Impact of Unprecedented UAE Rainfall on the Insurance Industry

7th May 2024, By Salman Shah

Impact of Unprecedented UAE Rainfall on the Insurance Industry

The UAE recently experienced unprecedented rainfall, with record single-day levels unseen in over seventy years of available data. The rainfall disrupted life across the emirates, and the insurance industry was not spared from its devastating impacts.

The heavy rains led to widespread urban flooding that severely impacted several lines of business, including motor, property, travel, and business interruption. The motor insurance segment was hit particularly hard, with reports of around 30 to 50 thousand cars submerged underwater for extended periods. Initial estimates of Motor claims are $150m to $250m.

This flooding will likely reduce already strained salvage recoveries as the supply of water-damaged cars increases while demand remains low. Due to overload on the repair workshop and coverage disputes, the claims will take considerable settlement time.

The Central Bank (CBUAE), issued a Circular (2024/2089) instructing companies to submit data on claims incurred during 16 to 18 April 2024 at a class of business level. However, due to delays in reporting and estimating the claims, it may take a few weeks to determine industry-wide accurate estimates of projected losses.

Many insurers are already discussing claims coverage under catastrophe (CAT) treaties with their reinsurers. The attachment points and coverage limits of each company's CAT reinsurance will be critical in estimating the net impact of rainfall claims on their financials. Typically, these treaties include a cash call provision to assist insurers in managing liquidity for timely claim settlements.

On property insurance, early estimates suggest insured losses could range from $650 million to $850 million. Some companies initially stated they would deny coverage for cars driven despite government warnings about the heavy rains, only covering parked cars. However, the CBUAE has directed insurers to settle valid motor and home insurance claims per policy terms.

Business interruption policies are also expected to face significant claims as the storms impacted operations across many sectors. The travel insurance segment likewise saw disruptions.

Since solvency regulations are fairly robust, most companies should be able to settle claims without significant difficulty, however, a few who were already struggling will face issues. This may also trigger merger and acquisition trends as companies find themselves undercapitalised.

Looking ahead, while motor insurance claims will increase, the net impact on insurers will be reduced due to catastrophe reinsurance coverage. However, insurers are likely to raise rates for future coverage as reinsurance rates harden. There is also an expectation that more policyholders in UAE will consider comprehensive coverage rather than third-party liability motor insurance to protect against such catastrophic events. Overall insurance penetration levels may rise in the UAE, especially given it is currently low (2.75%).

Insurance policy wording could be updated to exclude coverage if vehicles are driven despite government warnings and safety precautions are ignored during severe weather events. Furthermore, reinsurers may increase catastrophe reinsurance pricing for the region due to the perceived heightened risks from climate change.

Companies may also review their risk appetite and exposure to minimize the impact of these catastrophic events on their portfolio.

In the aftermath of these historic rainfall levels, the insurance industry finds itself vulnerable to substantial claims while also facing longer-term impacts on pricing, policy terms, and risk assessments. Actively preparing for future catastrophes will be crucial for insurers to maintain stability and preserve capital.

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