Following the major fire at The Address Downtown Dubai on New Year’s Eve, real estate community premiums in UAE are under review, and they might rise, reports The National.

Two other 2015 skyscraper fires in Dubai are contributing to this possibility: one is the Regal office tower fire that happened in November, and the other is the Torch Tower fire that happened in February. None of these fires were reportedly suspicious or terrorist related, though three major building fires in a single year in Dubai do seem odd.

Buildings with aluminum cladding panels, says Mohammed Hesham, Operations Manager of Capital Shield Insurance Brokers, is one reason for potential premium increases.

“Cladding” refers to the outside surface of buildings. If the materials used for cladding are flammable, then the risk of damage and loss of life from accidental fire, arson, or terrorist bombing increases significantly.

“If [insurers] notice that these types of buildings have more of a tendency for claims, then it will have an impact on the whole market,” Hesham told The National.

Executive VP of General Insurance at Oman Insurance Company, Michael Rafter, echoes this sentiment. Increased premiums “would be specific to buildings with combustible cladding only, and it is not possible to predict how much [premiums will rise],” he says. Rafter’s company insured the Torch Tower, a calamity that caused Oman Insurance to back off insuring buildings with flammable cladding and other “combustible material.”

Adding to the possibility of premium increases, The National’s investigation of these fires revealed this week that the majority of skyscrapers in Dubai built before 2012 – including hotels – “used non-fire-rated exterior cladding.”

On the other hand, Garry Taylor, Managing Director of Bowring Marsh, disagrees with the potential for premium increases in UAE. Bowring Marsh, he says, figures that a single fire such as at The Address is not enough to increase premiums.

Head of General Insurance at Dubai-based Nexus Insurance Brokers, Alison Fenech, also doesn’t see The Address fire as a precursor for increased premiums. “If you have 10 fire incidents in a year amounting to Dh20 million,” she told The National, “it is more likely to increase premiums than one incident in a year amounting to Dh25m.”

Ultimately, then, it’s up to the insurance market’s collective reasoning to determine whether UAE building premiums will go up or not. No doubt, London will have its say in this matter as well. The fact that most buildings in Dubai that were built before 2012 likely have flammable cladding (or non fire-resistant cladding) should be a major factor in deciding this issue. It is curious, however, that the insurance sector didn’t see this before. Perhaps it did, and it was not a major concern at the time.

Also, the difference of opinion between these insurers appears to revolve around the mentality of being:

1. Ahead of the curve, or…
2. With the curve, or…
3. Behind the curve

In other words, what influences premium increases here? One fire? Or three fires plus the cladding risk issue? Or, as Ms. Fenech says, must it be 10 such fires, and then premiums might go up?

And then there is the issue of terrorism insurance. If standard commercial property premiums in Dubai might increase because of fire risk, then might terrorism premiums increase as well? Maybe so. Terrorism premiums are not just based on the terrorism risks in a country. They are also based on the insured entity’s physical security. In many cases, if a policyholder can demonstrate increased physical security, terrorism premiums can be lowered. In the case of Dubai where there are multitudes of buildings with flammable cladding, the risk of fire resulting from terrorism, specifically from arson, sabotage, and/or bombings, is higher.

The terrorist attacks on the Taj Mahal hotel in Mumbai in 2008, and the Westgate Mall in Kenya in 2013 both began with raids where gunmen took over the properties and shot people, but they ended with mass arson. Additionally, the initial terrorist bomb blast that damaged the Islamabad Marriott in 2008 did not burn down the hotel. It appears that the overpressure from the explosion ruptured the hotel’s gas lines, and the resulting gas leak then caught fire, which engulfed the hotel. The same scenarios could happen in any city in the world, including Dubai.

Adding to the terrorism insurance risk angle is the fact that the UAE has spent the last few years thwarting insurgency and terrorism. In 2012, a group called al-Islah tried to overthrow the government by setting up a shadow government and then trying to launch scores of attacks. The government halted all this from happening and arrested 94 suspects. It convicted 68 of them for subversion in 2013.

On 2 August 2015, the UAE arrested 41 people attempting to topple the government and set up a caliphate – an ISIS related or mimicked plot. The belligerents sought to assassinate people and bomb hotels and shopping malls.

So while the UAE government has been expert so far in preventing terrorism and insurgency, such risks are indeed real, and flammable cladding on buildings, while seemingly just a technical building issue, could have disastrous strategic results in the event of an attack. Accordingly, terrorism insurance premiums in the case of Dubai are fair game for review.

Sources and further reading:

“Insurance premiums in focus after The Address Downtown Dubai fire,” The National, 5 January 2016.

“Most Dubai towers built before 2012 ‘have non fire-rated exterior panels’, The National, 4 January 2016.

“Smoke still wafting from Dubai’s luxury Address hotel after blaze,” CNN, 1 January 2016.

“Fire at Regal Tower in Business Bay, Dubai, under control,” Gulf News, 25 November 2015.

“Saudi Arabia braces for ISIS,” INTERSEC, 23 November 2015.

“Fire rips through 79-storey Dubai Marina Torch,” The Telegraph, 21 February 2015.

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