SPECIAL REPORT: MENA CONSTRUCTION RISK

Risk management in the MENA construction sector

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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.

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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.” . “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 , 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 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 caused flash floods after actually happening bringing three years’ rainfall in a single day. It was at the loss and the the strongest ever registered on the , bringing wind speeds of 185 claims end km/h (equivalent to a category 3 storm). The Port of 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 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. happening at the loss and the claims “These cyclones are supposed to be a 1-in-50 year event,” end,” he continues. “That’s probably observes AM Best’s Mahesh Mistry. “While other weather- because the loss cycle only occurs two related losses are a small blip on most companies’ ratios, the to three years down the line. However, Omani cyclones probably had a greater impact on the Omani there has certainly been a tightening of conditions and a more selective insurance market.” policy in relation to risks. The market is also trying to apply better risk management principles in the SAUDI ARABIA selection of risks to insure.” Flash floods and hail storms Jones thinks diversification (by geography and line of business) is the Flooding occurs almost every year in the Saudi Arabian city key to success in the region having of Jeddah, exacerbated by inadequate drainage systems witnessed the retrenchment of local and rapid development in recent years. In 2009 and 2011 players with portfolios too narrowly floods killed 123 people in the Red Sea city and caused focused on property, construction and economic losses of approximately $4 billion. There was energy risks. “[The GCC] was seen as widespread damage to over 10,000 homes and commercial an easy region in which to do business properties, vehicles and infrastructure, prompting a govern- - it was seen as a growth region, which ment-backed project to increase the size of existing drainage systems. it certainly is, and it’s also seen as a region which historically hasn’t Saudi Arabia has also seen its fair share of hail storms in recent years, with sustained many losses and was damage to new car imports being one of the biggest drivers of insurance relatively non-litigious,” he says. losses. In February 2018 torrential rain, hail and strong wind caused wide- “Those factors are now changing.” spread damage to vehicles and infrastructure across the port city of Medina. “I did actually choose to believe that the series of high-rise tower fires in Dubai and across the Gulf would COUNTRIES BY NATURAL DISASTER RISK harden the property market, but I’ve subsequently changed my mind,” he World Risk Index (calculated by the UN University Institute for Environment adds. “I don’t think it has changed the and Human Security). All have a “very low chance of disasters” according property market in any substantive to the index. way. Local cedants and brokers are still managing to get sufficient reinsurance support, and while this is : Saudi Bahrain: the case there won’t be any grassroots Arabia: change. There’s still too much 0.08% 1.76% capacity in the region and the market 1.1% remains very soft and ultra competitive.” n

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KUWAITx Setting the bar on Severe sandstorms In early 2018, severe dust storms occupational health & safety swept across Saudi Arabia, , Bahrain and Qatar, disrupting activity at ports and airports. While these Nadjib Bouzeboudjen, head of energy and storms are not uncommon across the engineering, Trust Re, looks at how the region’s MENA region, there are signs they are approach to construction health & safety is improving becoming more fre- and asks what more can be done quent and intense, according to the he collapse of a crane in Mecca World Meteorology in 2015, which caused the Organisation. deaths of over 100 pilgrims in the holy city’s Grand Mosque and injured hundreds more, Thighlighted the need for yet more stringent health and safety construction ABU DHABIX practices. The crane’s safety experts admitted they had no license to operate the crane and that At risk of sea level rise? operational safety measures were outdated. In March 2016 torrential rain caused Standards in the approach to construction health & safety widespread floods across the city, shut- have improved over the past ten years. Many of the drivers ting Abu Dhabi’s stock exchange and for this were the lessons learnt during the construction the city’s international airport. Low lying boom of the 2000s, where accidents and loss of life reflected cities such as Abu Dhabi are badly on the industry. vulnerable to rising sea levels Stricter occupational health and safety (OHS) standards have been introduced and best practice guidelines were set. caused by climate change, The high-profile nature of many of the projects around the with artificial shoreline, region also means there is significant pressure to adhere to islands and breakwaters construction standards. The eyes of the world are on the also at risk, according to region thanks to projects such as the Dubai 2020 World the UAE Climate Change Expo and NEOM city in Saudi Arabia. Risks and Resilience report. Failure to comply with health & safety standards can cause workplace accidents and have a significant reputational impact. It can also potentially lead to fines and DUBAIx even criminal convictions. Ministry of Labour inspectors Earthquakes and skyscrapers - a worrying mix? carry out regular on-site inspections to check that standards are being adhered to. While the Gulf region’s earthquake exposures are rela- Contractors and their senior officers that are considered tively low, the Bam earthquake in south-eastern to have taken a negligent approach or breached other health Iran in 2003 killed over 26,000 people. & safety provisions can be prosecuted. Liability can include Tremors from more recent quakes in Iran criminal sanctions, fixed compensation, civil compensatory in 2008 and 2013 were felt in Dubai and damages, contractual liability and administrative penalties. other parts of the Emirates, a concern Re/insurers inevitably have a role to play as well, by given the high number of skyscrapers in refusing to cover projects and contractors that do not the city (over 500). From 2014, new regula- demonstrate they are adhering to OHS. tions were introduced requiring that buildings of The most fatal hazards are lifting operations, work at 10 floors or more should be built to withstand earthquake height, excavation work and vehicle movement on site. Soaring summer temperatures can lead to accidents if shaking of up to M5.9. workers become dehydrated and delirious. For this reason, the UAE has introduced a mandatory midday break rule, COUNTRIES BY NATURAL DISASTER RISK where workers are encouraged to rest during the hottest part of the day. The rules are strictly enforced and firms found to have breached the designated break time can be fined up to Dh50,000. All these efforts to improve OHS have borne fruit. Between 2012 and 2013 there was a 32% reduction in the number of workers killed due to falls at work in Abu Dhabi, UAE: Oman: Kuwait: for instance. However, more recent statistics from 2016 from 1.84% 2.75% 3.26% the Health Authority Abu Dhabi show that 38% of occupational injury deaths are still due to a fall or being hit by a falling object, suggesting there is still room for improvement.

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