Corporate Risk Radar
Corporate Risk Radar podcast series: US/LatAm | Episode 2 | Amid the risks comes opportunity in US and LATAM
The Middle East is no stranger to environmental challenges, with its scorching temperatures, and long stretches of drought. However, recent events in the region have underscored the inescapable impact of climate change. Notably, in addition to rising temperatures and poor air quality, the region has recently experienced a surge of extreme weather events, prompting consideration about the impact of climate change.
Science tells us that more frequent weather events should not be surprising and Middle East governments have been sounding the alarm. For example, as early as 2013 Oman’s submissions to the United Nations on climate change warned that, on the most conservative calculation, more than 375 km2 of Oman is expected to be flooded by rising sea levels. Similarly, in 2021, the UAE government issued a report warning of an anticipated increase in cyclonic activity in the Arabian Sea and a rise in extreme weather events. Recent years have seen these predictions coming to fruition, with Oman, Yemen and the UAE most recently being affected by Cyclone Tej in October 2023.
Not only are the effects of climate change becoming increasingly evident, but so too are the direct and indirect impact on construction and its re/insurance across the Middle East.
The evolving climate in the Middle East is necessitating adaptation within both the insurance and construction industries.
Increased temperatures, rising sea levels, severe flooding and cyclones require the construction industry to account for risks and issues that may not have been a concern as little as twenty years ago. Such environmental issues impact directly on building design and materials, interruptions and delay, damage to works, and mitigation costs. The industry must also contend with changing and evolving regulations introduced by governments to protect the public and workers from such risks. While doing so the industry has to deliver projects, for example a renewable energy project to power a new city, at a scale not undertaken before, and in circumstances where project delivery requires novel technology and construction methods.
Middle East insurers and reinsurers are also grappling with changing risk profiles influenced by extreme weather events such as floods and cyclones. Such events can result in extensive damage and a significant accumulation of exposures in a concentrated geographic area. Insurers operating in markets with exposure to such changing weather conditions may find it challenging to obtain the desired level of reinsurance support from suitably rated reinsurers and are looking to consider alternative solutions to address such concerns. As recently as March 2023 for example, Oman was investigating a natural catastrophe insurance pool.
The challenges faced by insurers generally are exacerbated with respect to Middle East construction insurance where the market must continue to develop rapidly to keep up with the demand for insurance of high-profile mega-projects.
The scale of projects, regulatory changes and the impact of climate change therefore puts pressure on insurers, brokers, and potential policyholders to ensure projects are covered by insurance products tailored to the region's unique challenges. To achieve this, all stakeholders need to undergo a significant shift in mindset to adapt and address the evolving catalogue of climate-driven perils.
We set out below key considerations for stakeholders in the insurance and construction industries.
Insurers and underwriters need to consider the potential impact of climate change on the validity of their risk assessment and risk modelling tools. The accuracy and validity of climate risk data, for both short-term and long-term trends, should be thoroughly evaluated considering that records are often less extensive than in other regions.
Against this background insurers are having to consider risks on novel and significant projects in a region where the decision on contractors and building methods is often determined by cost and where the contracting process tends to be adversarial.
For brokers, ensuring the availability of suitably rated reinsurance capacity to support projects in the Middle East will be a challenge in areas facing increased extreme weather events.
In this context the role of "all risks" policies may be challenged in light of increasing pressure to negotiate bespoke insurance products that offer the right level of coverage with realistic limits for reasonable premium. This will however need to be balanced with appropriate reinsurance support from multiple international markets. Reinsurers in such markets are however likely to be most comfortable providing reinsurance support based on standard industry wordings that are intended to be adaptable across jurisdictions.
Middle East brokers will consequently need to ensure that policy coverage matches not only the changed risk profile, but also all stakeholders’ expectations. To do so brokers will need to continue to develop their technical competence and build global relationships to access capacity across multiple markets to support their clients in the Middle East.
The cost of construction and therefore contractors’ margins will be influenced by concerns about the longevity and suitability of today’s construction for the future climate. This will necessitate a critical evaluation of industry standards as well as project design to ensure they reflect changing climate risks and regulatory requirements. Pressure to meet evolving industry standards in turn creates liability risk for negligence claims as professional standards evolve.
The cost of insurance is likely to be driven by the extent to which risk management practices can be adopted to mitigate against extreme weather risks. Risk management processes will necessitate focus on climate-resilient design, early adoption of industry practices and realistic modelling and future planning. In addition, quality site records and robust project monitoring will be essential to ensure compliance with policy requirements.
These concerns are likely to be amplified in the Middle East, where mega-projects, which may be under construction for a decade or more, are likely to be significantly impacted by climate change during that period.
Climate risks are expected to have a direct impact on the future of insurance for construction projects, necessitating adaptability and a willingness to change established practices to meet market demands. The challenges presented by climate change will reshape the insurance landscape for construction projects in the Middle East. However, the demand for capacity and new insurance products tailored to the region's evolving climate risks presents an exciting opportunity for the industry to innovate and develop.
As the industry grapples with these changes, Clyde & Co's market-leading insurance practice can offer invaluable support in navigating the complex risks inherent in the Middle East. For detailed insights and solutions, reach out to our specialists, Alfred Thornton and Emily MacDonald.
For a deeper understanding of the risk landscape that corporations face concerning ESG and climate change, and the steps they are taking to manage these risks and maximize opportunities, you can explore part 2 of our Corporate Risk Radar report: "Climate Change, Digital Transformation & Global Analysis".