Rising commodity prices could prove to be a burden for most countries – and a double-edged sword for the energy-producing countries of the Middle East.
While Russia president Vladimir Putin’s invasion of Ukraine is having a major impact on the global economy, largely through higher commodity prices, there is no immediate end in sight and the shooting war is forecast to last for the rest of the year at the very least.
This could prove to be a very difficult environment for the insurance sectors of many nations in the Middle East – especially those that were hoping finally to reap the rewards of the post-COVID economy.
Western sanctions on Russia are, realistically, likely to remain in place until 2026 at least which means that oil prices could remain elevated – certainly for as long as the war lasts. The price of natural gas is also likely to rise sharply while the price of essentials like grain and other basic foodstuffs will also see sharp increases.
On the upside, this means that oil and gas producing nations in the region will see their state coffers fill rapidly and this could allow them the leeway to undertake essential infrastructure work that may have been put on hold while the pandemic had its hold on the economy.
But on the downside, the rise in commodity prices will boost consumer price inflation yet further. This means that the typical insurance consumer – mums and dads as well as corporates of all sizes – will have less money to spend on buying cover.
The discretionary nature of insurance purchases could prove to the biggest impediment to sector growth as overall spending is squeezed by inflation that is creeping towards 10% in many nations in MENA.
The stark reality is that as the price of bread rises, the ability of the typical customer to buy life or health cover will fall – in spite of the fact that insurers are much better at marketing their products and following through with better claims management infrastructure.
Of course, the other significant factor affecting global growth will be interest rates - with the US Federal Reserve tipped to continue to raise rates with some vigour until the end of 2023 at least. The European Central Bank is likely to follow suit and this will prove to be a constant challenge for all national governments juggling fiscal priorities amidst a muddy forward picture.
This means that the asset managers working within insurance companies will have an easier time in securing significant returns on their investments - but the challenge will be ensuring that these returns are higher than the rate of inflation which will constantly chip away at the capital value of their funds under management.
Without wishing to paint too pessimistic a picture of the business outlook for the next 18 months, there are few bright spots on the global horizon – which means that it will fall to individual nations in the Middle East to ‘make their own luck’ and pursue domestic agendas that look after their populations – their businesses – and, hopefully, their insurance and reinsurance sectors.
Middle East Insurance Review