Countries belonging to the Gulf Cooperation Council (GCC) must increasingly focus on enterprise risk management (ERM) strategies following a recent series of both natural catastrophes and man-made losses, according to a report by rating agency A.M. Best.
While countries such as Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) typically experience relatively little natural catastrophe activity, Cyclone Mekunu’s recent impact in Oman, as well as 2007’s super cyclone Gonu and flooding in the UAE and Saudi Arabia shows that these areas are not totally immune to weather-related losses.
Furthermore, A.M. Best proposed that low levels of natural catastrophes in the GCC region are more than compensated for by the scale of potential man-made perils, which have historically been caused by economic growth and regulatory changes.
Since the 1990s, these perils have spurred greater insurance penetration in many GCC countries, which now rely heavily on the protection offered by the global reinsurance community.
Although catastrophe losses in the GCC region are generally picked up by reinsurers, in 2007 Gonu caused Oman’s combined operating ratio to surge from 72% to 123%, mainly driven by a higher frequency of motor losses.
A.M. Best warned that a single large catastrophe event could have a severe impact on GCC re/insurers, calculating that a third of companies would require recapitalisation if they were hit with an event with the same severity as Gonu.
Nevertheless, A.M. Best considers the global reinsurance sector well placed to continue to support the GCC market, as providers of convergence capital have been able to re-load their capacity despite hurricane activity in 2017.
It found that UAE markets in particular have benefitted from what appears to be a period of inexpensive capacity, and that after a period of decline whereby the cession ratio fell from 54% in 2007 to 43% in 2011, the cession ration for the overall UAE market had returned to 54% by 2016.
The agency added that many other local markets have benefitted from declining reinsurance rates and increased their cession rates, particularly for large-value items such as energy risks.
As part of their ERM practices, A.M. Best advised that insurers question whether counterparty risk has remained stable throughout the period and ensure reinsurance buying is linked to risk appetite, in addition to evaluating the viability of their business model should reinsurance capacity be reduced drastically.
