Climate change continues to present significant risk for the global insurance industry even as stakeholders are making notable progress to mitigate exposure and boost resilience. The Middle East is exposed to climate change as well and more action is required, said speakers at the 6th Dubai World Insurance Congress, held in the UAE last month.
The understanding of sustainability in the financial sector is evolving, said Global Ethical Finance Initiative (GEFI) global steering group chair Susan Rice in her keynote speech opening the sixth edition of Dubai World Insurance Congress (DWIC).
“Financial institutions and central banks are focused beyond climate change. [They have become] focused on the interplay between climate change and issues that arise in both nature and society,” Dame Rice said.
She added that as insurers are financially on the frontline against climate risk, they have a strong desire to improve climate resilience, both from a physical and societal point of view. “The net-zero insurance alliance is one example of how the industry is cooperating and making its own net-zero transition.”
She said that regulations matter in finance but cannot keep up with every new practice; therefore, organisations must have a culture that embraces ESG in place to ensure that allocating capital in a future-positive way is inherent to the organisations’ professional function and duty.
Maintaining resilience amid macroeconomic concerns
The main concern for investors is the possibility of seeing disinflation - while debt and interest rates risk are also among the major worries, said Swiss Re group chief economist Jerome Haegeli.
Global debt has increased by 70% since 2008, while today the global debt to GDP ratio stands at around 12.5%. “The good news is that the GCC region has seen very small increase in the debt ratio,” he said.
He added that 2022 was challenging and saw the repricing of risk as well as hikes in interest rates. Nonetheless, the priority for central banks is to fight inflation. “There is a lot of determination to fight off inflation … the credibility of central banks is at stake. It is their responsibility to have price stability in the first place.”
Mr Haegeli said that inflation shows signs of easing, although he expects inflation to remain persistent and above policy target levels in 2023 and 2024. As a result, the negative yield environment is over but monetary tightening is to continue, albeit at a slower pace with lower increments.
“[The year] 2023 is probably going to be much better even though it’s going be more challenging,” he said.
The view in the Middle East
Despite a weaker global environment, economic growth in the Middle East region will remain resilient supported by government spending on infrastructure projects, said Mr Haegeli.
Growth in the GCC was supported by commodity prices in 2022. As for 2023, growth will be slowing down as commodity prices will be coming down, he pointed out.
On the insurance industry in the region, the outlook is positive, he said. “On the price front, it is a soft market … prices are too low and there is a need to reprice risk because of the various pressure points we have it in the industry, be it on capital (and) uncertainty of inflation.”
However, opportunities remain because insurance penetration is below 2%, lower than the average of emerging markets. Therefore, he said, the insurance market in the Middle East and Pakistan remains resilient with increased growth rate in recent years, and three to four times higher premium growth in the post-COVID period compared to the developed market average.
The Middle East and Africa are exposed to climate change, said Mr Haegeli, adding that projections suggest that GDP growth will be lower by 27% by 2050 in a scenario with temperature increase by 2.3 degrees.
He said that the Middle East has begun to act on mitigating climate risks. However, there is a substantial global investment gap ($271tn) that has to be filled to reach net-zero by 2050, which provides opportunities, noting that there is a need to increase sustainable finance.
Status of the market
Howden Tiger head of industry analysis and strategic advisory David Flandro said that following serious shocks faced over the past three years, including the pandemic, Nat CAT losses as well as disruptions in the supply chain, Russia president Vladimir Putin’s invasion of Ukraine along with interest rate and inflation changes, the reinsurance sector has lost 17% of its dedicated capital.
“Nothing like that has happened since the financial crisis,” he said.
Commenting on the recent renewals, he said, “Because reinsurers couldn’t get retrocession coverage, they couldn’t write as much reinsurance as before. There were gaps in programmes. The result of this, however, is that risk was adjusted, property catastrophe reinsurance rates increased by 37% by 1/1 renewals, they were up by 30% in Europe and 50% in the US. We are undoubtedly in a hard market.”
Zurich head of commercial insurance Middle East Peter Englund concurred and said that the cycle is not dead and that the industry continues to experience a hard market.
“Maybe the swings are not as meaningful and distinctive as in the past … after three years of meaningful CAT losses, significantly over the historic average … we are still in a hard market but the capital is very much hidden on the sidelines and ready to be deployed. This is a big different from the past.”
Oneglobal Broking group CEO Mike Reynolds said that the macroeconomic environment and the political instability around the world have a huge effect on insurance and reinsurance markets.
“The financial turmoil we see increasing interest rates and trying to control inflation – central banks might not be able to bring it under control because this time there are other factors at play such as the dislocation of the labour market that happened post-COVID and the companies trying to cover the losses they have made during the pandemic period. Therefore, it will take more time for central banks to get inflation under control.”
Organised by Global Reinsurance and co-hosted by the DIFC, the 6th annual DWIC gathering was held with the theme ‘Resilience: Navigating the storm to a better world’. M