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With cyclonic storms striking Oman with increasing frequency and rising intensity, the need for a new risk management and loss mitigation solution has become a pressing imperative, according to Murtadha M J Ibrahim al Jamalani (pictured), Chairman of the Finance & Insurance Committee of Oman Chamber of Commerce and Industry (OCCI).
That solution, first proposed in the wake of Cyclone Gonu which struck the Sultanate with devastating consequences in 2007, has largely languished, he lamented. It envisions the establishment of a Natural Catastrophe Fund, coupled with the creation of a new Insurance & Reinsurance Pool designed to address primarily uninsured public and private sector losses, which account for a disproportionately large share of losses inflicted by any adverse weather event in the Sultanate.
“The concept of a Natural Catastrophe Fund was first proposed by OCCI in the aftermath of Cyclone Gonu in 2007,” says Al Jamalani. “Together with this proposal, the Insurance Committee of OCCI also came up with a number of initiatives in support of the insurance industry, notably in the design and preparation of tailormade insurance products (one example being the Fishing Boats / Vessels Insurance Unified Policy). OCCI was also a Founder & Investor in the first specialised reinsurance company i.e. Oman Reinsurance Company SAOC, which was set up to aid foreign investment inflows and improve premium retention in the country through better cash-flow management.”
Commenting on the status of the longstanding proposal for a Natural Catastrophe Fund, the official said: “Yes, we understand the government has plans to establish such a fund, but how and when are big question marks! The need of the hour is a combination of a Natural Catastrophe Fund / Insurance & Reinsurance Pool supported jointly by public and private sectors to compensate victims of various types of disaster-related risks, as well as to invest in the country’s infrastructures.”
The need for a special disaster fund has become even more critical as climate change threatens severe flooding, tidal surges and other phenomena with greater frequency in the coming years, Al Jamalani warns.
“Already, Oman’s location overlooking the Arabian Sea and Indian Ocean beyond, coupled with its varied natural topography, characterised by mountains, wadis, coastal plains and low-lying areas, makes it vulnerable to adverse weather events. Indeed, the World Risk Index for Global Warming Natural Hazards – World Risk Index ranks Oman high in its vulnerability to natural disasters – a key point of concern that was highlighted at a major symposium on Public Private Partnership (PPP) held in Muscat in 2019.”
Urban areas, in particular, have heightened exposure to flooding due to their proximity to overflowing wadis, combined with the lack of adequate drainage infrastructure. Consequently, there are limited options for high volumes of waters to run off effectively, the official points out.
Risk-based zoning
Following Cyclone Gonu’s devastating impact in 2007, Al Jamalani launched an initiative to map Muscat and Salalah into geographical zones based on their vulnerability to floods and subsidence.
This colour-coded zoning – white for safe zones and red for high-risk zones – is based on the Japanese concept of zoning for seismic risks. However, the initiative failed to gain traction at the time because the reinsurance market was still in its infancy. “I think it’s time to revive this project,” he stressed.
Furthermore, proposals for the introduction of a new building and construction code for homes and structures in risk-prone areas, including wadis, seafronts or hillsides, have not been embraced yet. Neither have been calls for a review of construction materials used in such zones. “To the best of my knowledge, the construction code is yet to be completed by the concerned authorities,” the official lamented.
In response to the rising frequency of cyclones and adverse weather events, insurance underwriters began placing a greater emphasis on exposure related to storms, floods and tempests (STF). Surveys of property were mandated to assess risks. But due to “cutthroat competition” in the property insurance business, insurers failed to push through significant rate increases despite their rising exposure, said Al Jamalani.
The insurance sector, according to the official, has been beset by a number of structural shortcomings. For one, its gross written premiums have declined in recent years with many insurers currently saddled with an “unbalanced business portfolio”, which goes contrary to the Law of Large Numbers underpinning the insurance business.
Moreover, the sector has suffered declines in net retention ratios, capital, assets values, and technical reserves and provisions. Dividends distribution policies have fluctuated as well – symptoms that don’t bode well for the health of the industry, he said.
Legislative review
To help address these challenges, Al Jamalani has called for a review of relevant laws, as well as the reactivation of articles of the Insurance Law to help enhance insurance premium growth and the sector’s contribution to the GDP.
He also stressed the need for mergers and acquisitions (M&A) to help achieve economies of scale. Additionally, sustainable dividends policies will help enhance asset values and stability of share prices in the stock market, he stated.
“Clearly, there are huge challenges facing the insurance industry today, but addressing them will not be possible without an overhaul of the procedures, practices and amendments in the law, along with the reactivation of key articles in the Insurance Companies Law. Therein lies answers to questions about compensating victims of Cyclone Shaheen and tackling uninsured losses as well,” he added.
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