UAE: Insurers' profits could drop up to 25% due to rains in April

The UAE insurance companies' profits could drop by up to one-fourth in the second quarter due to unprecedented rains recorded on April 16, which caused severe property and vehicle damages for residents. Smaller players are expected to face liquidity and solvency issues as a result of these record rains.

Industry insiders say that the highest rainfall in the UAE in 75 years could push insurers' profits down and may cause some of them to incur losses, but investment income could mitigate the losses.

Post the rains in April, insurers witnessed a massive increase in claims related to automobiles, villas and commercial properties. Some industry insiders suggest up to 100,000 vehicles were damaged during the rains.

“The combined effect of increased claims and higher reinsurance costs is projected to reduce profits significantly. Estimates suggest that profits could drop by as much as 15-25 per cent compared to the previous quarter, depending on the insurer's exposure and reinsurance arrangements,” said Salman Shah, senior consulting actuary at Lux Actuaries and Consultants.

According to Badri Management Consultancy, UAE-listed insurance firms’ revenue surged 24 per cent to Dh8.5 billion in the first quarter of 2024, compared to Dh6.9 billion in the corresponding period the previous year. Profits after-tax rose 19 per cent to Dh654 million in Q1 2024.

Reinsurance coverage helps

Salman Shah said that the April 16 rains severely impacted the profitability of UAE insurers due to a significant increase in insurance claims.

"This situation has strained the financial resources of many insurance companies, especially those with minimal reinsurance coverage or lower capital buffers. Guy Carpenter's updated estimate of insured losses amounts to $2.4 billion, with motors' share of $250 million. The property claim estimate increased significantly from the initial estimate of $650 million to $850 million, while motor updated losses were close to the initial estimate. The other major lines affected by rains are business interruption and travel insurance," Shah added.

He added that most insurers are expected to see a drop in profits rather than slipping into outright losses.

“The strong reinsurance coverage for major claims helps in mitigating the financial impact. However, some smaller and less capitalised insurers might face liquidity and solvency issues. Larger insurers with diverse portfolios and substantial capital reserves are better positioned to absorb the shock without falling into the red,” said Shah.

According to Badri Management Consultancy, solvency standings among companies are progressively facing greater strain. Out of 25 that disclosed their solvency in Q1 2024, 6 firms did not meet the solvency criteria.

Insurers have also increased the motor rates after the rains to cover the losses and higher expected reinsurance costs, improving future business profitability.

• Record rains in UAE: Two months on, car insurance claims continue to be filed