By Christos Adamantiadis ,
Chief Executive Officer, Marsh MEA
01/07/2022 · 5-minute read
The inflationary consequences of the COVID-induced closure of global markets and supply chains were still playing out when the Ukraine conflict began. The war has predictably exacerbated soaring energy and raw material costs. Combined with the impact of lockdowns and border restrictions, there have been widespread downstream impacts – particularly in sectors related to labour, construction and the movement of goods. As project costs soar, we are witnessing an inflationary landscape that makes it harder for companies to comprehend the real-time value of their assets and subsequent business interruption costs. Many who fail to recalibrate their risk and indemnity provisions face an existential threat.
In the MENA region, this new reality is even more complicated, in part because of a lack of clarity on what is happening to inflation in neighbouring countries – especially between those whose supply chains are deeply interconnected. Official statistics are continuously updated in every region, but in the Middle East, the variations between neighbouring countries appear to be very substantial.
Moreover, the difference between official and perceived inflation rates, as well as between imported and domestically sourced goods and materials, and even between different types of raw materials, is often high. For example, newly released consumer inflation data in the UAE report that inflation accelerated by an annual 4.6% in April, up from 1.1% in December 2021. Yet many consumers and businesses on the ground might suggest that this is a significant underestimate. What we do recognize is that a main driver of inflation in the region over recent months has been transportation costs; in the UAE, for instance, these were up 28.8% year on year in April, accounting for a large part of headline inflation.
In addition, the squeeze on global supplies of goods such as steel as a consequence of supply chain disruptions exacerbated by new challenges, including geopolitical risks, continue to put pressure on pricing. Rising fuel prices are also putting more pressure on budgets as it is becoming significantly more expensive to move materials or goods globally, regionally or in-country.
For enterprises in the MENA region, conducting a Business Interruption review is a good place to start. An analysis of an organization’s Business Interruption indemnity against their inflationary risk exposures will reveal the adequacy of their existing insurance cover - and identify any major uninsured exposures.
Specific questions to be answered would include how rising raw material and labor costs are affecting profitability and whether those costs are being passed on to customers – this is an essential understanding for businesses if they are to accurately predict revenue and cost estimates into the future. Only then can business impact be appreciated and addressed through the creation of a meaningful Business Interruption insurance policy.
Firms also need to accurately assess their post-COVID recovery rate. Understanding the speed of recovery could have major ramifications if a company suffers an insured loss during the recovery period. Some sectors - particularly construction - face additional challenges in crystallizing an appropriate maximum indemnity and protection period. Specifically for the construction sector, which is one of those worst hit by COVID-19 and the Ukrainian conflict, we are now in a period when projects are taking much longer than expected due to material and labour shortages; and the time required to source replacement plant and equipment is increasing. The business impact of such a scenario must be understood when discussing protection.
Analysis of the Drewry World Container Index (WCI) can help. The index shows that the average cost per 40ft container is 8% higher than a year ago. Whilst the WCI generally measures shipping costs of finished goods, the need for raw materials also impacts transport costs – namely iron ore and coal to produce steel – from countries such as Brazil and Australia to Asia. This is a truly global phenomenon. Consequently, plant and machinery costs have also soared.
The Baltic Dry Index (BDI) measures the transport costs of raw materials such as coal and iron ore. That index recorded the most elevated levels observed in October 2021, and whilst there were decreases witnessed in early 2022, they have subsequently been increasing and with the index up 11% in mid-June. Companies should be under no illusions that right across value chains, transportation costs are and will continue to affect the stability of their business operations.
Whilst the full impact of the current crises on businesses and their risk may take months or even years to develop fully, the impact is being felt across the globe. It is imperative for businesses operationally affected by the unfolding and increasingly complicated inflation landscape to engage a qualified strategic partner and conduct a Business Interruption review in order to help them to understand the correct value of their assets and correlating business interruption values.
By doing so, firms have the ability to secure a tailored Business Interruption insurance program that correctly incorporates the many complex risks and inflationary issues affecting their industry today and into the mid-term. We know that the consequences of inaccurately declared asset values are severe – indeed, for many, they would constitute an existential threat. Now, as our world reels from multiple historic events, it is not the time for guesswork.