Insurers in GCC markets are coming under pressure to increase retention levels for high-rise buildings to demonstrate their alignment of interests with those of reinsurers, according to new research by A.M. Best.
In a new Best’s Briefing titled “GCC insurers must monitor impact of changing terms for high-rise property insurance”, the rating agency noted that global reinsurers have introduced stricter terms and conditions over the past five years, including event limits and tighter policy wordings following regional instability.
Property insurance has been a major issue given the frequency of losses experienced over the past decade. For many insurers and reinsurers, it is an under-performing business segment, and in many cases loss-making.
According to the briefing, during the recent renewal period, some major reinsurers stipulated that local insurers must retain a minimum of 30% of risks following a large number of fires in high-rise buildings in the Middle East. A.M. Best considers this to be a significant development for the market if implemented, given that the common net retention levels were at 5% or lower on high-value risks.
Mr Mahesh Mistry, Senior Director of Analytics at A.M. Best, said: “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.”
In the past three years, significant claims for property insurance covering high-rise and high-value buildings have included fires in Dubai in 2015 at the Address Hotel on New Year’s Eve, and earlier that year at the Torch residential skyscraper. The loss estimate for the Address Hotel claim is estimated between US$200 million and $300 million, which, if taken together with the ACWA Power fire in Saudi Arabia, could have been sufficient to result in a negative return for most international reinsurers’ Middle East property portfolios.
Ms Yvette Essen, Director of Research & Communications – EMEA at A.M. Best, said: “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.”