‘Protection gap’ is growing in the Gulf as insurance costs rise

https://www.century.ae/en/bhavik-mehta/"> Bhavik Mehta , May 22, 2025, Arabian Gulf Business Insight

It is perhaps no surprise that, after the heaviest rains 13 months ago since records began and billions of dollars in flood damage, the cost of insuring homes in Dubai and Abu Dhabi has jumped.

But it is the so-called protection gap in the Gulf insurance market, which the average 10 to 15 percent rise in premium has highlighted, that is perhaps more interesting.

The protection gap is the amount of insurance that may be economically needed and the amount actually purchased. Put even more simply, it is the shortfall between losses people or businesses suffer and the insurance coverage they have to recover from those losses.

This is worrying, as the level of future claims may rise on the back of climate change and the greater risk of extreme weather events.

“The GCC region is warming at twice the rate of the global average,” https://www.century.ae/en/bhavik-mehta/"> Bhavik Mehta , deputy head of research at Century Financial in Dubai tells AGBI.

Last year summer thermometers in the UAE federation ranged between highs of 42C and 52C.

Such temperatures can cause a host of problems, from boosted energy consumption and the risk of rising sea levels, to deteriorating public health and more frequent sand storms.

These problems – defined as chronic or gradual by many insurance risk assessors – may also lead to a higher frequency of sudden, catastrophic, “acute” events, like last year’s flooding in the UAE and Oman. That caused $3.4 billion of damage and economic losses.

All this places a heavy burden on the insurance sector.

Aggregate cover is the traditional way insurers have dealt with repeated, smaller disasters, such as local storms. A total limit for coverage is set, rather than limits for individual events.

These global trends are impacting the Gulf.

“In such an environment, local insurers may struggle to access affordable reinsurance, especially for natural catastrophe coverage,” says Century Financial’s https://www.century.ae/en/bhavik-mehta/"> Mehta .

Reinsurance is when an insurance company pays another company, called the reinsurer, to take on some of the risk of the policies it has issued. This helps the insurer protect itself from large losses.

The solution may lie in a sensitive, yet often neglected area of the climate change debate: adaptation.

Up to now, most of the focus in combatting climate change has been on trying to cut emissions and halt temperature rises. Among climate change experts, this is known as mitigation.

Adaptation gains attention

Now though, a concept known as adaptation is gaining more attention. This refers to the measures governments, communities and corporations can take to reduce physical risk from climate change.

Adaptation can range from projects such as Dubai’s $8.2 billion drainage improvement programme to the use of clay facades to provide natural cooling at the Mohamed bin Zayed University of Artificial Intelligence.

How insurers bake into their calculations the risks posed by acute or extreme weather events is a tricky business.

This crystal-ball gazing can be challenging for corporations, too, looking to calculate the return on investment (ROI) of adaptation measures.

“Climate change introduces long-term, systemic risks that are difficult to quantify and reserve for,” says https://www.century.ae/en/bhavik-mehta/"> Mehta at Century Financial.

Nonetheless, a recent report by investment bank JP Morgan suggested that the ROI for adaptation ranged from $2 to $43 for every $1 invested. This demonstrates adaptation’s bankability.

In future, such investments may be crucial in reducing insurance premiums, as well as in maintaining operations during events like last year’s UAE and Oman floods.

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