Has inflation heightened the risk of global economic disruption?

2024/06/06

The surge in inflation delivered a cost-of-living crunch in mature economies and humanitarian crises in emerging economies driven by factors such as food and energy costs, supply chain disruptions and geopolitical events. These inflationary pressures have significant implications for economies worldwide. ^{[15, 16]}

Background

In 2022, while some countries were still recovering from the COVID-19 pandemic, global inflationary pressures started putting a squeeze on prosperity by driving up the price of commodities.

Although the conflict in Ukraine was one of the triggers for the 2022 inflation spike ^[1], an additional significant driver of inflation was the COVID-19 spending and the post-pandemic recovery together with its impact on supply chains.^[2]
During this time consumer demand fell sharply but as restrictions eased, there was pent up demand, creating a shortage of parts, products and commodities and prices rose as a result. ^[18]

An EY survey of 200 senior-level supply chain executives in late 2020 and 2022 found that 72% of companies were negatively affected, with sectors such as automotive and industrial products companies' particularly hard hit. ^[12]

For some emerging economies, which were already struggling with several other problems, such as flooding and droughts, the effects have been profound. ^{[3, 14]}

The rise in the price of basic foodstuffs such as flour and cooking oil which increased by almost 50%, combined with other factors like climate change, has been devastating for some. Countries teetering on the edge (such as Afghanistan and Somalia) have been pushed into humanitarian disasters. ^[4,5]

These effects have been felt on more developed economies too. In May, 2022, an Ipsos poll for the World Economic Forum found that one in four people were struggling financially in 11 developed countries.^[11]

Economic squeeze implications

In both mature and emerging economies, the economic squeeze can be a driver of civil unrest and political violence. Strikes and anti-austerity movements are also likely outcomes; these have the potential to impact economies and bring nations to a standstill. 2022 saw strikes across Europe in countries such as France, Italy, Germany, Spain and the UK. ^{[6, 7]}

In France, there was disruption to fuel supplies ^[8], which led to EDF warn of EUR1bn in strike-related losses. ^[9]

The disruptive effects of inflation may be exacerbated if the wealthy are seen to have profited while others have struggled. ^[10]This actual or perceived economic unfairness can feed into populist movements, both of which are associated with a heightened risk of disruption and political violence.

In the long-term, economic discontent can damage trust in a country’s institutions and the rule of law.

What might happen

Driven by a cost-of-living crisis, we might experience an increased risk for a new wave of populism and extremism emerges, causing greater disruption and unrest globally. The rule of law, might become weaker as might global order. It is possible that 2024 will become a turning point for the economic position of many jurisdictions as almost half of the world's population across 64 countries, is due to go to the polls during the year.

Political violence insurance becomes more important, particularly for those who operate in volatile countries.

Although inflation is now moderating globally, the high inflation of the last few years has delivered shocks that are still being felt and which are likely to result in a heightened risk environment.

The importance of Political Violence cover

These conditions may create a heightened risk of political violence in the coming years. Therefore, adequate Political Violence and Terrorism insurance protection should be considered.
This should encompass areas such as Business Interruption resulting from Property Damage (extra expense, loss of profit, loss of revenue, loss of rent & delay in start-up, advanced loss of profits for construction risks) and Contingent Business Interruption (such as denial of access, loss of attraction, named customers &/or suppliers).

Daniel Hiller, Group Head of Terrorism & Political Violence shared his views on the risks inflation can have on businesses in an evolving and uncertain world.

In an environment where inflation can exacerbate the financial impact of political disturbances, such insurance offers a buffer that preserves operational stability

Daniel Hiller

Munich Re Specialty – Global Markets, Syndicate

Group Head of Terrorism and Political Violence

“Political Violence Insurance is a critical tool for businesses in managing the complex and evolving risks associated with operating in our interconnected and politically volatile world. It can provide financial security and peace of mind, enabling businesses to focus on growth and innovation despite the uncertainties they face.”

“In an environment where inflation can exacerbate the financial impact of political disturbances, such insurance offers a buffer that preserves operational stability.”

“What we have experienced through the 2021 South African unrest and conflict in Ukraine, is that overall insurance claims-related inflation can have significant implications for both insurers and policyholders, impacting premiums, coverage options, claims processes and the overall insurance market dynamics.”

“The knock-on impact of a more prudent approach to reserving due to inflation, coupled with higher costs and tightened terms and conditions on reinsurance programs can significantly affect insurers’ profitability and potentially the long-term viability of the class of business.”

Coverage needs to anticipate events ranging from industrial strikes to coups. Many risks have the potential to affect each other – for instance, public policy can interact with inflation to create poverty and heighten the risk of political unrest.

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