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New capacity stems rise in Middle East casualty rates

The article below, by Rachel Cohen, Senior Treaty Broker at New Dawn Risk, was originally published in Insurance Day in March 2021.

The market is hoping that as Covid-induced losses start to come through, and reinsurance rates harden, it will drive further increases in underlying liability rates in the region.

Before the onset of the global pandemic and the subsequent lockdown at the end of March 2020, the reinsurance sector had certain­ly seen some hardening of rates in the January 1, 2020 renewals, com­pared to the recent past.

In the international casual­ty treaty sector, this hardening was more prevalent on loss­-affected programmes. Reinsureds were achieving more and more increases in underlying rates, in particular on directors’ and offi­cers’ (D&O) and the professional lines business, where increases were anything between 25% and 200%, even where accounts were claims-free. However, it could still be argued that rates were still not quite where they should be, mainly because of the abun­dance of reinsurance capacity in the market.

Modest rate rises

Fast forward to the recent Janu­ary 1, 2021 renewals and it can be said that for the most part, casual­ty treaty reinsurers remain fairly subdued about the overall rein­surance rate changes that were achieved. There was certainly a hardening of rates, particularly on distressed accounts, but not the emergence of the hard market that many had speculated would finally occur post-pandemic.

In the Middle East, many ced­ants during the July 2020 and Jan­uary 2021 renewal meetings told their reinsurers they were achiev­ing underlying rate increases on bankers’ blanket bond and D&O business for the first time in a long time. These rate increases range from +5% to +30%, which is considered significant for the Middle East.

This certainly brings a glimmer of hope that the United Arab Emir­ates (UAE) market is turning, even if that turn is in its very early stag­es. Even on general liability pol­icies where rate decreases have traditionally been recorded year on year, cedants were reporting that rates were finally holding flat, which can certainly be de­scribed as an achievement.

These rate increases bring wel­come news to those reinsurers who participate on proportional placements and therefore directly benefit from these increases. In addition to this, the treaties that New Dawn Risk places in the UAE continue to remain even more profitable because of the absence of significant casualty losses, cer­tainly compared to London mar­ket placements.

It was also apparent, particu­larly during the recent renew­al season, that reinsurers were holding firm on the ceding com­mission and profit commission levels on their casualty propor­tional treaty renewals; certainly no decreases were being granted to the reinsureds, and reinsur­ance rate decreases on non-pro­portional contracts were also rarely seen.

One key trend in the Middle East market at the moment is the growth in single-project profes­sional indemnity (PI) business risks because of the increase in construction projects in the re­gion. ·while rate increases are being achieved on this line of business, many reinsurers remain cautious about the extensive long­tail nature of this line of business, and some are reducing capacity, since 10 years of extended report­ing period coverage tends to be standard in the territory.

Covid claims expected

In terms of Covid-19-related claims, liability claims are typical­ly long tail with a lag in reporting, so general liability and workers’ compensation claims have not yet materialised. However, the prediction is there will be a sig­nificant rise in these loss notifica­tions all over the world over the next few years.

Several outbreaks of corona­virus have already been linked to high-risk environments, such as gyms, hotels and cruise ships. There is a significant likelihood that all these environments will be sued for not taking proper care of their clients by either al­lowing them to enter against the government rules or failing to provide a Covid-19-safe environ­ment, resulting in clients catch­ing the virus.

The more of these liability losses that come to fruition, the greater the likelihood that under­lying rate increases in the liability sector in the UAE will finally turn positive along with more harden­ing of reinsurance rates.

As a result of the fallout from the pandemic, closer attention is now being given to wording cov­erages and more questions are being asked in relation to any existing clauses in contracts that could be construed as ambigu­ous. Certainly, in the UAE, the majority of cedants are imposing the Covid-19 specific or commu­nicable disease exclusions on all their new and renewal business. Most of our clients have informed us that they have not received pushback from their brokers on applying these clauses to the con­tracts, which is a great comfort for the reinsurers.

Finally, changes in the Middle East market continue, with insur­ers and reinsurers moving in and out of the Dubai International Fi­nancial Centre and some reinsur­ers making the decision to write the business out of their Europe­an offices instead going forward. In addition, new reinsurance ca­pacity continues to be set up, with the capabilities to write Middle Eastern business.

As 2021 continues, time will tell if there will be an increase in casualty losses, particularly in relation to Covid-19, to continue hardening reinsurance rates or if new reinsurance capacities will continue to suppress this.