Gulf flooding to activate excess-of-loss reinsurance, drive prices higher: Moody’s

The recent April 2024 severe storms that caused heavy flooding impacts across the United Arab Emirates, Oman, Saudi Arabia and other Gulf Cooperation Council (GCC) countries are expected to activate excess-of-loss reinsurance recoveries for primary insurers, which Moody’s Ratings says will drive prices higher.

Photo from: Reuters

The flooding is expected to push up primary insurers’ claims and reinsurance costs, which Moody’s says is a credit negative for the carriers.

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

“The impact on insurers’ profitability will also be limited by the sector’s generally strong reinsurance cover, including excess of loss protection, which we expect will be activated by this event,” the rating agency said.

The overall insurance claims bill is expected to span across commercial and consumer lines of insurance, including motor, property, business and travel interruption.

However, the economic loss from the flooding is expected to be much higher, running into the hundreds of millions of dollars, with Dubai particularly affected, as our sister publication Reinsurance News reported last week.

Moody’s notes that these April storms confirm, “a recent trend toward more frequent and severe weather events in the GCC region.”

The region has been affected by seven storms and cyclones over the past five years, up from four over the previous five year period, Moody’s says.

“We expect 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,” the rating agency reports.

Adding that, In some cases, rising reinsurance costs have contributed to insurers shifting towards using lower quality, less expensive, reinsurers which increases counterparty risk.”

Moody’s also notes that the global reinsurance costs have risen and reinsurers have reduced their capacity to cover secondary perils such as floods, which create volatility in their earnings.

“These floods, which also highlight rising water risk management challenges in otherwise arid areas that have urbanized 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 believes.

Because of the claims from these storms and expected rise in the cost of reinsurance for insurers in the Gulf region, Moody’s says that some smaller to medium-sized entities could be at “a higher risk of capital erosion that would negatively impact their credit profiles.”