The UAE insurance companies’ profits could drop by up to one-fourth in the second quarter due to unprecedented rains recorded on April 16, which caused severe property and vehicle damages for residents. Smaller players are expected to face liquidity and solvency issues as a result of these record rains.
Industry insiders say that the highest rainfall in the UAE in 75 years could push insurers’ profits down and may cause some of them to incur losses, but investment income could mitigate the losses.
Post the rains in April, insurers witnessed a massive increase in claims related to automobiles, villas and commercial properties. Some industry insiders suggest up to 100,000 vehicles were damaged during the rains.
“The combined effect of increased claims and higher reinsurance costs is projected to reduce profits significantly. Estimates suggest that profits could drop by as much as 15-25 per cent compared to the previous quarter, depending on the insurer’s exposure and reinsurance arrangements,” said Salman Shah, senior consulting actuary at Lux Actuaries and Consultants.
According to Badri Management Consultancy, UAE-listed insurance firms’ revenue surged 24 per cent to Dh8.5 billion in the first quarter of 2024, compared to Dh6.9 billion in the corresponding period the previous year. Profits after-tax rose 19 per cent to Dh654 million in Q1 2024.
Reinsurance coverage helps
Salman Shah said that the April 16 rains severely impacted the profitability of UAE insurers due to a significant increase in insurance claims.
“This situation has strained the financial resources of many insurance companies, especially those with minimal reinsurance coverage or lower capital buffers. Guy Carpenter’s updated estimate of insured losses amounts to $2.4 billion, with motors’ share of $250 million. The property claim estimate increased significantly from the initial estimate of $650 million to $850 million, while motor updated losses were close to the initial estimate. The other major lines affected by rains are business interruption and travel insurance,” Shah added.
He added that most insurers are expected to see a drop in profits rather than slipping into outright losses.
“The strong reinsurance coverage for major claims helps in mitigating the financial impact. However, some smaller and less capitalised insurers might face liquidity and solvency issues. Larger insurers with diverse portfolios and substantial capital reserves are better positioned to absorb the shock without falling into the red,” said Shah.
According to Badri Management Consultancy, solvency standings among companies are progressively facing greater strain. Out of 25 that disclosed their solvency in Q1 2024, 6 firms did not meet the solvency criteria.
Insurers have also increased the motor rates after the rains to cover the losses and higher expected reinsurance costs, improving future business profitability.
Investment income to offset impact
Jessica Botelho-Young, associate director at AM Best, said the UAE floods will impact insurers’ profitability for 2024, particularly those that have a greater exposure to motor comprehensive risks where flood risk is covered)in Dubai.
“This will include local insurers and those that have subsidiary or branch operations in the market. Property and engineering claims will be largely ceded to the international market. There may be some accumulation of net loss exposures, utilisation of reinsurance capacity and ability to restate reinsurance cover if exhausted, potential changes to T&C, including price and commission rates at renewal – this could depress future profitability,” said Botelho-Young.
She added that many insurers’ losses for the quarter could partly be mitigated by investment income.
Investment income, according to Badri, increased from Dh559 million in Q1 2023 to Dh754 million in Q1 2024 which is causing the overall profitability to go up.
Botelho-Young added that there may also be some spillover in Q3 as loss amounts are revised up or down, or companies pushing some losses in the next reporting period.