over the previous five year period.

Moody's expects GCC insurers to face higher reinsurance costs and more restrictive reinsurance policy terms as a result. It 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. In some cases, rising reinsurance costs have contributed to insurers shifting towards using lower quality, less expensive, reinsurers which increases counterparty risk.'

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 urbanised 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 pointed out that some small to medium-sized GCC insurers are at risk of capital erosion as a result of the April storms.