News Middle East28 Apr 2021

MENA:Nat CATS and the need for risk modelling

| 28 Apr 2021

The MENA region is prone to Nat CAT risks and there is a need to build capacity and develop the necessary means to face the potential consequences of such disasters, said experts at a recent webinar organised by the General Arab Insurance Federation (GAIF).

There is a need to raise awareness of the threats arising from natural hazards and the importance of creating the necessary models to ensure preparedness in the face of the risks, said GAIF secretary general, Mr Chakib Abouzaid.

Dealing with Nat CATs is a common responsibility shared by governments, institutions and individuals, he emphasised.

The Beirut Port explosion in 2020 is the worst event the region has experienced in modern history, said Mr Abouzaid noting that other cities in the region remain susceptible to Nat CATs and manmade risks. “Cities like Alexandria or Casablanca might face potential cumulative losses of $1bn because of climate change as per the World Bank, which also might cause a decline in the GDP of countries like Tunisia (6.8%) and Yemen (23.9%).”

He added that the protection gap globally is expanding with only 36% of economic losses being covered by insurance. “In 2020, the protection gap is becoming more obvious especially in developing countries. However, we have many initiatives in the Arab world. In Algeria, CCR is managing a Nat CAT pool and there is a Nat CAT fund in Morocco. Other similar initiatives are being created in some Arab countries including Tunisia and Oman.”

New systemic risks

Systemic risk is increasingly inclined to spread globally due to the interconnectedness of risks, said Robert Muir-Wood, RMS chief research officer and part of the global executive/ leadership team.

He noted that the value of businesses is increasingly becoming intangible, as reflected by intellectual property and capabilities, instead of physical form. This is where systemic risks can appear. “For an insurer, systemic risk could arise from a wide range of non-damage related impacts, which might be a significant problem,” he said.

He noted that new classes of systemic risks, that could entail potential liability, have been discovered such as the external cladding installed on many buildings to reduce energy consumption. The cladding tends to catch fire easily – a problem in the UK and other locations in the world.

Since 2010, there have been 21 building fa├žade fires that spread 10 storeys or more. Eight of the fires were in the UAE and four in China. “There is an exponential increase in the occurrence of these events because of the increased use of claddings in new buildings.”

Grey swans

Basing estimates of the costs of hazards on historical data alone would not be the most efficient way to identify and deal with systemic risks, said Mr Muir-Wood. “For example, we have numerous instances in the past 20 years of events which had no precedent. We call them grey swans: credible events not yet experienced. It is a systemic challenge to move from a historical perspective on catastrophe risk to actually understanding what has the potential to be there. That is why we need modelling.”

The Beirut Port explosion was a grey swan event, he added. “Significant risk that wasn’t fully realised. (Therefore,) we can’t rely on just history alone to tell us what can potentially happen. The tsunamis on the north coast of Oman are now evidence of the need for modelling.” Climate change is another paradigm in the sphere of systemic risk, he said.

Systemic risk and insurance

From the COVID-19 pandemic experience, underwriters discover that they were covering business interruption losses without intending to do so, said Mr Muir-Wood.

He added that the ambiguity of the wording underwriters use along with the extension in coverage they provided to serve their clients have entailed considerable costs. An example is the COVID-19 losses that Hiscox has suffered, which led to a pre-tax loss of $268.5m in 2020.

“The function of insurance has to be cleaned up and simplified to avoid such situations where unintended coverage creeps in through some systemic event of this kind,” he said.

Dealing with Nat CATs in MENA

Dr Lurrent Marescot, senior director, as well as market and product expert EMEA at RMS, said that the MENA region is exposed to many Nat CAT threats especially with climate change and the increased amount of exposures at risk. “There is a special concern from floods or flash floods from excessive precipitation which hit many parts of the region.” He emphasised that operators need to understand their exposures so as to locate risks in their business.

The Moroccan experience

Sharing the Moroccan experience, Mr Abderrahim Chaffai, director of the Moroccan Solidarity Fund Against Catastrophic Events (FSEC), said that Morocco’s strategy towards mitigating the impacts of natural catastrophes was triggered after the earthquake that struck the country in February 2004.

He added that a new strategy was adopted in 2016 to manage Nat CATs and climate change’s related risks with more focus being given to strengthening preparedness to deal with them.

“In this framework, the government has passed a new law that mandates a national risk insurance programme (through a private-public mechanism) that was implemented in 2020. The government has also adopted a national disaster risk management strategy for the period 2020-2025, including disaster risk financing, based on building preparedness to manage Nat CAT risks,” said Mr Chaffai.

He explained that the government has implemented a dual mechanism against natural and manmade disasters. In addition to a private insurance scheme, and making catastrophe risk insurance coverage compulsory for insured people, households and firms, the other mechanism is the public compensation scheme which provides basic compensation for the uninsured.

Nat CAT modelling

Mr Ahmed Al-Qarishi, chief risk officer and chief actuary at Saudi Re, explained the necessity for modelling to deal with Nat CATs in light of their growing threat in the region.

About the main Nat CAT risks in the Arabian Peninsula, he said that earthquake is the first most relevant peril affecting Saudi Arabia and the region. He noted that the region surrounding the peninsula has witnessed 3,633 earthquakes with a magnitude of above 2.5 since 2000. “This should prompt the insurance sector to seek more efficient means to face such a threat. The main mechanism is by designing suitable models that look into these risks and create ways to manage them,” said Mr Al-Qarishi.

Flooding is the second most relevant peril affecting Saudi Arabia he added. “Extreme rainfall events result in severe flash floods and urban flooding, which could be very costly especially in populated cities in low-lying areas such as Jeddah, Makkah and Riyadh.”

The third major risk in Saudi Arabia and beyond arises from the Arabian Sea tropical cyclones, which strike mainly during May-June and July-August. “Cyclone Mekunu (in 2018) is an example of a cyclone which has affected the insurance industry,” he said.

The Saudi government, as part of its Vision 2030, is keen to improve the means to deal with natural hazards and their potential impact on the economy, he said noting that there have been some initiatives in that direction.

In the insurance industry, he noted that there were calls made a few years ago to establish a fund for natural disasters and there are current attempts to revive this initiative.

Commenting on the recent agreement signed between Saudi Re with RMS, he said that cooperation is currently based on using their models with the aim of developing these in the future to specifically address the Saudi environment. “The ultimate goal is having insurance and reinsurance companies capable of assessing risks and efficiently dealing with the consequences. (…) Hopefully, the government will support such a programme as it will strengthen protection of the kingdom and its resources.”

Sponsored by RMS, the webinar was held with the theme “Nat CAT and Manmade Risks in MENA: Mastering the Current Challenges & Owning the Future Opportunities”. This is the 6th webinar in GAIF’s series of virtual events. Over 340 participants attended this event.

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