Recent Floods May Result in Higher Vehicle, Property Insurance Rates: S&P Report

Rains and floods in the UAE could result in higher vehicle and property insurance rates, as indicated by a recent report.

Last week's unprecedented rainfall, which exceeded a year's worth in a single day on April 16, marked the heaviest recorded since climate data began in 1949.

Several motorists were compelled to abandon their vehicles on flooded streets, and rainwater seeped into residents' homes, causing damage.

The report from S&P Global Ratings, an independent credit risk research provider, highlighted that many motor insurers in the UAE have already raised rates by up to 50 per cent for certain coverage over the past year due to increased claims frequency and costs.

Given the recent floods, another round of rate increases is anticipated, particularly for comprehensive motor policies.

"We also anticipate potential rate increases for insuring commercial and residential property risks as local insurers and international reinsurers reassess their pricing following a rise in the frequency and severity of rainstorms in the UAE and neighboring countries," stated the report.

The agency also projected a surge in insurance claims. According to media reports, local insurers are preparing for what they anticipate will be the highest-ever number of claims, with some reporting a 400 per cent increase compared to previous peaks.

A "significant" number of cars damaged during last week's rains may only have third-party insurance and therefore may not be covered for natural disasters like flooding, warned S&P.

"Flooding damage is typically covered under comprehensive motor policies, but this coverage may apply only under specific circumstances, such as when a vehicle is parked and not in motion, further limiting insurers' liability," the report explained.

The company expects that claims related to motor and property damage will constitute the majority of losses for local insurers.

While insurance companies often transfer large, high-value commercial risks to international reinsurers, risks related to motor business are typically retained by local insurers.

Despite the anticipated high number of motor claims, the industry is expected to manage the total amount of insured losses.

Although it is still too early to assess the full financial impact of this natural disaster on the UAE's insurance sector, S&P Global Ratings believes that most insurers in the region benefit from robust capital and liquidity buffers, enabling them to absorb related claims.

However, insurance companies with weaker capitalisation could face challenges, potentially leading to delays in claim payments.

There are currently about 60 licensed insurers in the UAE, according to the agency. The accumulation of claims from the same storm could trigger reinsurance policies, depending on the reinsurance coverage companies have in place, which would cap the liability of those insurers at a set amount.

Damage to property has been substantial based on initial estimates. The company noted that many larger, high-value commercial risks are typically transferred to international reinsurers, meaning that local insurers retain only minimal or no risk in such cases.

In response to the storm impact, the government, private businesses, retailers and property developers have offered various free services to residents in the most affected communities, including maintenance, cleaning, and pest control.

"Some property developers in Dubai have announced plans to cover repair costs for residential buildings. This, combined with the relatively low number of home content insurance policies, could further limit exposure for local insurers," commented the rating agency.

The company anticipates that insurers will receive numerous claims related to infrastructure damage, such as shopping malls.

However, the impact on local insurers is expected to be limited, as these risks are typically ceded to reinsurers due to low local insurers' retention levels.

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