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Oct 2022

MENA: Inflation aggravates business interruption risks

Source: Middle East Insurance Review | Aug 2022

Companies navigating global inflation are at risk of undervaluing or overvaluing their assets when assessing the impact of business interruption (BI) on their organisation - for those that get it wrong, the danger can be existential, according to Marsh Middle East and Africa CEO Christos Adamantiadis.
 
In a commentary published on his LinkedIn account, Mr Adamantiadis said, “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 BI costs. Many who fail to recalibrate their risk and indemnity provisions face an existential threat.”
 
Inflation rates
He said that 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 shows 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.
 
Mr Adamantiadis said, “What we do recognise 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.”
 
Assessing inflationary BI impacts
For enterprises in the MENA region, conducting a BI review is a good place to start, Mr Adamantiadis said. An analysis of an organisation’s BI 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 labour 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 predict revenue and cost estimates accurately into the future. Only then can business impact be appreciated and addressed through the creation of a meaningful BI insurance policy.
 
He added that firms also need to assess their post-COVID recovery rate accurately. 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 crystallising an appropriate maximum indemnity and protection period. M 
 
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