The world has seen an increased number of natural disasters in recent decades. Last year alone saw around 350 to 500 medium-sized natural disasters, according to the Global Platform for Disaster Risk Reduction. The count is expected to reach 560 disasters by 2023, based on the current trend.
The impact of disasters across the world is disproportionate. Developing countries lose nearly 1% of their GDP to naturally occurring disasters, while the rate is nearly 0.1-0.3% for developed nations. States in the developing world also lack the needed insurance coverage to recover and rebuild. Since 1980, nations in the developed world have been able to insure 40% while poorer countries managed to recover less than 10%. In many cases, the coverage rate was nigh on naught percent, for developing countries do not have access to international insurance markets, which could help mitigate climate risks, according to the IMF’s latest report.
Global Trends
Most climate and disaster risk insurance activity takes place in developed countries. And while lower-income countries have recorded higher growth rates, such activity is mainly geared towards developing nations given they see the biggest impact of climate disasters. Indicators show that most insurance markets are concentrated in North America, Europe, and advanced Asian markets, which have a long history and a global reputation, as all as high-risk assets that need protection. According to insurance group Munich Re, countries in North America accounted for 31.1% of the total global share, while Europe took 28.8%, and advanced economies in Asia, such as Japan, accounted for 19.8%. Yet growth rates in developing markets are much higher: according to a report published by EY, life insurance rate in 2014 increased by 7.8% in developing countries compared to 4% in advanced markets; 13.2%, and 3.4% in 2015; 20.1%, and 2% in 2016; and 14.9%, and 2.1% in 2017 respectively. The biggest increase in rates came from Vietnam, Malaysia, and Indonesia. Whereas other types of insurance saw 5-8.5% increase in 2012, while rate in the developed countries remained at 2%.
With regard to property and accident insurance (P&C), it witnessed a growth of 4.7% in 2019 compared to previous year, raising its market share to about 31% of global insurance premiums. Advanced markets — North America, Western Europe, and developed Asia-Pacific countries — continue to contribute the largest share of 61% to absolute growth in risk insurance premiums. Emerging markets in Latin America, developing Asia-Pacific countries, and Africa recorded the fastest growth rates of 13%, 9%, and 8%, respectively.
There’s a move to spread insurance culture in developing countries. Global development organisations are moving to support micro-insurance initiatives, which have been targeted as one of the United Nations Sustainable Development Goals as a modern development entry point. Swiss reinsurance company, Swiss Re, estimates that the micro- and micro-insurance market could cover 4 billion people worldwide.
Regional Drop
The Middle East is one of the hottest and driest regions in the world, facing some of the worst effects of climate change, such as floods and droughts, along with earthquake-related disasters. This brings about huge financial losses, especially for countries already experiencing economic insecurity. More than 40 million people have been affected at a cost of more than USD 20 billion over the past 30 years, according to the World Bank. Over the past five years alone, 120 disasters have been recorded in the region, resulting in an average of USD 1 billion a year in damage and losses.
Turkey and Syria recently witnessed a series of severe earthquakes that Turkish President Recep Tayyip Erdogan has described as a “disaster of the century,” saying: “We are facing one of the biggest natural disasters not only in Turkey but also in human history.” Fitch Ratings noted that most of the insurance payments due to the earthquake would be borne by global reinsurers, which the agency estimated would exceed USD 2 billion and could reach USD 4 billion or more. However, insured losses could be much lower and possibly around USD 1 billion.
Insurance coverage is likely to be low in most affected parts of Turkey and Syria. Although the Turkish disaster insurance group "TCIP" was established after the Izmit earthquake in 1999 to cover earthquake damage to residential buildings in urban areas, it does not cover human losses or indirect losses, such as the interruption of business. Moreover, earthquake insurance coverage is technically mandatory in Turkey, but often is not applied in practice. Insurance coverage in the affected parts of Syria is also likely to be similarly low as a result of the unrest and wars the country is seeing.
In general, the Middle East and North Africa region is witnessing a significant decline in insurance rates, as the ratio of insurance depth (ratio of insurance premiums to GDP) did not exceed 1.9% in the Arab countries in 2020. The market share of the insurance sector in these countries represents 0.75% of the global insurance market, which is a very modest share, and the performance of the sector varies given the exceptional performance of the GCC countries.
Growth in Arab Gulf
The above shows that the recurrence of natural disasters in the Middle East is a driver for insurance and reinsurance companies to expand the provision of their services in the region and to create new products that are more resilient to greater risks. The Covid-19 crisis provided an excellent demonstration of insurers' ability to withstand pandemic outbreaks and the resulting economic turmoil largely.
The GCC insurance market is expected to grow, rising from USD 26.5 billion in 2021 to USD 31.1 billion in 2026, driven by continued population growth, economic recovery, a restart of the tourism sector, recovery of infrastructure development projects, as well as efforts by governments in promoting innovative technology-based services. Kuwait, Qatar, and the UAE are expected to achieve annual growth rates of more than 5.3%, 4.7%, and 4.1%, respectively, over the next five years.
It can be said in conclusion that insurance plans can play a crucial role in facing the main challenges resulting from frequent natural disasters in the MENA region. But there are still many factors that prevent the expansion of insurance and reinsurance activities in the region. The key reason is weak community awareness of the importance of insurance, and there is a need for low-cost products designed. Moreover, insurers must share their expertise and help individuals, businesses, and governments minimise risk. To raise awareness of the potential benefits of insurance, it will be necessary to increase investment in financial education. The existence of a general policy and regulatory framework is a prerequisite for the development of an effective insurance market for the countries of the region.
