SPECIAL REPORT: MENA CONSTRUCTION RISK Risk management in the MENA construction sector IN ASSOCIATION WITH globalreinsurance.com | 09 SPECIAL REPORT among emerging markets. The Dubai International Financial Centre has become the recognised hub for the industry, attracting specialist re/insurers and brokers from Europe, London, Asia, Bermuda and beyond to set up offices. More recently, a number of MGAs with Lloyd’s backing have entered the DIFC. High levels of competition have, however, exerted downward pressure on rates. “Price continues to be highly competitive in the GCC and property insurance prices have seen a 10-15% reduction”, says Ramesh Viswanathan, senior underwriter, engineering, Trust Re. “However, a conscious decision is taken to underwrite keeping in mind selection of risks based on risk management practices and previous claims experience.” According to the MENA Insurance Pulse 2018, the region’s insurance markets are expected to continue outgrowing GDP over the next 12 months. It notes that price adequacy in commercial lines - especially property business - has improved in response to the industrial and commercial property fire losses, but that “a higher frequency of large Fire, wind, water claims and deteriorating reinsurance contract terms and conditions took their toll on technical profitability”. and earth: An added attraction for international carriers seeking diversification is the low level of Re-evaluating the exposure to natural catastrophe risk. However, losses resulting from fires and natural perils have begun to erode hazard exposures underwriting profitability. When some reinsurers have pulled back their capacity, citing unprofitable rates on As a massive growth region, the past decade has seen a line, others have swiftly moved in to construction and engineering boom across the Middle East take their place. Last year’s blaze at Dubai Torch and North Africa. However, with growing assets at risk and tower – the second at the residential a worsening loss experience, a correction is underway in the high rise in less than three years famously-competitive MENA and GCC re/insurance market, – raised concerns that the risk posed driving a more sophisticated approach to risk management. by insulation and cladding materials was higher than previously thought. Across Dubai, it is estimated there are 1,000 tower blocks with combustible ulf Cooperation Council Encouraged by trillions of dollars cladding, which is used to keep (GCC) nations in particular of investment in mega construction buildings cool in the summer. boast a robust pipeline of projects and a construction boom, The cladding was also a culprit in construction, transport and MENA has been awash with the New Year’s Eve blaze in 2015 at energy projects worth over international re/insurance capacity in the Address Hotel, adjacent to the G$2.4 trillion, according to Deloitte. recent years. As of September 2017, Dubai Mall, which was caused by an Airports, high-speed railways, metros, total MENA insurance premiums had electrical short circuit. The fire, which bridges, skyscrapers, economic cities reached $57 billion, according to AM spread rapidly due to external and oil refineries are among the Best. However there is plenty of room cladding, was estimated to have cost projects underway. All require for further growth with MENA the insurance industry $800m in specialist insurance and reinsurance countries still reflecting some of the damage, in addition to a further $400m backing. lowest insurance penetration rates in business interruption. 10 | globalreinsurance.com IN ASSOCIATION WITH Fires are also a frequent occurrence region is still low.” during the construction phase of Mistry notes the growing RAISING THE BAR projects. “We have seen quite a few frequency of property and fire losses,” says Viswanathan. “Most engineering losses, including the $2.5 International reinsurance companies, of them are due to fire as a result of billion Abu Dhabi National Oil brokers and service providers have a negligence when it comes to Company (Adnoc) claim for a role to play in improving risk operation, construction practices, refinery fire and $250m to $350m management within the GCC improper storage and failure of fire Sohar Aluminium plant fire loss in protection systems.” Oman. “An insurer would need a construction and engineering sector. “In order to minimise this, local very big and diverse portfolio of The decision to provide cover, including authorities have come up with new risks to absorb a couple of hits in commercial property, should be based construction guidelines and are giving the market. This is all dictated by on a close partnership approach, says guidance to existing facilities,” he the international market and there’s Nadjib Bouzeboudjen, head of energy continues. “Insurance companies need a lot of capacity there in the and engineering, Trust Re. to check whether these rules are reinsurance sector, and they’re “Reinsurers can share their expertise, complied with while doing regular happy to have these terms for the data and modelling,” he explains. “On project monitoring. “In countries such insurance companies there.” the other hand reinsurers can also as Saudi Arabia, the regulator has Across broader MENA the assist the [GCC] governments in introduced a new deductible scheme earthquake exposures Turkey, Iran, enforcing high standards. Usually the which is compulsory for Property and Yemen and parts of North Africa are Engineering lines of business. This well understood. The GCC policies themselves contain warranties gives some additional comfort, meanwhile has traditionally been and limitations requiring the although price continues to be considered a relatively benign region contractor to respect high construction competitive.” where natural hazards are standards and stating that any Various fire safety rules have been concerned. However, a relatively violation of those would typically introduced since 2012 in an effort to high frequency of cyclones in Oman result in the loss of coverage. So mitigate the risk and prevent the use along with flash floods and hail that’s an additional incentive for of some of the more combustible storms in other parts of the region, contractors to respect the highest materials being used in construction is changing the view of the potential standards of construction.” of high-rise towers. At the same time, for sizable losses emanating from Reinsurers can also raise the bar the re/insurance industry is making natural disasters. by insisting the underlying insurance recommendations of its own where In an effort to better understand construction materials are concerned, and price for these exposures, re/ industry retains more and acts as a and practising more stringent insurers are calling for investment risk partner and not a risk trader. underwriting discipline. in catastrophe modelling for the Traditionally, local insurers have “Following the Address fire loss region. “The categorisation of non ceded a large proportion of the risks there has been a change in the cat has changed a little bit with the underwritten into the international underwriting environment,” notes realisation that in a low cat zone you reinsurance markets in return for Mahesh Mistry, senior director at AM can still have storms, floods and commission payments. This is Best. “That’s probably as a result of a other catastrophe losses,” says beginning to change, with new push from the reinsurance market to Wayne Jones, partner at Clyde & Co. principles-based regulation in many charge a higher premium for “Ten years ago you didn’t have countries and minimum capital properties’ construction before 2012 metro stations with underground requirements driving a more that used the old aluminium cladding. electrical control units.” sophisticated approach. “Certainly However, premium rating in the “The absence of drainage here, ▼ exposure and accumulation management is improving for the Middle East & North Africa Reinsurers – larger players in the market. “And we Five-Year Average Non-Life Underwriting Performance (2012-16) are seeing companies using geo- (A comparison between loss ratios and combined ratios) coding and buying cat protection. We are also seeing a shift to local surveys 100 being conducted,” he continues. 80 “Although the approach is quite varied. You have the big loss 60 adjusters there in the market and 40 Loss ratio Combined ratio there could be a discrepancy in terms of how they see things compared to 20 68% 100% some of the companies that are using 10 the survey reports, so it’s a gradual improvement of knowledge, but there’s 0 still a lot of investment that needs to Notes: Excludes companies for whom financial data were not available. be done to get things to a much better Source: A.M. Best data and research standard.” globalreinsurance.com | 11 SPECIAL REPORT GCC: Counting the cost of mounting extreme weather losses The pricing of these OMANx risks has not kept Three 1-in-50 tropical cyclones in 11 years pace with what is In May 2018 Cyclone Mekunu caused flash floods after actually happening bringing three years’ rainfall in a single day. It was at the loss and the the strongest tropical cyclone ever registered on the Arabian peninsula, bringing wind speeds of 185 claims end km/h (equivalent to a category 3 storm). The Port of Salalah was closed for several days after being left without power or communication systems. According to initial estimates, overall losses could amount to several hundred million dollars, with around a third of these insured, accord- ing to Munich Re. because it hardly ever rains, means that when there is a rainstorm there Oman has seen three powerful storms in the space of 11 is a good chance these new years, including cyclone Phet in 2010, which had wind speeds installations could get flooded. And of up to 120 km/h when it made landfall on Oman and with a more urbanised coastline caused damage estimated at $780m. 2007 brought Cyclone inevitably there’s going to be more Gonu, previously the strongest cyclone on record in the Ara- damage as a result of a cyclone.” “The pricing of these risks has not bian Sea, which cost an estimated $4.2 billion in economic kept pace with what is actually losses.