The connection between extreme weather and climate change is becoming increasingly clear and is leading to significant material losses for both car owners and businesses putting the global motor leasing industry in the eye of the storm.
Ten years ago, scientists could only hypothesise that a specific hurricane, heatwave, flood, drought, or wildfire was exacerbated by climate change without being able to specify its exact contribution. Today, thanks to advanced mathematical models, precise weather data, and supercomputers, climate fingerprints can be identified for many significant weather events.
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“We want everyone to understand how what we as humans have done translates into the intensities and frequencies of extreme events,” Joyce Kimutai, a climate scientist at the World Weather Attribution (WWA), said about the link between extreme weather and climate change in a June article in National Geographic.
The downpours in Dubai on 15-16 April, where up to 10 inches of rain fell within two days, serve as a pertinent example. WWA researchers found that such an event has become twice as likely due to current climate conditions.
This rapid connection between extreme weather events and climate change helps people realise the immediate impacts of global warming. “Quickly connecting the dots between the event and greenhouse gases helps people realise that climate change isn’t our children’s and grandchildren’s problem. Significant things are happening now,” Michael Wehner, a senior scientist at the US Department of Energy’s Lawrence Berkeley National Laboratory, told National Geographic.
When the floods hit the UAE, the number of claims for damages that could have happened in 12 years were registered only in a couple of days, according to Dubai-based insurance brokers.
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By GlobalDataAuthorities, particularly the Central Bank of the UAE (CBUAE), which supervises and regulates the insurance sector, have not given exact figures as to how many cars were affected by the floods but insurance providers and brokers said they “have not seen so many claims caused by a single natural incident.”
Insurance brokers estimated that approximately 100,000 vehicles in the country were affected by the rains, many of which were deemed irreparable due to being submerged in water, resulting in total loss classification, the Khaleej Times, an English-language UAE news service reported.
Others provided lower estimates. Insurance Business America reported that Guy Carpenter, a reinsurance broker, said the estimated damage to motor vehicles in the UAE ranges between 30,000 and 50,000 vehicles, predominantly in Dubai. The reinsurer estimated losses for motor insurance could be as high as $250 million.
Gautam Datta, CEO of National Takaful Company, Watania, based in the UAE, underscores that the recent floods in Dubai are a stark reminder of the threats severe weather events pose to the motor leasing sector.
“As the frequency and intensity of such events continue to rise,” Datta emphasised, “insurers must adapt their risk management strategies and pricing models to effectively mitigate associated risks.”
He elaborated, “We are continuously evaluating and adjusting our risk mitigation strategies and reinsurance programme to navigate the evolving risk landscape, including the potential impact of climate-related risks on our business. This involves leveraging advanced technologies like AI and data analytics to enhance our underwriting processes and claims management.”
Reflecting on the UAE insurance sector, Datta noted that motor insurance has historically been underpriced, suggesting that recent weather events may prompt a reassessment of insurance costs.
“In the motor insurance segment, particularly for luxury vehicles often stored underground, insurers are facing significant losses,” Datta remarked. “This trend is expected to drive up insurance premiums due to escalating costs of parts, labour, and reinsurance.”
Looking ahead, Datta stressed the importance of collaboration between insurers and regulators to enhance risk management practices, insurance products, and customer safety procedures.
“As an industry, we must work closely with regulators to derive lessons from these events,” Datta asserted, “and develop or refine practices that strengthen risk management and support sustainable business growth in the face of climate change challenges.”
Amanullah Zafarullah, General Manager of Leasing, Finance & Insurance at Sixt UAE, said the company successfully protected its fleet of leased vehicles from damage during the recent storm.
Operating in the auto leasing sector for the past four years, Zafarullah said that damage to vehicles under contract was minimal. “We proactively advised our customers to avoid unnecessary travel,” he noted.
According to Zafarullah, government warnings issued before the storm ensured leasing fleets and car stocks were well-informed and prepared to take appropriate precautions. “While the insurance sector has faced claims, most companies had adequate reinsurance for luxury vehicles, minimizing their losses,” Zafarullah commented. “However, we anticipate adjustments in insurance rates in the near future.”
Insurance premiums
Comprehensive motor insurance premiums in the UAE increased between 10% and 20% in the first quarter of this year, reaching 3% of the total value of the vehicle, the Middle East Insurance Review reported on 28 April.
Meanwhile, Asian vehicle owners in the UAE faced the sharpest rise in motor insurance rates. In the wake of the flooding, drivers of Chinese vehicles saw their premiums rise by 26%, while rates for South Korean and Japanese models climbed by 25%. Meanwhile, rates for German and American models dropped by 9%, Atlas Magazine, an insurance title, reported in June.
Neeraj Gupta, CEO of Policybazaar AE, a regional insurance player, underscores the substantial threat that floods pose to the motor leasing sector in the UAE.
“These natural disasters can cause severe damage to leased vehicles, including harm to electrical systems, engines, and interiors,” Gupta explains. “This leads to high repair costs or total losses, driving up insurance claims and operational expenses for leasing companies.”
“Flood-damaged vehicles also suffer from accelerated depreciation and lower resale values,” Gupta adds, impacting leasing companies reliant on fleet residual values. “Operational disruptions further exacerbate issues, hindering vehicle delivery and service, and affecting customer satisfaction and business continuity.”
Gupta emphasises the financial strain on customers, especially businesses, from potential lease payment delays or defaults due to flood impacts on cash flow.
“Repeated flood events can alter market perceptions and reduce leasing demand in flood-prone areas,” Gupta notes, suggesting proactive measures like enhanced flood preparedness, urban planning, and comprehensive insurance coverage to mitigate risks.
Regarding insurance costs for flood-damaged vehicles in underground storage, Gupta highlights the complexities: “The increase in motor insurance costs post-flood is challenging to determine due to varying policy coverage,” Gupta explains. “Factors like storage location risk assessments and individual negotiations between insurers and clients based on specific vehicle details influence premium adjustments.”
Gupta anticipates general trends such as overall insurance premium increases, particularly for comprehensive coverage including natural disasters, and higher premiums for luxury vehicles stored underground due to heightened risk.
“The full impact of floods on the insurance and leasing sectors is evolving,” Gupta concludes, “prompting increased claims, potential premium hikes, stricter risk evaluations, and greater reliance on reinsurance in the foreseeable future.”
A spokesperson from LeasePlan Emirates, established in the UAE in 2006 to provide vehicle leasing to corporates, SMEs, and private individuals, highlighted the impact of recent floods on their operations.
“The recent floods in the UAE were unprecedented and had a significant effect on our business,” the spokesperson explained. “In Dubai, some areas received over 250 mm of rain in less than 24 hours, breaking records for daily rainfall in the last 75 years.”
The spokesperson noted that 437 vehicles in LeasePlan Emirates’ fleet were damaged, leading to challenges such as a shortage of replacement vehicles and backlogs in workshops handling repairs due to the surge in demand for repairs and spare parts.
“To manage the strain on maintenance caused by overloaded workshops, LeasePlan Emirates deployed mobile service vans to ensure regular vehicle upkeep was minimally affected,” the spokesperson added.
The spokesperson questioned the link between climate change and Dubai’s flooding event, saying that the link to climate change is not fully understood and the rarity of rainfall in the Arabian Peninsula offers little historical data for climate scientists to work with.
“If such storms become more frequent in the UAE,” the spokesperson cautioned, “it could escalate insurance and maintenance costs for car leasing and rental companies.”
Dieter Scheidl, Head of International Leasing Steering and Product Management of Raiffeisen Bank International, believes that negative consequences from recent floods are exaggerated:
Scheidl said: “I doubt that it might have an impact on the motor leasing sector. However, insurance companies might have to reconsider their pricing models with respective regions etc”.
Technology and risk
Steven Kirwan, Director of Operations at ALD Automotive | LeasePlan Insurance UK, discussed the implications of natural disasters on insurers and the role of technology in risk assessment: “On insurers’ financial stability, as regulated entities, they are mandated to maintain robust control over their solvency positions, so this isn’t currently a major concern,” Kirwan explained.
“However, if extreme flooding incidents become more frequent, insurers may reconsider their risk exposure and could raise premiums.”
Regarding the operational impact on insurers due to high claim volumes from natural disasters, Kirwan noted, “It can be logistically challenging and further complicate the financial and operational aspects for insurers.”
On technology’s role in enhancing risk assessments for more profitable policies, Kirwan highlighted, “Digital tools like social media provide a quick and efficient way to monitor extreme weather geographically and communicate preventive measures to drivers.”
“Telematics also play a crucial role,” Kirwan added, “allowing companies to gather weather data from vehicles and their common routes, which helps in identifying potential risks and improving risk management strategies.”
Climate change and collaboration
The Dubai floods serve as a stark reminder of the tangible effects of climate change on extreme weather events. With advanced climate models now able to accurately link specific incidents to global warming, the motor leasing industry is finding itself increasingly vulnerable.
The significant material losses, unprecedented surge in insurance claims, and resultant hikes in premiums highlight the urgent need for the industry to adapt. Insurers and leasing companies must reassess their risk management strategies, leveraging advanced technologies and data analytics to mitigate future risks.
Collaborative efforts between industry stakeholders and regulators are essential to develop sustainable practices that safeguard against the growing frequency and intensity of such events. As climate change continues to reshape the risk landscape, the motor leasing sector must evolve to ensure resilience and stability in an era of increasing environmental uncertainty.
Insurers navigate challenges as UAE floods impact motor sector
