The reaction to the fire at the Address Downtown hotel in the last hours of 2015 was commendable in that the New Year Eve’s firework display was not disrupted. Yet, it highlights the need to put in place the necessary insurance and risk management measures to deal with such hazards.
The Address Downtown Dubai, a 63-storey tower of around 300 meters tall and one of the UAE’s most luxurious hotels with 193 rooms and 600 apartments, caught fire on New Year’s Eve. The fire originated on the 20th floor at 9.30pm and spread to around 40 floors. Dubai Civil Defence and Police rushed to the site immediately and managed to evacuate more than 80% of residents in less than 20 minutes. Fourteen minor and one moderate injuries were reported, while one man suffered a heart attack during the evacuation process.
Thanks to the well-planned road network with dedicated lanes for emergency vehicles, fire brigades, ambulances and other machinery managed to swiftly reach the site despite the congestion in the area caused by massive New Year’s Eve crowds. Effective fire alarm and monitoring systems also helped to detect the fire early. All these meant that the celebrations could proceed as scheduled.
Despite the advanced level of risk management in Dubai government which sheltered the city from more dire consequences, the accident brings to the surface once again a serious issue which requires all stakeholders’ attentiveness. This is Dubai’s third high-rise blaze in three years, following the one in February 2015 at the 336-meter-high Torch, one of the tallest residential skyscrapers in the world. Fires also broke out in Dubai Skycourt Towers in 2014 and the Tamweel Tower in 2012. Other high-rise fires have also taken place in the neighbouring emirate of Sharjah in the past few years.
Material causes
Regardless of the reasons behind the fires, a real concern lies with the materials used on the exteriors of skyscrapers in the country and across the GCC. In 2013, the UAE updated the Fire and Life Safety Code requiring the external cladding to be fire resistant on all new buildings over 15 meters tall. Yet, experts in the UAE have previously warned that many of the country’s towers, especially those built before 2013, are covered with a highly flammable material, as the majority of high-rise buildings have a layer of combustible thermoplastic core along with aluminium composite panels cladding the exterior of the buildings.
Mr Tareq Marea, Director of General Insurance and Partner, Apex Brokers, Dubai, said it is common for vertical properties to have a higher spreading risk than horizontal ones, but the materials used for cladding obviously had a major role in spreading the fire. He added this needs to be revisited not only by the government, but also by the insurance companies who are holding these risks.
He said that it will not be economical to change these materials for built-up properties, “but it can be managed by imposing some safety factors, such as having an external fire sprinkler system, which is mostly used for low-rise buildings but can be adapted to high-rise ones”.
Risky race to the top
Fire premiums in the UAE in the years 2010-2014 have not grown in parallel with the increase in sums insured or wealth accumulations, particularly in properties. In 2014, fire premiums for the UAE reached AED2.24 billion (US$609.9 million) from AED2.27 billion in 2010, a drop of almost 1%, while paid and outstanding claims for the same period increased by around 23%. The gross loss ratio for fire reached 86% in 2014, compared to 59% in 2010.
Many experts and market players have repeatedly expressed fears about the growing cut-throat competition in the fire branch over the past few years. Unprofessional competition and price wars have placed non-motor lines, including fire, under pressure and this has been evident with several international reinsurers starting to refrain from accepting business from a number of MENA countries, including Saudi Arabia.
“Premium growth is related more to the rate reductions provided by the insurance companies in the market as fierce competition is dragging prices south,” said Mr Marea. He ruled out the possibility that sums insured have diminished, though these could have flattened because new projects have considerably decreased compared to five years ago.
The main reason behind the severe competition is the huge available capacities in the market. Local companies’ capacities can absorb most of the risks within the region, which will leave the pricing process with less supervision.
To overcome the unprofessional competition, he recommended reducing capacities for companies and cutting their inward facultative acceptance level, applying minimum rates for certain perils in the coverage, and monitoring the pricing process by using rating engines.
“Insurance coverage should be compulsory for certain properties,” he said, adding that the Saudi market has concentrated on technical results rather than premium growth, with the focus shifting towards setting deductibles to manage the market’s loss ratios. “I see this as a very good step. It will take time, but it will work.”
Lessons for the future
For the Address Hotel, though the size of losses caused by the blaze has not been announced, the total sum insured, according to some market sources, is estimated at around US$500 million covering risks including fire, third-party liability and others, including business interruption.
Consequential losses, indirect losses and liabilities are usually much higher than the material damage itself, said Mr Marea, pointing out that this is the case with the Address Hotel fire. He added that experts need to calculate the right consequential covers and ensure they respond precisely to the market’s needs.
While the frequency of such losses remain relatively low, the stakes are considerably high. The Address Hotel fire is a reminder for insurers to set in place the right tools to manage risks and become more engaged with the nature of the perils before it is too late. Collective and proactive measures to implement risk management as processes are necessary.