Heavy rains and subsequent floods in the United Arab Emirates (UAE) last month are expected to deal a significant blow to the country's listed insurance companies, with major losses anticipated in the second quarter (Q2) of 2024.
The unprecedented rainfall, the heaviest recorded in 75 years, caused widespread damage across the emirates. This has led to a surge in insurance claims, putting a strain on the finances of insurers.
Analysts at Century Financial, a Dubai-based investment firm, point to a potential decline in stock prices for most insurance companies as a reflection of the expected losses. This trend has already begun, with major players like Dubai National Insurance (DFM-listed) and Abu Dhabi National Takaful (ADX-listed) witnessing significant drops of 27% and 20% respectively, according to Vijay Valecha, Century's chief investment officer.
The financial impact on insurers is likely to be two-fold. Firstly, they will face a direct financial burden due to payouts for flood-related claims. This could be particularly challenging for companies with weaker capital positions, potentially leading to delays in claim settlements.
However, analysts also highlight a potential mitigating factor:reinsurance. Many insurance companies reinsure a portion of their liabilities with other insurance companies. This means that for certain claims, the financial burden will be shared with the reinsurer, limiting the ultimate losses for the original insurer. The extent to which reinsurance policies will come into play depends on the specific terms of each contract.
Looking beyond the immediate financial impact, the floods could have a long-term positive effect on the UAE insurance market. The need for reconstruction and infrastructure projects in the wake of the disaster is expected to drive demand for various types of insurance. This could ultimately lead to increased insurance penetration in the UAE, a metric that reflects the percentage of the population with insurance coverage.
While the short-term outlook for listed UAE insurers is undoubtedly challenging, the long-term picture may be less bleak. The events of the past month could pave the way for a more robust and resilient insurance sector in the country.