April storms expected to increase claims & reinsurance costs for GCC insurers: Moody’s

The April storms that struck the United Arab Emirates, Oman, Saudi Arabia and other Gulf Cooperation Council (GCC) countries are expected to “push up” local insurers’ claims and reinsurance costs, say’s Moody’s.

Analysts noted that smaller insurers with more marginal profitability will be most impacted.

However, while insurers are expected to only bear a small fraction of the total economic loss for this event, increasing insurance penetration, combined with the rising frequency of severe weather events could over time put pressure on some companies’ profitability and capital adequacy.

The April storms brought the region’s heaviest rainfall since records began 75 years ago.

The storms reportedly caused severe flooding, which led to about 20 deaths.

The total economic cost is of the event is anticipated to be significant.

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

It should be addressed that the April storm confirms a recent trend toward more frequent and severe weather events across 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 explained that it expects GCC insurers to face higher reinsurance costs and more restrictive reinsurance policy terms as a result.

“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,” Moody’s said.

“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,”’ said Mohammed Ali Londe, Vice President Senior Analyst at Moody’s Ratings.

Importantly, 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.

Moody’s added that these floods could heavily contribute to reinsurers reducing capacity and raising prices to the extent that GCC insurers will face greater risk of earnings volatility in the future.

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