Weathering the storm: How insurance is innovating to protect the Gulf states from extreme weather events

A version of this article by MNK Re-DIFC Senior Executive Officer Mario Nahas and DIFC Chief Executive A R Srinivasan was was first published in the March edition of Premium Insurance Magazine.

The Dubai Word Insurance Congress in March came at a key time for the Gulf region in thinking about the risks it faces and what our industry can do to support the economies and industries that are coming under increasing threats from extreme weather events.

The situation is particularly challenging given the breadth of events that the region, characterised by high temperature and humidity, is experiencing. While some areas are facing severe droughts and water shortages, others are having to deal with and recover from the devastating impact of freak thunderstorms and floods. In addition, salt intrusion into aquifers is affecting the limited agricultural land, with potential for having dangerous knock-on effects for food security.

Oman’s maritime location makes it particularly susceptible and vulnerable to cyclones, which are increasing in frequency and severity. At the end of 2021, the northern part of the country was hit by Cyclone Shaheen, the first tropical cyclone to make it that far west into the Gulf. The cyclone generated heavy rainfall and excessive flooding in the many of the Sultanate’s valleys. The high winds of the cyclone generated massive storm surges along the coast and caused serious damage to infrastructure and homes, displacing many.

When severe tropical cyclones maintain their original intensity at landfall, truly catastrophic outcomes ensue.  Cyclone Shaheen followed Oman’s worst natural disaster Cyclone Gonu, which brought wind speeds in excess of 100 miles per hour, heavy rainfall, inland flooding and strong coastal waves, caused extensive damage and devastation to buildings and infrastructure along with widespread power outages. It was reported that the final tally in cost of damages and fatalities was USD 4.4 billion and 78 lives respectively.

There have also been serious consequences for surrounding countries, in the form of extreme rainfall, winds and flooding in the UAE.  In May 2021 the UAE saw two extreme, but very different weather events. Abu Dhabi recorded the year’s highest temperature of just under 50°C, while on the same day and remarkably at almost exactly the same time, Fujairah saw heavy rains as well as a hailstorm, which was reported on social media.

Coastal flooding in Fujairah – with waves reported to be over 10 metres high – caused severe damage to the port and forced arterial roads to be shut as they were submerged, resulting in economic disruption.

The Middle East is warming at twice the rate of the rest of the world. Gulf coastal cities could find themselves inundated as waters rise by the end of the century. The region’s climate is changing dramatically with projections suggesting that some Gulf states will experience a temperature rise of 2.6°C and a nearly 35% decline in rainfall over the next thirty years.

Climate change is highly likely to exacerbate the situation, with warming ocean waters feeding the capacity for even more intense cyclones to hit the Gulf coastline. As Oman’s experiences over the last decade have proved, this brings with it a higher probability of landfall, bringing serious and long-term devastation with it.

The Middle East Institute has warned that the warming of oceans and seas near the Equator, as evidenced by rising sea surface temperatures, coupled with climate projections of increased global warming, signals the potential of more frequent and intense cyclones landing well into the Arabian Peninsula and surrounding regions. Cyclone Shaheen both serves a reminder of the peninsula’s vulnerability to extreme weather events as well as an early indicator of how climate change is exacerbating that vulnerability. This is also having a wider environmental, social and economic effects. For example, in the UAE, it is estimated that the climate crisis costs USD 7.8 billion a year in higher health costs.

The trends are clear and the situation needs fresh thinking to support the people, businesses and economies that face these threats. Insurance can play a major role and it was underscored at the Congress as one of the top policy priorities for the region.

It’s also good to see that the region’s governments and regulators recognise the value of working closely with our industry.  Last year there were calls for a National Catastrophe Fund & Insurance Pool to help Gulf states cope with the damaging effects of adverse weather. This kind of partnership approach is vital, but what’s also clear is that we need to innovate.

At MNK Re we work together with our clients around the world to develop next-generation reinsurance and insurance schemes.  They enable risk transfer for risks that are not adequately addressed by the traditional indemnity market, as well as addressing any existing gaps in coverage as well as for emerging risks.

The ability of parametric insurance to capture the full economic impact of natural catastrophes and extreme weather events, protect critical infrastructure, proactively support businesses in their recovery post-event and build resilience at a mass-level, is a real game-changer. The industry is highly experienced in designing and implementing index-based/parametric insurance schemes and should be able to leverage its knowledge and experience as part of successfully delivering the ambitions of the governments across the Gulf. This is particularly important given that recent studies have revealed clear monthly and seasonal patterns of these weather events. This knowledge will help to improve and enhance disaster planning for high-risk areas.

The value of innovative risk transfer mechanisms to the Gulf economy is undeniable. The integration and availability of technology, such as satellite monitoring and virtual weather stations, which relay real-time data with customer-centric designed digital platforms, can deliver almost instantaneous resolutions and rapid claims settlements.  This opens up many new and exciting opportunities for Gulf insurers.

We’re actively working with clients across the MENA region to better manage cyclone risk. Just imagine the impact that the application of this technology and expertise could have in places such as Oman and the UAE that are facing similar and growing challenges. Local insurance markets cannot deliver the coverage needed on their own, but with the right partners and access to the right data and technology, not to mention the growing capacity available in the global parametric weather-based market, the options are there.

A number of countries facing similar challenges are considering the introduction of subsidies to kick-start the development of parametric schemes and regulators are beginning to see the value in this approach, offering further regulatory encouragement. This gives users more confidence in the role that parametric insurance can play in tackling systemic risks such as climate change and extreme weather than threaten food security.

Index insurance is highly transparent and uses objective and independently verifiable data, with the parametric trigger(s) judged by an independent third party. Its streamlined form and simplified structure make it highly customisable and easy to administer, resulting in the ability for claims pay-outs to be made considerably faster when compared to traditional indemnity-based insurance programmes. Parametric solutions are designed to provide the certainty and financial stability required in the immediate aftermath of a qualifying catastrophic event, enabling businesses and communities to recover faster during their time of need.

Furthermore, as policies are based on verifiable triggers, we now have the ability to design bespoke solutions that include the transfer of elements that have previously been challenging or even uninsurable in the past for our clients. Credit/default risk is one such exposure, with financial institutions being particularly exposed to event driven volatility.  This has significant implications for financial institutions that provide lending to commercial businesses as well as the agricultural sector.

Spikes in withdrawals and defaults on loans are often observed after disastrous events.  Climate shock is increasingly cited as one of the leading causes of high loan default rates, which if unmanaged can lead to portfolio level issues, resulting in the erosion of both equity and liquidity, increasing costs to provide financial services and limiting economic growth. Greater insurance coverage and better designed programmes can add an additional level of resilience and help to break this vicious circle.

The policies can also be highly tailored, allowing clients to obtain the exact coverage they need to successfully survive critical events, complementing their existing standard insurance policies by filling is any gaps in coverage, including Physical Damage and Business Interruption.

Parametric insurance places the client and their needs at the very centre, giving them the control and confidence that the chosen limit will be paid in full and within a matter of days following a qualifying event.

At MNK Re we have seen the difference that these solutions can make on the ground first-hand, providing our clients with the financial certainty needed to undertake business with confidence, knowing that they have cover in place should disaster strike. The decisions made by governments and regulators have the potential to fundamentally impact and build the resilience needed in this highly threatened part of the world.