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Market Segment Report: GCC Natural Catastrophe and Man-Made Losses

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Market Segment Report: GCC Natural Catastrophe and Man-Made Losses BEST’S MARKET SEGMENT REPORT July 25, 2018 GCC Natural Catastrophe and Man- Made Losses Highlight Importance of Enterprise Risk Management The Gulf Cooperation Council (GCC) countries have traditionally been exposed to low levels Man-made of weather-related claims, although cyclone Mekunu recently striking Oman and super cyclone events more Gonu in 2007 (as well as flooding in the United Arab Emirates (UAE) and Saudi Arabia) serve as reminders that the region is not entirely free of natural catastrophes. than offset However, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE have experienced lower activity the more for earthquakes, storms and flooding in comparison to other countries. This is more than compensated muted natural by the scale of potential man-made perils. Consequently, A.M. Best believes that (re)insurers need to increasingly focus on enterprise risk management (ERM) to manage the impact of possible claims. catastrophe activity in the According to the United Nations’ WorldRiskReport 2017 (which ranks countries according to their exposure to natural catastrophes), GCC countries are among those with the lowest region rankings on its RiskIndex, reflecting their experience of natural catastrophes in the region. All six GCC countries are at the lower end of the table with Qatar at the bottom (171) and Kuwait (138) occupying the highest position of all the GCC states. Analysis of precipitation in the GCC by the World Bank supports the view that most markets have enjoyed relatively benign weather conditions over the last decade. However, there have still been some weatherstorms with significant precipitation. Annual rainfall levels in the GCC show most recent floods are below historical precipitation levels, with the only exception being Cyclone Gonu – the strongest tropical cyclone on record in the Arabian Sea – which impacted Oman’s capital, Muscat. A.M. Best notes there have been some significant losses, partially as a result of economic growth and regulatory changes that have spurred greater insurance penetration since the 1990s. In addition, the region is subject to some earthquake risk, which has struck the Arabian Peninsula and the Strait of Hormuz. Analytical Contact: Mahesh Mistry, London Tel: +44 207 397 0325 [email protected] Impact of Cyclone Mekunu on the Omani Market Cyclones in the Sultanate of Oman were originally viewed to be a 1-in-50 year event. Market Development: Vasilis Katsipis, Dubai However, Oman has now experienced a number of cyclones within the last 11 years. Tel: +971 4375 2782 Cyclones Gonu (2007) and Phet (2010) had a significant impact on the Oman’s insurance [email protected] market. As a result, reinsurers tightened terms and conditions and introduced event limits within the country. Additionally, Oman enhanced its ‘early warning systems’, so that the Editorial Managers: country was better prepared for catastrophes, as well as introducing stricter building codes. Yvette Essen, London Tel: +44 20 7397 0322 [email protected] Gonu and Phet affected the more densely populated Muscat area, with little damage reported to Oman’s oil fields, although oil exports from its ports were much reduced. On the other hand, Richard Hayes, London Mekunu hit the southern part of Oman in May 2018, affecting the Dhofar district and northern Tel: +44 20 7397 0326 [email protected] Yemen. Salalah (population: 200,000) was the main city affected by the cyclone. Salalah has the 2018-102 largest port in Oman, and has refinery and many other industrial risks. The cyclone was severe, Copyright © 2018 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. No portion of this content may be reproduced, distributed, or stored in a database or retrieval system, or transmitted in any form or by any means without the prior written permission of A.M. Best. While the content was obtained from sources believed to be reliable, its accuracy is not guaranteed. For additional details, refer to our Terms of Use available at A.M. Best website: www.ambest.com/terms. Market Segment Report Gulf Cooperation Council (GCC) Region reaching wind speeds of 185km per hour, and with a rainfall equivalent to three years falling in a single day. Royal Oman Police, the Ministry of Defence, the Royal Airforce and other government agencies had made extensive preparations to ensure the safety of lives and property. Evacuation of low lying areas took place and safe shelters were provided. Warning systems helped limit fatalities, although four lives were lost during the event. A.M. Best expects claims for property, motor and engineering risks. The Muscat Securities Market has reported property damage and possible business interruption at listed public companies including Salalah Port, Raysut Cement, Sembcorp Salalah Power and Water, Dhofar Poultry and Dhofar Cattle Feed. Current estimates from Oman’s Capital Markets Authority state that insurance losses from the cyclone have reached up to OMR 75 million, with the majority of claims for property, motor and engineering. In comparison, insurance claims following the impact of Gonu and Phet were reported to be OMR 250 million and OMR 77 million respectively. A.M. Best also believes that insurance losses are likely to be mitigated by low insurance penetration levels in Salalah, combined with the precautionary measures taken by the Public Authority for Civil Defence. Local market participants are expected to be affected mainly by a higher frequency of attritional motor claims, but not to the extent of Cyclones Gonu and Phet. High-value risks are largely ceded to the global reinsurance market, with local players having some exposure through accumulations on low net limits on these risks. A.M. Best expects that Mekunu is unlikely to have an impact on credit ratings for A.M. Best- rated Omani insurers and regional reinsurers, although most companies are expected to suffer a moderate reduction in earnings. Exhibit 1 GCC - Non-Life Combined Ratio and Correlation to Precipitation (2006-2016) (%) 125% 100% 75% 50% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 *Correlation coefficient (ranges from -1 to +1). Positive numbers indicate positive correlation Source: World Bank Group 2 Market Segment Report Gulf Cooperation Council (GCC) Region Profits Not Necessarily Driven by Weather Events In many GCC markets, companies’ technical profitability is unrelated to weather events. A.M. Best has analysed the combined operating ratio (COR) of 132 GCC companies from its data set Best’s Statement File - Global to determine if there is a connection between COR and precipitation. Exhibit 1 shows there have been great variations among GCC markets – Saudi Arabia has the highest correlation between weather and technical profitability, and there is also a positive link for Oman and Kuwait. A different picture emerges for Qatar, the UAE and Bahrain, whereby COR is not driven by precipitation. This lack of correlation is partly a result of benign weather-related activity with claims primarily originating from man-made losses. In the UAE in particular, there is a greater probability of higher losses on damages related to fire and real estate rather than from precipitation. This demonstrates that although certain GCC countries are less prone to natural catastrophe events than other territories, the importance of man-made claims should not be underestimated. In the GCC, there is a heavy reliance on the reinsurance market. Although catastrophe losses are generally picked up by reinsurers, in the year of Gonu (2007), Oman’s COR surged to 123% mainly driven by a higher frequency of motor losses, from below 72% the prior year. The COR remained high for subsequent years, perhaps reflecting a late reporting of claims related to Gonu. Potential Implications of a Wider Reaching Event In A.M. Best’s opinion, a single large catastrophe event could have a severe impact on the region’s (re)insurance industry. Had Gonu’s reach been wider or focused on an area with higher insured values, such a weather system or catastrophic event would have had profound implications. Based on A.M. Best’s data captured on 164 companies, a single event with the same severity as Gonu across the GCC would have resulted in an estimated third of all companies requiring recapitalisation (see Exhibit 2). However, none of the companies rated by A.M. Best currently would have an issue with their capitalisation even if they were impacted Exhibit 2 GCC - Catastrophe Event with Severity Similar to Gonu* - Impact on Operating Profits and Capitalisation (Number of companies and USD billions) 180 1.4 160 1.2 140 40 USD 1 120 1.10 billions USD to 0.8 100 133 1.38 bn 80 0.6 60 124 0.4 Number of Companies 40 59 0.2 20 31 0 0 Capital required 2015 With 120% combined Companies requiring (USD billions) to capital injection reach MCR post event Profit making Loss making Companies requiring capital injection Minimum capital shortfall Maximum capital shortfall Notes: * Single event resulting in a non-life combined ratio of 120% Sources: – Best's Statement File – Global, A.M. Best data & research 3 Market Segment Report Gulf Cooperation Council (GCC) Region by a 1-in-250 year event as they are generally sufficiently capitalised to absorb a material catastrophe event based on current assumptions used by companies. The data show that 124 companies posted a profit in 2015, but had a major event caused the non-life sector to post a combined ratio of 120%, then 133 would have been loss making. More than a third (59) would be below their minimum capital requirement (MCR) levels, resulting in a need to replenish capital. A.M. Best estimates the total capital injection could potentially amount to USD 1.38 billion – assuming that reinsurers did not default and would have been able to pay obligations on time, and that there was no decline in investment values.
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