Inflationary concerns are sweeping through the business community, and its insurers... Oliver Wheeler examines the latest developments, and considers what might be up ahead

The Russia-Ukraine war has rapidly disrupted global trade in key commodities, including grain, oil and gas. This has only served to exacerbate an existing background of energy shortages and rising costs.

It is not surprising, therefore, that our latest Risk and Resilience survey shows inflation as one of the key issues concerning business leaders, and that they expect economic uncertainty to remain. The latest OECD economic outlook now projects inflation at nearly nine per cent in OECD countries for this year, twice the organisation’s previously projections.

High inflation impacts multiple aspects of corporate decision making – from capex to rising employee wages and cost of borrowing. At the same time, business leaders must also have human empathy for the suffering and hardships that employees and customers may be experiencing. Unlike the previous generation, which endured the double-digit inflation of the 70s and early 80s, many of today’s business leaders are having to address this challenge for the first time.

The data from our survey shows that concern about inflation differs internationally. In the US, 42 per cent of companies rated it their biggest concern – a much higher number than in the UK, where only 28 per cent of business leaders rated it their largest concern. Even more striking is the lack of resilience that businesses believe they have to inflationary pressure, with 65 per cent of US business leaders and 55 per cent globally feeling unprepared to meet the challenge.

The UK’s business leaders do appear to be less concerned about both economic uncertainty and inflation than the US. Perhaps years of Brexit, Covid-19 uncertainty and more recently government instability have bred a weariness about doom and gloom.

Supply chain bottlenecks may be a short-term problem that businesses are becoming practiced at working through, but costs involved in transforming to a zero-carbon economy, or ‘greenflation’, and rising labour costs are long-term issues that won’t disappear any time soon.

In recent weeks it has become clear, that in the short-term at least, sterling is facing considerable pressure that will only exacerbate inflation – most notably as oil is priced in dollars. All of this will likely drive a period of price increases and with these seemingly intractable underlying problems. The need to improve productivity is key to keeping inflation down, for the country and for individual firms.

What does this all mean for the health of businesses and the insurance market? There is clearly cause for concern around the inflationary risks that the directors’ and officers’ market now faces. Inflation and supply chain constraints, including raw material costs and pressures on transportation costs, are leading to higher costs of goods sold. Companies are now faced with the dilemma of passing these costs onto the end consumer. During this same period of increased pricing, companies – especially those in retail and hospitality – may face a market with significantly less discretionary spending. All this can lead to lower sales volume. Wage and labour inflation remain a challenge in a tight, though softening, labour market. Companies are needing to spend more to attract and retain their talent. Whether it’s due to one or a combination of these reasons, companies’ margins are being affected, and potentially, too, their financial results.

Directors' and officers' cover is also being affected by social inflation, or the increase in claims costs, such as defence costs, beyond the economic value of the actual cost. Should social inflation continue on its current trajectory, it is hard to see how carriers can avoid passing these costs onto clients – something that could have an impact on terms and conditions moving forward.

In addition to all these challenges, the spectre of a potential global recession is looming large. Despite the improvement in unemployment rates from the all-time highs during the peak of the pandemic, analysts are warning of signs of future layoffs. Between the potential for high unemployment rates and higher costs, the risk to employment practice liability insurers is also increasing. Workers may look to recover lost wages through whatever means available, including lawsuits against their former employer.

Insurance buying will be complex

The conflict in Ukraine was already proving an inflection point for the insurance markets, with hardening rates and capacity changes anticipated in some specific classes. Now, the wider impact of inflationary pressure, macroeconomic instability and increase in regulatory reporting are likely to push costs (and potentially therefore premiums) higher across all classes.

Inflation brings uncertainty. For those trading internationally, trade credit insurance becomes even more necessary. The current macroeconomic climate only puts more pressure on companies and their business leaders. D&O as well as business interruption coverage becomes a critical way to protect boards of directors against this uncertainty.

It can be hugely challenging for companies buying insurance to try to navigate these changing exposures. A continuous and transparent dialogue is essential: this should not just be a once-a-year conversation around the renewal period. Clients, brokers and insurers are looking for stability and more now than ever.

This article was published in the Q3 2022 issue of CIR Magazine.

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