24 September 2024 Leveraging Parametrics to Mitigate Evolving Weather Risks
The catastrophic floods that swept across the Arabian Gulf region in April 2024 represent a stark deviation from typical weather patterns in the Middle East.
Historically, the region has not been prone to extreme weather events of this magnitude. The Middle East's climate is predominantly dry, with deserts covering much of the landscape and rainfall being a rare occurrence. However, the April floods suggest a potential shift, possibly linked to broader climatic changes. The increased frequency and intensity of such events could signify a new norm, raising concerns about the region's preparedness and resilience to future climatic shocks.
Given the evolving nature of this risk landscape, could parametrics offer an innovative solution to manage and mitigate such unprecedented weather risks?
The increased frequency and intensity of such events could signify a new norm, raising concerns about the region's preparedness and resilience to future climatic shocks.
The exceptional nature of the April 2024 floods
The floods of April 2024 were marked by an unprecedented deluge, with several areas receiving more than a year’s worth of rain in less than 24 hours. For instance, parts of Oman, such as Mahdha, experienced an astonishing 302mm of rainfall, while Khatm Al Shikla in the UAE recorded 254.8mm. These figures far exceed the region's average annual rainfall and underscore the remarkable characteristics of the event.
Meteorological and climate drivers
The flooding was precipitated by a convergence of meteorological factors: a strengthening low-pressure system, successive rounds of thunderstorms, and unusually warm waters in the Arabian Gulf. Additionally, the strengthening Indian Ocean Dipole (IOD) played a critical role in intensifying the rainfall. The region's warming climate further exacerbated the situation by increasing the atmosphere's capacity to hold moisture, leading to heavier precipitation.
The physical geography and infrastructure of the Middle East also contributed to the severity of the floods. The arid soils, which are less able to absorb water, coupled with extensive concrete surfaces, facilitated rapid runoff and flash flooding. This combination of natural and human factors culminated in a weather event that was both extraordinary and devastating.
Impact on the region
The impact of the floods was widespread and severe, affecting multiple countries, including Oman, Iran, UAE, and Yemen. In Oman, 20 fatalities were reported, and over 1,400 people required shelter as dams reached full capacity. The UAE saw significant disruptions, particularly in Dubai, where airport operations were suspended, metro lines were halted, luxury shopping malls were flooded, and schools were closed. Bahrain experienced structural damage and school closures, while Iran reported eight fatalities and extensive flooding. Saudi Arabia's Eastern Province also faced transportation challenges due to flooded roads.
Satellite imagery from NASA illustrated the widespread flooding, with submerged roads and residential areas clearly visible in key locations like Dubai and Abu Dhabi. The visual evidence provided by these images underscores the severity and pervasive nature of the floods.
Financial implications
The financial toll of the floods was immense. Gallagher Re's proprietary flood model estimated market losses for UAE property at between USD1.8 billion and USD2.3 billion, with motor losses projected to be between USD 350 million and USD650 million. The UAE was the hardest-hit country, while insured losses in Oman, Qatar, Bahrain, and Saudi Arabia were comparatively minimal.
Leveraging parametrics to mitigate evolving weather risks
As the Middle East grapples with the increasing frequency and severity of extreme weather events, the need for innovative risk management solutions has never been more pressing. Gallagher Specialty's Parametric Insurance Centre of Excellence stands at the forefront of this evolving landscape, offering tailored support to clients as they navigate these challenges.
Quantifying exposure to extreme weather
Gallagher employs a suite of advanced data tools and bespoke software to meticulously analyse a client's risk exposure to extreme weather events. The process begins with collecting detailed client information, then processed through sophisticated modelling programmes. These models leverage historical data to assess the likelihood and potential impact of extreme weather on the client’s assets and operations.
This comprehensive risk assessment is subsequently shared with underwriters, facilitating the determination of an appropriate payout structure and coverage limits. By quantifying specific risks, Gallagher can design customised parametric insurance packages that effectively manage the client’s exposure to flooding.
By quantifying specific risks, Gallagher can design customised parametric insurance packages that effectively manage the client’s exposure to flooding.
Benefits of parametric insurance
Parametric insurance offers several distinct advantages over traditional insurance models, particularly in the context of extreme weather events:
- Absolute certainty of payment: If a flood triggers the parametric threshold, such as rainfall triggers or flood water depth, payment is guaranteed, eliminating disputes over claims and ensuring prompt financial support.
- Rapid payouts: Clients receive payouts within 30 days of a trigger event, providing quick liquidity and the flexibility needed to undertake immediate repairs and recovery efforts.
- Comprehensive coverage: Parametric insurance extends coverage to exposures traditionally not addressed by standard insurance policies, such as golf courses and beachfront properties.
- Inclusive loss coverage: Encompasses all forms of loss, including pure financial losses and non-damage business interruptions caused by flooding.
Tailored risk solutions
The increasing unpredictability of weather patterns in the Middle East necessitates proactive and innovative solutions. Gallagher Specialty’s Parametric Insurance Centre of Excellence provides the expertise and tools required to mitigate evolving weather risks effectively. Creating solutions tailored to a business’s unique risk profile, our team help businesses understand which risks to retain and which to transfer, enabling them to make informed decisions about their risk management strategies.
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Gallagher Specialty accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
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