< PreviousWords by: Nivetha Dayanand WEATHERING THE STORM How is climate change rewriting the insurance rulebook? fi nancemiddleeast.com10 | June 2024 SPOTLIGHTfi nancemiddleeast.comJune 2024 | 11 SPOTLIGHTSPOTLIGHT fi nancemiddleeast.com12 | June 2024 experienced severe rainfall, insurers must thoroughly evaluate the impact on their models and methodologies. “The changing climate patterns and environmental damage will likely require updates to actuarial models and risk assessment methodologies,” noted Piyush Dubey, Partner, Financial Services Practice and Monti Daryani, Manager, Financial Services Practice, Kearney Middle East and Africa. “Developing new risk models is crucial, along with ensuring a more sustainable distribution of risk and value among insurers, reinsurers and alternative risk transfer systems.” He is right. Traditionally, models relied on past weather patterns, but climate change throws a curveball. The rising temperatures, intensifying droughts and spreading desertifi cation in the Middle East are forcing insurers to revamp their approach. Insurers are now considering tailored products, risk-based pricing and data- driven decisions. DATA IS THE FUTURE In the face of a changing climate, historical data becomes increasingly unreliable. Data analytics and predictive modelling are emerging as essential tools for insurers navigating this new reality. By crunching vast amounts of weather data alongside historical claims information, insurers can build more sophisticated models that account for the rising frequency and intensity of extreme weather events, like heatwaves, droughts T he insurance industry relies heavily on historical data to assess risk and set premiums. However, shifting climate patterns, with more frequent and intense weather events like fl oods and wildfi res, challenge these traditional models. Rising sea levels and changing precipitation patterns is forcing insurers to re-evaluate risk profi les in certain areas, potentially leading to adjustments in premiums or coverage availability. Additionally, new climate threats like heat waves and droughts require adaptation of actuarial models. To navigate this uncertainty, the insurance industry is embracing data-driven modelling. The technology incorporates climate science, stress testing fi nancial resilience under various climate scenarios, and even developing new insurance products to address specifi c climate risks. “By adapting and innovating, insurers can continue to off er protection in a changing world, but collaboration with governments and climate scientists will likely be crucial for building a more resilient future for all,” said Neeraj Gupta, CEO of Policybazaar.ae. In April 2024, the Gulf region, typically known for its arid climate, was overwhelmed by an unprecedented rainfall that exceeded a year’s worth in just one day. This extraordinary event led to severe fl ooding, particularly aff ecting the UAE and Oman. Dubai was among the hardest-hit cities, experiencing its largest single day of rainfall in the 75 years since records began in 1949. The downpour caused signifi cant disruptions, fl ooding roads, buildings, apartments and critical infrastructure, including airports. Since the GCC region has only recently and fl oods. “This allows them to pinpoint areas most susceptible to these perils, enabling more accurate risk assessments and, consequently, fairer pricing strategies,” added Gupta. Furthermore, data analytics empowers insurers to develop new insurance products tailored to specifi c climate threats. This enhanced ability to assess and manage climate risks not only safeguards the fi nancial health of insurance companies but also ensures continued fi nancial protection for individuals and businesses grappling with the consequences of a warming planet. “We are seeing the development of new insurance products tailored to climate- Neeraj Gupta of Policybazaar.aePiyush Dubey of Kearney Middle East and AfricaSPOTLIGHT fi nancemiddleeast.comJune 2024 | 13 related risks, such as parametric insurance for extreme weather, including parametric drought insurance for agricultural concerns,” stated Atish Suri, CEO of Guy Carpenter IMEA. A parametric cover helps provide greater resiliency, working to complement traditional indemnity coverage. With these covers, a predefi ned benefi t is paid based on a predetermined threshold being reached, such as the level of fl ooding or desertifi cation. “More widely, we are seeing climate risk assessments being incorporated into underwriting processes to better evaluate and price risks,” Suri added. “Companies are using advanced modelling techniques and data analytics to better anticipate and manage climate-related risks over time. Insurers and reinsurers are also reassessing their exposure and accumulation control, introducing catastrophe (CAT) exclusions, where CAT risks are covered separately at an additional cost.” One example is GIG Gulf. The company develops response plans to address the impact of emerging climate-related risks with three key objectives. Firstly, it aims to estimate the expected frequency pattern of natural catastrophe (NatCat) events, utilising predictive modelling based on meteorological data series to inform insurance pricing. Secondly, these plans focus on forecasting which areas or locations are more exposed to risk when a NatCat event occurs. This enables insurers to price insurance more accurately for assets in high- risk areas. Lastly, insurers seek to estimate the potential severity of damage to exposed assets, such as buildings and vehicles, should Monti Daryani of Kearney Middle East and AfricaAtish Suri of Guy Carpenter IMEA they be impacted by a NatCat event. This is crucial for tailoring product covers and ensuring alignment between policy terms and actual loss scenarios. MITIGATING RISK Insurance companies are adopting various strategies to ensure long-term sustainability to mitigate the fi nancial impact of climate change-related losses. They are enhancing risk assessment models with advanced data analytics and predictive modelling to better understand and manage climate-related risks. Additionally, insurers are conducting climate-specifi c stress tests to evaluate the potential impacts of extreme weather events on their portfolios, allowing them to adjust their strategies accordingly. By diversifying investment portfolios, insurers aim to reduce exposure to high-risk areas and sectors, investing instead in sustainable and climate- resilient assets. One of the primary tools for insurance companies is reinsurance, often referred to as “the insurer’s insurance.” Specifi c reinsurance protections are in place to cover NatCat events that exceed insurers’ risk appetites. fi nancemiddleeast.com14 | June 2024 “Equally important is raising awareness among the insured about their ‘duty of care’ to act diligently and minimise losses in the event of NatCat events,” explained Paolo Ogno, Head of Retail Product Off ering and Claims, GIG Gulf. “Balancing these two strategies—robust reinsurance protections and proactive risk management by the insured—has proven eff ective in maintaining coverage and minimising losses during recent NatCat events.” Suri agreed, stating that reinsurance is playing an increasingly important role in the insurance sector. “More insurers are REGULATORY FRAMEWORK As climate change alters historical weather patterns, the insurance industry is grappling with how to adapt its risk assessments and product off erings. Regulatory frameworks and government interventions are playing a growing role in shaping this response. On one hand, regulations can incentivise insurers to take climate risks more seriously. Governments might mandate the inclusion of climate data in risk models or require insurers to off er specifi c climate-related products, like fl ood insurance in fl ood- prone areas. However, a lack of clear transferring a portion of their risk to reinsurers who specialise in managing catastrophe and climate risks,” he explained. “Additionally, alternative risk transfer solutions such as catastrophe bonds and parametric insurance policies can help mitigate long-term exposure and build resilience.” Furthermore, insurers are promoting innovative products like parametric insurance, which provides quick payouts based on predefi ned weather events, helping to manage risks more eff ectively and support customers in the aftermath of climate-related disasters. Paolo Ogno of GIG Gulf SPOTLIGHTSPOTLIGHT fi nancemiddleeast.comJune 2024 | 15 regulations can create uncertainty for insurers. With clear guidelines, they may be able to develop new climate-resilient products or adjust pricing strategies for fear of regulatory hurdles. “To navigate this evolving landscape, insurers need to be proactive,” explained Gupta. “Collaboration with governments and regulatory bodies is key. By working together, they can develop clear and adaptable frameworks that encourage responsible risk management and innovative product development, ultimately ensuring the insurance industry remains a safety net for communities facing the brunt of climate change.” At a global level, the International Organization of Securities Commissions has endorsed the fi nal disclosure standards published by the International Sustainability Standards Board in 2023, indicating a trend toward achieving climate regulatory convergence in the long run. “Collaborating with policymakers and environmental experts to develop climate adaptation measures is another key approach,” noted the experts from Kearney Middle East and Africa. For insurance companies, these evolving regulatory frameworks will play a key role in standardising and disclosing climate risks, providing stability for the sector. Moving forward, bringing in the right expertise and investing in training and development to ensure adherence to these necessary standards will be essential. The industry needs to engage with a full range of stakeholders–regulators, policymakers and business organisations–to ensure that the emerging policies and initiatives are sustainable and actionable in the era of climate change. As the fi ngerprint of climate change deepens on weather patterns, the insurance industry needs to adapt its risk assessment and product off erings. A two-pronged approach is crucial. Firstly, insurers must prioritise incorporating climate science data into their actuarial models. This allows for a more nuanced understanding of future risks, like increased heatwaves or fl ash fl oods, enabling them to develop targeted insurance products. Secondly, industry-wide collaboration is vital for eff ective adaptation. Sharing data on emerging climate threats and best practices in risk mitigation can lead to a more standardised approach. This collective eff ort will strengthen the fi nancial resilience of the industry and ensure communities facing new climate perils have access to the fi nancial protection they need. By working together, insurers can become a bulwark against the rising tide of climate risks. Mohammed Seghir of HAYAH Insurance Consumer attitudes towards insurance coverage in the Middle East are evolving, driven by increased awareness of climate change and its impacts Mohammed Seghirfi nancemiddleeast.com16 | June 2024 INDUSTRY INSIGHTS Behind the luxury property market’s boom in the Middle East T he Gulf Cooperation Council (GCC) real estate market is witnessing an unparalleled expansion. The total value of real estate projects currently planned or under construction in the region stands at an estimated $1.68 trillion, up from $1.38 trillion in 2023, according to the CBRE Group. Residential real estate dominates the GCC market. The sector has been predicted to reach $5.05 trillion by 2028, driven by new government initiatives and increased demand from local and international investors. “The region off ers a luxurious lifestyle with top-tier amenities, and rising affl uence and population growth drive increasing demand for luxury properties,” Andrew Cummings, Head of Residential Agency at Savills Middle East told Finance Middle East. “These factors combine to make the Middle East a sought-after destination for investors seeking high returns and prestigious assets.” The drivers of this outstanding market growth are hardly a mystery, but they remain diffi cult to replicate. The region’s exceptional services and amenities, including world-class healthcare facilities, high rental yields, capital appreciation, favourable tax and visa policies have driven investors, entrepreneurs and retirees to acquire property. The Middle East’s easy access to other countries through well- fi nancemiddleeast.com Words by: Beatriz Valero de Urquía THE RACE FOR REAL ESTATEINDUSTRY INSIGHTS connected airports and international transportation networks enhances its appeal as a destination for luxury real estate investment and cultural experiences. But where will the industry go from here? OUTSTANDING RECOVERY GCC real estate companies have witnessed the market’s extraordinary recovery following the pandemic. Saudi Arabia and the UAE have led the way, with the two nations accounting for 63.1% ($1.06 trillion) and 24.4% ($409 billion) of the total value of real estate projects currently planned or under construction in the region, as per the CBRE Group. Oman ranked third, accounting for 5.2% ($87 billion) of the total value, followed by Kuwait with 3.2% ($54 billion), Qatar with 2.9% ($48 billion) and Bahrain at 1.3% or $21 billion. Amongst this growth, the GCC has seen an increase in demand for luxury real estate properties, as a refl ux of an infl ux of high- net-worth individuals (HNWI) into the region. “Amidst the global challenges, the luxury residential real estate market has demonstrated remarkable resilience, swiftly rebounding and entering a robust growth phase,” said Cherif Sleiman, Chief Revenue Offi cer at Property Finder. “We have closely Istvan Juhász of ShardCherif Sleiman of Property FinderBarnaby Crompton, Property expert observed this resurgence seeing a notable increase in available properties, the mid- market as well as off ering property seekers a wide range of options to choose from.” THE DUBAI BOOM When asked about the cities with the fastest growth in the global luxury real estate sector, fi nancemiddleeast.comJune 2024 | 17fi nancemiddleeast.com18 | June 2024 INDUSTRY INSIGHTS analysts instantly named Dubai, followed by Sydney or Miami. Ease of business, geographical location, price per square foot, individual and corporate security levels and standard of living for individuals and families all contribute to making the UAE attractive to HNW families worldwide. In 2023, the emirate recorded 431 home sales above $10 million, nearly 80% higher than London’s 240, and more than 3,800 transactions above AED 10 million, according to Savills and Knight Frank data. As such, residential property values in the emirate have risen for the 11th consecutive quarter, reaching an accumulative 30% price surge since Q1 2020. “Dubai stands out as a beacon of growth in luxury residential real estate,” said Istvan Juhász, co-founder and CEO of Shard. The city attracts millions of visitors annually, bolstering demand for luxury residential and commercial properties, especially those near major tourist attractions and amenities. The diversity in property types, from upscale apartments to extravagant villas, provides ample choice for investors.” Looking at the best-performing areas, Knight Frank’s analysis concludes that apartments in Dubai South have experienced one of the strongest growth rates, with prices increasing by 73% over the last 12 months. Following closely are Jumeirah Lakes Towers (67%) and Umm Suqeim Third (37%), with approximate prices of AED 1,150, AED 1,780, and AED 2,860, respectively. “The UAE’s reputation as a safe investment haven attracts HNWI seeking stability and asset diversifi cation, supported by proactive government measures like visa reforms and infrastructure investments,” Cummings commented. Dubai’s forecasted growth rates indicate a moderation towards a more sustainable pace in 2024, projected to range between 4% and 5.9%, according to the Savills Prime Residential Index. This transition signifi es a shift towards a more stable market environment, albeit one that continues to off er lucrative opportunities for investors. ENSURING SUPPLY With such tremendous demand, the question arises as to whether the supply of luxury real estate will be able to keep up. “If you had asked me this question last year, I would have said no,” noted property expert Barnaby Crompton, who now believes that “supply and demand are going to cancel each other out”, leading to a “steadying of the ship”. “We will still see high prices achieved for exceptionally well-located, well-built and fi nished properties,” he predicted. “I foresee a much slower, manageable increase in house prices moving forward.” In Q1 2024, the Dubai government reported over 25,000 new residents. At the same time, there are typically, on average, only around 50,000 properties handed over every year. As such, the ability of supply to keep pace with the robust demand hinges on a complex interplay of market dynamics and economic factors. Those numbers, Cummings explained, “mean that developers will have to work hard to make sure that supply catches up with demand.” In order to safeguard investments and maximise returns, analysts advise real estate companies to emphasise the importance of location when investing in properties Andrew Cummings of Savills Middle EastINDUSTRY INSIGHTS fi nancemiddleeast.comJune 2024 | 19 can be made more aff ordable without compromising quality. “This model not only makes luxury real estate more attainable but also stimulates market growth by expanding the pool of potential investors,” Juhász noted. “This, in turn, contributes to sustained demand and ensures the ongoing vitality of the prime residential market.” In the short term, the GCC luxury real estate market is likely to continue its growth trajectory, driven by factors such as high demand, net inward migration of HNWIs, low interest rates and favourable government policies. The distribution and amenities of the most sought-out properties might evolve, but their prime location within the GCC is poised to remain unchanged. and investors to focus on securing those exceptional deals—properties that represent the top 1% of the market. These properties are expected to remain in high demand, regardless of market fl uctuations. “Currently, the real risk is that oversupply will develop, and prices will collapse,” Juhász said. “However, Dubai has learned and evolved from the past, consciously maintaining high demand and leveraging its current momentum.” THE NEW “DREAM HOME” The pandemic turned the entire real estate market on its head. Four years later, buyers have redefi ned the ideal real estate investment, considering more factors when selecting properties. This shift is shaping a new narrative for luxury real estate in the UAE, with more people looking for pet-friendly and green environments, gated communities and lifestyle amenities, refl ecting an increased sense of comfort, convenience and quality of life. One key example of this change is the rising interest in detached properties and villas. Property Finder’s 2024 data revealed as many as 40% of home seekers are looking to buy villas, with 85% looking for properties with three bedrooms and above. Moreover, a “wave of youthful enthusiasm” is sweeping the villa ownership scene, as 39% of buyers were under 40 years old in Q1 2024 compared to just 31% during the same period a year prior. “The UAE continues to be a place that has something to off er for everyone and property is no diff erent,” Sleiman said. “Notably, the supply chain is also becoming more diverse. “The market is witnessing increased diversifi cation, and the completion of off - plan projects initiated in previous years will contribute to a balanced market, accommodating various client preferences. Ownership trends are shaping new ways of living, with a rise in short-term rentals and fl exible living options.” Accessibility and aff ordability are also two key trends the sector is experiencing. As the desire for property ownership grows, more individuals are exploring co- ownership to invest in real estate without bearing the entire fi nancial burden upfront. More specifi cally, there is an increasing curiosity about how premium real estate Next >