Reinsurance companies have tightened terms and conditions, as well as increase their commission rates, on residential and commercial property risks in the Gulf and Middle East region in the wake of a number of fires in high-rise buildings, according to A.M. Best.
Reinsurers had already introduced stricter terms and conditions across the region, tightening up event limits and policy wordings, following on from regional instability.
However property line premium rates had largely continued their downward trend, A.M. Best explains, which is mainly a result of overcapacity as more reinsurers and specialty insurers have entered the local market than departed in recent years.
But while premium rates may have continued downwards, reinsurance coverage in the Gulf and Middle East is becoming more restrictive, the rating agency explains and with property insurance considered an underperforming business segment in the region, now also hit by a number of larger losses, it seems reinsurers have had enough.
Given the frequency of losses experienced over the last decade property risks in the Gulf and Middle East region is a major issue, and now insurers are coming under increasing pressure to increase their retention levels for high-rise and skyscraper buildings, in order to demonstrate they have aligned interests with their reinsurance providers.
At the recent reinsurance renewal, some of the major reinsurers pushed local insurers to retain a minimum of 30% of property risks, following on from the large number of fires in high-rise, skyscraper buildings in the Middle East.
“A.M. Best considers this to be a significant development for the market if implemented, given that commonly net retention levels were at 5% or lower on high-value risks,” the rating agency warned.
Mahesh Mistry, senior director of analytics at A.M. Best, explained; “During the renewal period leading up to 1 January 2017, reinsurance companies have responded to the recent fire losses by further tightening terms and conditions, and adjusting commission rates for residential and commercial property risks. Most insurers have been under pressure to accept quota share treaties with higher retention mainly as a result of weak performance stemming from poor risk selection.
“While insurers are moving toward higher retention levels, in part to ensure a greater alignment of interests, A.M. Best believes that they will need to monitor whether this increased exposure will impact their balance sheets in the event of a major loss. A significant rise in retention levels could require greater levels of capital and will increase volatility within underwriting performance, although GCC companies rated by A.M. Best tend to be well-capitalised.”
In recent years there have been a number of significant property insurance claims at high-rise and high-value buildings. These include the 2015 fire at the Address Hotel in Dubai on New Year’s Eve, and earlier that year at the Torch residential skyscraper in the same city.
The Address Hotel fire is estimated to have caused an insurance industry loss of between USD 200 million to USD 300 million, which, when you also consider the ACWA Power fire in Saudi Arabia, might have been sufficient to result in a negative return for reinsurance firms Middle East property portfolios, A.M. Best believes.
Yvette Essen, director, research & communications – EMEA at A.M. Best, commented; “In 2016, there was further pressure on reinsurers’ technical performance for their GCC portfolios, as although fatalities have been few, subsequent fires have resulted in material property and business interruption claims.”