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Inflation Considerations for Risk Managers and Insurance Buyers

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According to Beazley’s recent Risk & Resilience Geopolitical Report, inflation is a key area of concern for business leaders and they expect economic uncertainty to remain high through to the end of this year. High inflation impacts multiple aspects of corporate decision making, from the changing value of stock to rising employee wages and cost of borrowing. It is interesting to note that worries about inflation differ internationally; in the US, 42% of companies rated it their biggest concern, while only 33% of business leaders in the UK had it at the top of their list. Even more striking is the lack of perceived resilience to inflationary pressure, with 65% of business leaders in the U.S. and 55% globally feeling unprepared to meet the challenge.

US business leaders’ concerns about the impending impacts of inflation are justified, as financial market volatility and losses are currently driving the greatest run-up in prices that the U.S. has seen in four decades. The S&P 500 officially entered a bear market and is down more than 20% since the beginning of the year, and the prevailing sentiment in the U.S. is an expectation that inflation is only going to get worse. U.S. retail sales fell in May as supply chain challenges drove a decrease in major purchases like vehicles, and record high gas prices pulled spending away from other goods. The Federal Reserve raised interest rates to try and reduce inflation, but businesses face a long road ahead as rising prices for everything from groceries to housing influence consumers’ buying power and economic confidence for the foreseeable future.

Inflation’s Impact on the Insurance Market

In light of current economic conditions, the directors and officers (D&O) insurance market is now facing several notable inflationary risks. Inflation and supply chain constraints led to higher costs of goods sold, including both raw materials and transportation/freight costs. If a company cannot or is not willing to pass the price on to the consumer, the margins will be impacted, leading to softer financial results. At the same time, as consumer prices increase due to inflation, companies (especially those in the retail and hospitality industries) may face a market with significantly less discretionary spending, leading to lower volume sales or lower sales overall. 

Amid these challenges, there are several signs pointing to a potential U.S. and, likely, global recession. While unemployment rates have been improving since the all-time highs during the peak of COVID, analysts warn of future mass layoffs. With high unemployment and higher costs, this also poses a risk to employment practices liability (EPL) insurers. Workers may look to recover lost wages through whatever means available, including bringing suits against their employer. A strong EPL policy and relationship with insurance carrier and broker can help during this time where unemployment may swing back the other way. 

Wage and labor inflation also remain a challenge in a tight (though softening) labor market as companies either cannot fully staff their businesses or are spending more to attract and retain talent. Both impact the bottom line. The insurance industry has already seen several supply chain and inflation-driven Security Class Action claims. Various companies have made claims as a result of challenged financials in the wake of strong inflationary and supply chain/labor impact. These were driven by everything from a shortage of staff to deal with consumer demand to slowed production as a result of supply chain constraints, and these cases are just the beginning.

In other lines of business, as inflation continues to rise and products become harder to get, we can expect to see increased crime activity, with higher value attributed to stolen goods due to shortages and inflation encouraging more employee theft. In the cyber market, larger ransom payouts are becoming regular and the costs to buy insurance, negotiate ransomware, and rebuild after a breach are all rising, but the need for more experts is also likely to present challenges as wage inflation rises.

Claims teams are seeing social inflation across most lines of business today, most prominently in bodily injury, wrongful death, EPL, and sexual abuse/molestation liability. This trend is driven largely by the plaintiff’s bar, which has been increasingly emboldened to tap into consumer unrest about everything that is happening in the world today. Jurors’ distrust of larger corporations and their empathy for impacted individuals are increasingly factors that the plaintiff’s bar is leveraging to return higher settlements.  

Increasing Complexity of Corporate Insurance Buying

The conflict in Ukraine was already an inflection point for the insurance markets, with hardening rates and capacity changes anticipated in some specific classes as a result. Now, the wider impact of inflationary pressure is likely to push costs (and, in turn, premiums) higher across all classes. This is bad news for insurers, and ultimately even worse news for the business owners who are insurance buyers.

Inflation brings uncertainty and demonstrates the increasing criticality of insurance in certain key areas. For those trading internationally, trade credit insurance becomes essential. With rising business pressure, D&O and EPL insurance-related risks also rise. Business interruption also becomes more likely in a world where energy supply and supply chains are both less certain. As pricing goes up, whether due to supply chain constraints or wage increases, this cannot help but impact companies’ overall performance, leaving them open to potential litigation from shareholders. In a land of rising costs and rising risks, many business owners may consider protecting their business operations as a continued priority, no matter what happens to cost.

Key Action Steps for Risk Managers

One of the most important things that risk managers can be doing in this landscape is proactively seeking to understand what is happening in the world. This includes considering not only the risks that are present, but also what is happening as a result of the inflation and social inflation trends we are seeing—namely higher costs and more pressure from the plaintiff’s bar.

With this understanding in hand, risk managers are then well-advised to call upon trusted experts, including brokers, insurance partners and third-party vendors who are available to test systems and table-top strategies. The priority should always be to find the best vendors and build long-standing relationships with them. This is the time to leverage that trust.

It is essential to be proactive when it comes to risk management. Do not wait for a crisis to come in the door and then behave reactively. Rather, prepare yourself with education and resources and then, after identifying risks unique to your business, proactively seek to mitigate them.

As inflationary risks look to be with us for the immediate future, it is critical for organizations to have a plan. Use your enterprise risk management strategies to develop responses to potential economic and geopolitical events. Communicate regularly and conservatively with shareholders. Consider diversifying your supply chain, as working with different suppliers can add to the confidence level of meeting demand levels. It is also important for businesses to demonstrate empathy for the suffering and hardships that employees and customers may be experiencing.

Many of today’s senior business leadership have not dealt with inflation, unlike the previous generation of leaders who endured double-digit inflation in the 1970s and early 1980s. Use data and rely on the experience of management that survived the Great Recession of 2008 to 2011 to help navigate these new concerns. And of course, work with your carrier partner to ensure that you are properly covered for the road ahead. If COVID-19 has taught us anything, it is that companies must be prepared and plan for the unexpected. This adage will continue to prove true as we weather the coming period of inflation-driven challenges.

Navigating the Supply Chain Crisis

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Two and a half years since COVID-19 emerged and set off a sea change in how we work and live worldwide, business leaders continue to grapple with the challenges it has created for the global supply chain. Extraordinary congestion at critical global ports, decreased availability of key raw materials and component parts, rising freight bills and an increasingly tight job market have all contributed to the need for companies to create an effective logistics risk management program. Such a program must focus on the detailed assessment of key risks to the supply chain and the creation of mitigation strategies that limit their impact on a company’s ability to satisfy its customers.

How Did We Get Here?

To better prepare an organization for the future, it is important to reflect on events in the past. Some of the critical issues that have contributed to the unparalleled supply chain pressure within the logistics world include:

  • Increasing reliance on foreign suppliers for key inputs, adding to the time it takes to secure goods and also leading to a diverse range of exposures that could impact customers
  • Greater dependence on ever more sophisticated components
  • Labor shortages impacting the transportation and port industries
  • Crumbling infrastructure, especially domestically, contributing to increased time and expense to move freight
  • The continued movement to just-in-time procurement, leading to challenges matching supply to demand as supply chains are strained
  • An increasingly sophisticated electronic network to plan, monitor and maintain the logistics chains, leading to increased vulnerability to cyberattacks

While these issues may have been the fuel, it is certainly the COVID-19 pandemic that was the spark for the current challenges facing the supply chain, as the pandemic affected the global supply chain in many ways. For example, reductions in production capacity overseas due to government quarantines left many components in shorter supply.

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Overseas port capacity was restricted because of quarantines and worker shortages due to illness. Already operating at its maximum after years of limited investment, United States port capacity became overtaxed and less efficient at moving product to final destinations. Additionally, increased consumer demand for foreign produced goods, such as home office equipment, clothing and furniture, further stressed global supply lines.

According to maritime research and consulting firm Drewry, these issues resulted in freight rates increasing by more than 100% year over year, transportation time increasing by almost 50%, and logistics professionals facing greater difficulty guaranteeing the ability to meet their company’s needs. Companies with logistics professionals who developed and implemented supply chain risk management strategies have likely experienced a limited impact in comparison to those without such processes in place.

It’s Not Over Yet

While the majority of the world is now emerging from the most dramatic parts of the unprecedented global shutdown and hope is on the horizon, significant threats remain that require vigilance and focus. This is best illustrated by the impact of the early 2022 lockdowns implemented in parts of China as part of the country’s zero-COVID strategy. With an export volume of more than trillion, what happens in China quickly ripples around the world and impacts every sector.
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From semi-conductors to resins, active pharmaceutical ingredients to petroleum products, China is a critical node in the supply chain of almost every consumer product. With major production and transportation hubs like Guangzhou and Shanghai implementing sweeping lockdowns, companies are once again feeling the pinch in reduced ability to source product and significantly expanded time lines for delivery.

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What Can Be Done?

Business leaders should consider several best practices to minimize disruption to their organization’s supply chain:

  1. Develop risk assessments on primary and secondary suppliers, determining the impact they could have on the company’s ability to produce product.
  2. Create a detailed mapping of critical suppliers that includes manufacturers and service providers, such as freight forwarders, in order to assess catastrophic risk potential.
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    Have multiple suppliers, preferably in multiple geographic areas, as sources of critical raw materials and components. This reduces reliance on any single supplier or oversized exposure to geographical catastrophe risk. For identified critical areas, create a business continuity plan that outlines the process to shift to another resource in a separate geographic area.
  3. Maintain increased inventory on hand versus reliance on “just-in-time” methods, increasing the ability to quickly match supply to customer demand.
  4. Invest in supply chain intelligence data and telematics to increase visibility on goods in transit, which will help business leaders identify a quick and effective response to catastrophes as they occur.
  5. Manage customer expectations in respect to delivery schedules. The old adage “Patience is a virtue” may never have been more apt.

Looking Ahead

Corporate executives now have a heightened understanding of the supply chain’s importance to a company’s bottom line, leaving logistics professionals uniquely positioned to gain investment in resources to help address emerging logistics and supply risks. By conducting regular risk assessments and developing risk mitigation strategies to address the exposure, business leaders can better position their company to limit the impact of supply chain challenges and create a stronger, more operationally resilient enterprise.

How to Manage Supplier Risk and Performance in an Uncertain Global Economy

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Essentially every company that manufactures goods today depends on other companies to supply the raw or value-added materials that go into their finished products. Most companies recognize that good supplier relationships are more than simply arm’s length transactions between opposing parties. A better way of looking at those relationships is as partnerships—albeit ones that require management and alignment of objectives first and foremost, but ultimately mutually beneficial relationships. The job of procurement is to ensure performance is as promised, risk is low and business objectives are being met through collaboration. When suppliers are treated as partners, they can be a huge asset in times of trouble. Especially today, with some industries moving from a buyer’s market to a seller’s market, many suppliers can have their pick of customers, especially if some are easier to do business with, foster collaboration, listen to new innovative ideas and, most importantly, pay on time.

Well before the pandemic, leading organizations in every industry have that strong supplier relationships and a reliable supply chain are paramount. It is critical to have full visibility across all your suppliers and knowing everything about them matters, because this may be the difference between meeting customer demand and falling short of it. Suppliers are a source of growth, innovation and efficiency, but if they are not managed holistically, they can be a source of risk, poor performance and noncompliance.

Enterprise technologies are available to holistically manage your suppliers throughout their lifecycle and incorporate all the necessary elements around supplier information-gathering, collaboration, and risk and performance management. Platforms with these capabilities can help risk professionals to: improve visibility across the supply chain (including sub-tiers of suppliers); ensure compliance with regulatory requirements (particularly new ESG regulations around carbon emissions, cybersecurity or diversity reporting); assess supplier viability and risk profiles; and evaluate performance and target improvement areas. Implementing such a system requires considerable advance planning and strategic thought. But following a deliberate series of steps can help you structure a solid program:

  1. Figure out what you want to accomplish with your supplier management program. 
  2. Secure executive buy-in from procurement, supply chain and IT leadership.
  3. Structure a plan to gather complete information about all your suppliers.
  4. Segment your suppliers into relevant groups, identifying the standards and processes each group is required to meet, and potentially establishing processes for each segment.
  5. Communicate goals, objectives and policies to your suppliers, whether it is around a code of ethics or more specific goals per segment.
  6. Create a process to continuously gather information about suppliers using surveys or a supplier portal, including topics like information security practices, certificates, financial updates and generic information updates.
  7. Establish an onboarding process for new suppliers and use third-party data sources to assess them against requirements and goals.
  8. Implement a monitoring program to regularly track key aspects of the supplier’s risk and performance profile. 

Your criteria can evolve over time, so regular reassessments of those criteria and related mitigation measures are always appropriate, but having them well-defined at the start will be a tremendous help in establishing clear expectations. As in any relationship, clarity is key to reducing the friction that can result from misunderstandings.

At the same time, however, issues directly affecting the supplier are only part of a larger risk profile. As we have seen during the pandemic, the transportation of supplies from a vendor’s overseas site to your own facility is also fraught with risks. For example, there are shortages of active piers, forcing ships to anchor for days or weeks before they can unload. Additionally, higher levels of theft and shortages of truck drivers, shipping containers, warehouse space, cargo pallets and inspection officials can all compound delivery delays. Being aware of issues within the supply chain, having visibility of your suppliers’ suppliers, and understanding relationships and dependencies are all key to be able to respond adequately.

Managing Sanctions Risk from Russia’s War on Ukraine

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Since Russia began attacking Ukraine on February 24, thousands of people have been killed and over a million people have had to flee their homes, presenting one of the largest refugee crises Europe has ever experienced. In addition to the tragic human losses, the Russian invasion of Ukraine has triggered wide-ranging economic impacts. Among them, the European Union, United Kingdom, United States, Canada, Japan and others have enacted sweeping financial sanctions on Russia in an effort to pressure President Vladimir Putin to end the conflict. These sanctions have targeted Russia’s financial system and its international financial connections by restricting transactions between Russian banks and those in other countries, most notably through the SWIFT global financial network.

The economic impacts of these sanctions will likely affect many industries around the world, whether organizations deal with Russia directly or indirectly through third countries. In a briefing yesterday, global risk consultancy Control Risks discussed some of the risk management considerations and steps companies need to take as the sanctions landscape continues to evolve. According to panelist Henry Smith, partner and head of business intelligence and due diligence in EMEA at Control Risks, there are five key areas risk professionals should focus on to address the risk facing their companies as a result of these sanctions:

  1. What are your nexuses to Russia (including outside Russia)? Organizations need to look at their touchpoints with Russia, including investors and shareholders, lenders and banks, direct and indirect clients, contractual counterparties, and goods and services sourced directly or indirectly from Russia.
  2. Which sanctions apply to your organization?
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    The applicability of sanctions will vary based on your sector, the nationality of the people within the organization, and the currencies you use. It is helpful to note that, currently, there is greater consensus among various sanctions regimes so you may not have to parse through conflicting degrees of severity—consistent sanctions against Russia are being imposed, at least across most Western countries.
  3. What risks are you exposed to? Conduct a risk assessment around which sanctions you are exposed to and whether there are any business activities, relationships or practices you need to end or change in some way. This involves regularly screening Russian counterparties against sanctions lists and undertaking detailed analysis of higher-risk relationships.
  4. How do you respond? Review the implications of any decisions on employees and on contractual obligations, both with direct and third-party clients. Consider any impact winding down activities in one area may have on other business areas. Be sure to engage with regulators, enforcement agencies, banks and insurers for guidance.
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  5. What do you do as sanctions regimes evolve? Sanctions will change in response to security and political developments over the coming weeks and months, so it is important to stay informed of any communications from authorities.
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    Review and read guidance from regulators, enforcement agencies, banks and insurers, and benchmark with industry peers to make sure you can still operate effectively.

Overall, when deciding whether to continue doing business with Russia, companies will need to consider both reputational and ESG-based perspectives as well as practical issues around your ability to do business, such as maintaining the working capital required to continue operations and ensuring that goods and services can still move through the supply chain.

Experts expect that the Russia-Ukraine crisis will have a long-term impact on the global economy and many effects of these sanctions may not be felt for weeks or months. Companies will need to remain vigilant in order to stay ahead of the risks.