2021 Weather, Climate and Catastrophe Insight
Navigating New Forms of Volatility
Inflation is Influencing Business Risk Management — Take Steps to Mitigate its Impact
Inflation has become one of the most vexing issues confronting economists, governments, business leaders and consumers — and has also tasked risk managers with navigating new forms of volatility in their risk management programs.
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Craig Lyn Cook
Valuations Director, Global Risk Consulting,
Energy Risk Engineering
craig.lyn-cook@aon.co.uk
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Inflation has made its presence strongly felt — in fact, global inflation has now reached 6 percent, 7.9 percent in the U.S., due in large part to the effects of the COVID-19 pandemic, which have created myriad interconnecting issues resulting in demand of goods and services outstripping supply.
1. Gabriel T. Rubin, “U.S. February Consumer Prices Rose 7.9 percent From Year Earlier,” Wall Street Journal, March 10, 2022
2. International Monetary Fund, “Rising Caseloads, A Disrupted Recovery, and Higher Inflation,” Jan. 2022
3. Financial Times indices, Financial Times
1. Trading Economics Commodities, as of March 17, 2022
6. International Monetary Fund, “Rising Caseloads, A Disrupted Recovery, and Higher Inflation,” Jan. 2022
5. “Renewable electricity growth is accelerating faster than ever worldwide” IEA, Dec 1, 2021
This has led to a return of inflationary pressures at a level not seen in generations. The Bloomberg Commodity Spot Index, which tracks price changes across a range of metals and agricultural commodities, jumped nearly 60 percent in 2021 over the same period in 2020.
Natural Resource
Food, Agribusiness and Beverage
Transportation and Logistics
North America
(non U.S.)
Europe
Middle East
Africa
Asia
Oceania
Sarah LaBarre
If you don’t have the capability to offer increased cash and equity, there are still a lot of powerful tools available to managers and HR leaders. Aon’s recent digital report on future skills and talent resilience in the life sciences sector provides a comparative view of organizational approaches to total rewards from 2020 to 2021, highlighting the increased focus on employee-centered strategies and wellbeing. More specifically, many life sciences companies are offering additional paid time off, including targeted recharge days, summer shutdowns and extra days around holidays. While there is a strong emphasis on flexibility, finding a balance is key. Companies that can offer work-from-home options should also encourage in-person meetings, lunches and other gatherings to foster connection and engagement. This directly improves company culture — a core component of retention.
Career advancement and accelerated promotions are extremely important to all employees across generations, particularly when it comes to providing a pathway for development. “Almost immediately after being hired, employees are asking what career growth options they have, and it’s important to have an answer. Every company should take the time to determine real definitions around career opportunities for employees,” says Sarah LaBarre, an associate partner focused on rewards solutions in the life sciences sector for Aon’s human capital practice.
Understanding job levels and families, as well as where any overlaps lie is essential. Companies should view career frameworks holistically, connecting job architecture, rewards, salary structures and incentives to create career paths that are no longer exclusively linear. If people are given new opportunities across different job families within the organization, there will be less reason for them to leave.
Almost immediately after being hired, employees are asking what career growth options they have, and it’s important to have an answer. Every company should take the time to determine real definitions around career opportunities for employees.
“
“
Transportation and Logistics
• While the pandemic played a part in the rising costs in the Food, Agribusiness and Beverage (FAB) sector, the reasons for the increases go much deeper. Increased fertilizer costs, adverse weather, labor shortages, fuel costs, supply chain issues in addition to cyber attacks have led to dramatic price increases and put pressure on crop yields. These conditions are hampering efforts to get to market in an industry where an efficient end-to-end delivery model is critical. Food inflation, which stood at a modest 2.2 percent in 2021, jumped to 7 percent at the start of 2022, its sharpest rise since 1981.
The price of meat, dairy and cereals trended upward from late 2021. Prices for feed grains and wheat, rice and soybeans are all higher. Global production of commodities such as wheat, corn and soybeans have decreased due to a variety of factors including current global political disruptions. Such disruptions are also impacting traditional supply routes. Between April 2020 and December 2021 alone, the price for soybeans increased 52 percent and corn and wheat grew 80 percent, according to the International Monetary Fund.
Supply chain issues can certainly be felt across most global industries, however, they are particularly acute in the FAB sector where speed to market is essential and the delivery delay of just one commodity -- when multiple ingredients must come together in the process of creating a single product -- can be devastating for businesses that operate on the thinnest of margins.
The pandemic is one reason behind the current supply chain issues – according to Aon’s Operational Resilience in the Food Agribusiness and Beverage Industry report, 42 percent of businesses surveyed experienced supply chain acceleration, however, 40 percent faced raw material supply issues due to the impact of COVID-19.
Issues in the FAB industry go beyond the pandemic. Climate disruptions, including drought, flooding and freezes, and also recent global conflict, have put serious stress on traditional global supply routes, and the FAB industry overall.
Further, a lack of labor in the fields, processing plants and in the supply chain, together with high turnover, are some of the FAB sector’s biggest obstacles as well. The lack of skilled labor can lead to potential food safety issues, and a deterioration of workplace safety.
These issues are compounded by the threat of cyber attacks, which can disrupt production and distribution and cause business interruption issues. Such attacks can destroy operations and supply chains, resulting in significant revenue loss, material costs and reputational damage. Aon reports that nearly eight in 10 FAB leaders surveyed rank cyber ris
Twenty-three individual events in the U.S. exceeded the $1 billion economic loss threshold in 2021.
“
Food, Agribusiness and Beverage
Axxxx
Global natural resource prices have risen sharply, from March 2021 to March 2022: Coal (up 275 percent), aluminum (up 56 percent), copper (up 13 percent), nickel (up 163 percent), brent crude oil (up 63 percent), and natural gas (up 97 percent). Metal prices have increased in the past 12 months due to increased demand for base metals and a fall in Chinese steel production. U.S. steel prices rose more than 200 percent in 2021, however, prices have since retreated in 2022.
Alongside legacy pandemic-related forces, currency exchange rates, interest rate hikes and political upheaval are increasing the cost of natural resources.
In the short term, energy prices remain highly uncertain. Recent international volatility helped push brent crude oil to well over $100 a barrel in March, leading gasoline prices to record highs. Natural gas also rose steeply, averaging $4.69 per million British thermal units. Global renewable energy, meanwhile, continues to grow. Renewables are set to account for nearly 95 percent of the increase in global power capacity through 2026.
Monetary conditions have also tightened. The U.S. Federal Reserve has begun increasing rates; the European Central Bank, meanwhile, has committed to maintaining its key interest rates at current levels awaiting progress toward stabilizing inflation at its medium-term target.
Less friendly monetary policies in advanced economies will likely pose challenges for central banks and governments in emerging markets with developing economies. Higher returns elsewhere will likely incentivize capital to flow overseas, putting downward pressure on emerging markets and developing economy currencies and raising inflation. Without commensurate tightening, this will likely increase the burden on foreign-currency borrowers, both public and private. Businesses with international exposures, both in property and equipment, are likely to be impacted.
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“
“
Natural Resource
Natural Resources
Global natural resource prices have risen sharply, from March 2021 to March 2022: coal (up 275 percent), aluminum (up 56 percent), copper (up 13 percent), nickel (up 163 percent), brent crude oil (up 63 percent), and natural gas (up 97 percent). Metal prices have increased in the past 12 months due to increased demand for base metals and a fall in Chinese steel production. U.S. steel prices rose more than 200 percent in 2021, however, prices have since retreated in 2022.
Alongside legacy pandemic-related forces, currency exchange rates, interest rate hikes and political upheaval are increasing the cost of natural resources.
In the short term, energy prices remain highly uncertain. Recent international volatility helped push brent crude oil to well over $100 a barrel in March, leading gasoline prices to record highs. Natural gas also rose steeply, averaging $4.69 per million British thermal units. Global renewable energy, meanwhile, continues to grow. Renewables are set to account for nearly 95 percent of the increase in global power capacity through 2026.¹
Monetary conditions have also tightened. The U.S. Federal Reserve has begun increasing rates; the European Central Bank, meanwhile, has committed to maintaining its key interest rates at current levels awaiting progress toward stabilizing inflation at its medium-term target.
Less friendly monetary policies in advanced economies will likely pose challenges for central banks and governments in emerging markets with developing economies. Higher returns elsewhere will likely incentivize capital to flow overseas, putting downward pressure on emerging markets and developing economy currencies and raising inflation.
Without commensurate tightening, this will likely increase the burden on foreign-currency borrowers, both public and private.⁶ Businesses with international exposures, both in property and equipment, are likely to be impacted.
Name Here
Food inflation, which stood at a modest 2.2 percent in 2021, jumped to 7 percent at the start of 2022, the sharpest rise since 1981.
“
While the pandemic played a part in the rising costs in the Food, Agribusiness and Beverage (FAB) sector, the reasons for the increases go much deeper. Increased fertilizer costs, adverse weather, labor shortages, fuel costs, supply chain issues in addition to cyber attacks have led to dramatic price increases and put pressure on crop yields. These conditions are hampering efforts to get to market in an industry where an efficient end-to-end delivery model is critical. Food inflation, which stood at a modest 2.2 percent in 2021, jumped to 7 percent at the start of 2022, its sharpest rise since 1981.
The price of meat, dairy and cereals trended upward from late 2021. Prices for feed grains and wheat, rice and soybeans are all higher. Global production of commodities such as wheat, corn and soybeans have decreased due to a variety of factors including current global political disruptions. Such disruptions are also impacting traditional supply routes. Between April 2020 and December 2021 alone, the price for soybeans increased 52 percent and corn and wheat grew 80 percent, according to the International Monetary Fund.
Supply chain issues can certainly be felt across most global industries, however, they are particularly acute in the FAB sector where speed to market is essential and the delivery delay of just one commodity — when multiple ingredients must come together in the process of creating a single product — can be devastating for businesses that operate on the thinnest of margins.
The pandemic is one reason behind the current supply chain issues – according to Aon’s Operational Resilience in the Food Agribusiness and Beverage Industry report, 42 percent of businesses surveyed experienced supply chain acceleration, however, 40 percent faced raw material supply issues due to the impact of COVID-19.
Issues in the FAB industry go beyond the pandemic. Climate disruptions, including drought, flooding and freezes, and also recent global conflict, have put serious stress on traditional global supply routes, and the FAB industry overall.
Further, a lack of labor in the fields, processing plants and in the supply chain, together with high turnover, are some of the FAB sector’s biggest obstacles as well. The lack of skilled labor can lead to potential food safety issues, and a deterioration of workplace safety.
These issues are compounded by the threat of cyber attacks, which can disrupt production and distribution and cause business interruption issues. Such attacks can destroy operations and supply chains, resulting in significant revenue loss, material costs and reputational damage. Aon reports that nearly eight in 10 FAB leaders surveyed rank cyber risk as a top-five corporate threat.
Transportation and logistics issues also compound inflation. Interconnected supply chains continue to be hampered by container shortages and lack of dock and truck driver labor. Global shipping container rates rose from less than $2,000 to a peak of nearly $11,000 in late 2021.
Shipping costs continue to increase overall – ocean freight costs are up 29 percent and shipping by truck is up 18.3 percent in January 2022 in the U.S. alone. As ocean cargo supply chain delays have continued, shippers have increasingly turned to air freight to deliver their goods. However, recent political conflicts have caused a surge in jet fuel costs and shippers have paid the price. Air cargo rates from China to Europe jumped 80 percent to $11.36 a kilogram in early March, according to Freightos, a freight booking platform.
Aon classifies complex supply chain risk as one of the six largest risks facing businesses today, along with loss of intellectual property, cyber attacks, damage to reputation, climate change and the COVID-19 pandemic. All are interconnected and evolving fast.
Supply chain disruptions due to the pandemic are well-documented and substantial. According to Aon’s COVID-19 Risk Management and Insurance Survey the largest percentage of disruption in the supply chain due to the pandemic was because of a drop in consumer demand (36 percent), which affected hospitality and energy sectors that are heavily led by demand.
Increased cyber attacks have also caused broad disruptions in the supply chain. Ransomware attacks are threatening the shipping industry, which relies heavily on the interaction between a number of different digital systems, from ports and cities to individual ships and the companies that own them.
Loss of income from this risk in the past 12 months has risen from 21 percent to 35 percent, whereas risk readiness has declined from 70 percent to 63 percent. The results are consistent with those in Aon's COVID-19 survey, in which 36 percent of surveyed companies cited disruption to their supply chains and nearly 20 percent had trouble sourcing materials.
Economists initially felt inflation would be a transitory issue. However, many now believe inflation may be more persistent — there are too many interconnected variables present to suggest this is a short-term phenomenon.
The International Monetary Fund expects ongoing supply chain disruptions and high energy costs to continue to boost inflation, only decreasing in late 2022 as supply-demand imbalances wane and monetary policy in major economies responds.
With the effects of the pandemic still fresh on business leaders’ minds, it is not surprising that risks contributing to high inflation are top on their list of risk concerns. Leaders surveyed in Aon’s Global Risk Management Survey rank such contributing factors as Business Interruption (2), Commodity Price Risk/Scarcity of Materials (4) and Supply Chain/Distribution Failure (8) among their top 10 risks over the next three years. And leaders are not convinced those risks will soon dissipate. Each remains in the top 15 of their projected risk concerns for 2024.
History provides evidence that inflation can also impact risk, adding to risk buyers’ challenges to achieve risk resilience amid a hard market that’s just beginning to moderate across multiple lines of business.
During the high inflationary period of the 1970s and early 1980s the U.S. property-casualty industry delivered weaker underwriting performance and reserve levels. Rising rates led to fixed income asset value deterioration, unpredictable claims trends and reduced underwriting quality during a period of “cashflow” underwriting. Insurance carrier combined ratios were often over 100 percent during that period and the property-casualty industry recorded its worst-ever underwriting year in 1984 with a 118 percent combined ratio.
The current market is indeed better positioned to absorb reserve risks relative to historical inflationary periods, with 15 years of favorable calendar-year reserve development, according to Fitch Ratings.
What inflation can do is increase loss costs, which can impact pricing. Fitch adds that rising inflation is negatively impacting 2021 claims in the property and commercial auto segments with higher costs for building materials, auto parts and skilled labor. It is too early to know what impact higher inflation will have on longer-tail lines as claim factors such as medical and litigation costs take longer to unfold.
Generally, carriers benefit from rising rates and may be positioned to increase premiums for standard lines. Carriers will, however, need to rely more on underwriting efficiency and investment earnings to minimize any shortfall between premium revenue and claims payouts as premiums tend to lag behind the rate of inflation.
Inflation as a Risk Management Concern
Alternative Risk Strategies
Solutions to Help Mitigate Inflationary Pressures
Innovative alternative placement ideas and strategies can help businesses rethink access to capital and control risk outcomes. Many risk managers will choose to retain more risk, but it is important to be strategic and thoughtful in these decisions so that the agreed risk assumption is an informed decision for the organization and its key stakeholders.
Further, to effectively achieve risk resilience and gain access to greater capital and capacity, more businesses are leveraging analytics to help determine their optimal level of risk retention. Depending on how much risk they choose to retain, they might consider evaluating the effectiveness of single-parent or group captives or other alternative risk-financing approaches, including parametric insurance and insurance-linked securities such as catastrophe bonds, as strategic mechanisms that might provide the ability to raise retentions and reduce risk transfer.
For a variety of reasons, inflationary times require risk managers to stay on top of property and equipment valuations. Market-shifting events and inflation can cause international currency fluctuations. If currencies are devalued, a business runs the risk of being underinsured. International projects may include equipment from other countries, which could change the replacement cost. That could potentially lead to being underinsured, which could impact the business should a claim occur.
Further, with construction materials, and repair and rebuilding costs increasing, risk managers should confirm the valuations utilized in their policies would be able to cover current recovery expenses after a loss. Outdated valuations may leave businesses underinsured if the cost of repairing or rebuilding their properties exceed their existing coverage limits.
Current inflationary pressures are likely to ease eventually. In the interim, however, risk managers who focus on staying ahead of those pressures by seeking out creative strategies and properly managing their valuations and coverage limits will likely experience more risk resilience through these turbulent times.
Reassess Valuations
Natural Resources
Daniel Ocampo
LATAM Natural Resources Industry Leader
daniel.ocampo@aon.com
Tami Griffin
U.S. National Practice Leader
tami.griffin@aon.com
Ciara Jackson
EMEA Food, Agribusiness & Beverage Industry Leader
ciara.jackson@aon.ie
Food, Agriculture, Beverage
Chris Bhatt
Chief Commercial Officer, Global Transportation and Logistics
chris.bhatt@aon.co.uk
Transportation & Logistics
Jas Thandi
Partner, Global Head of Asset Allocation
jas.thandi.2@aon.com
General Inflation Questions
7. International Monetary Fund, “Rising Caseloads, A Disrupted Recovery, and Higher Inflation,” Jan. 2022
8. Kay Summers, “Food Price Inflation is Endangering Global Food Security,” American University, Washington D.C., Feb 24, 2022
9. “Operational Resilience in the Food, Agribusiness and Beverage Sector,” Aon, 2021
10. Parisa Kamali, “Global Shipping Costs are Moderating, But Pressures Remain,” International Monetary Fund. Jan. 13, 2022
11. Vince Golle, “U.S. Freight Cost Blowout May Mean Little Inflation Relief Soon,” Bloomberg, Feb. 16, 2022
12. Parisa Kamali, “Global Shipping Costs are Moderating, But Pressures Remain,” International Monetary Fund. Jan. 13, 2022
13. “Inflation, Rising Rates Fuel Downside Risk for US P/C Insurers,” Fitch Ratings, October 2021
Evolving compensation programs
Increasing use of equity
Realizing the power of perquisites and career development
North America
(non U.S.)
Europe
Middle East
Africa
Asia
Oceania
Sarah LaBarre
If you don’t have the capability to offer increased cash and equity, there are still a lot of powerful tools available to managers and HR leaders. Aon’s recent digital report on future skills and talent resilience in the life sciences sector provides a comparative view of organizational approaches to total rewards from 2020 to 2021, highlighting the increased focus on employee-centered strategies and wellbeing. More specifically, many life sciences companies are offering additional paid time off, including targeted recharge days, summer shutdowns and extra days around holidays. While there is a strong emphasis on flexibility, finding a balance is key. Companies that can offer work-from-home options should also encourage in-person meetings, lunches and other gatherings to foster connection and engagement. This directly improves company culture — a core component of retention.
Career advancement and accelerated promotions are extremely important to all employees across generations, particularly when it comes to providing a pathway for development. “Almost immediately after being hired, employees are asking what career growth options they have, and it’s important to have an answer. Every company should take the time to determine real definitions around career opportunities for employees,” says Sarah LaBarre, an associate partner focused on rewards solutions in the life sciences sector for Aon’s human capital practice.
Understanding job levels and families, as well as where any overlaps lie is essential. Companies should view career frameworks holistically, connecting job architecture, rewards, salary structures and incentives to create career paths that are no longer exclusively linear. If people are given new opportunities across different job families within the organization, there will be less reason for them to leave.
Almost immediately after being hired, employees are asking what career growth options they have, and it’s important to have an answer. Every company should take the time to determine real definitions around career opportunities for employees.
“
“
Realizing the power of perquisites and career development
Twenty-three individual events in the U.S. exceeded the $1 billion economic loss threshold in 2021.
Equity is another important retention tool that can also help maximize compensation programs. Equity awards, which have become integral to the total rewards package, are larger and far-reaching. Companies can offer faster vesting periods and make the grants more targeted, if necessary.
Key business issues in hiring and retaining talent are driving evolving equity trends. We are seeing an increased use of full-value shares and many life sciences companies are introducing restricted stock units (RSUs) earlier in the life cycle. Equity choice at the commercial stage is also being considered to help companies differentiate themselves in the market. With this growing trend, tension between equity spend and talent needs continues. Compensation committees are being extra mindful of equity spend, ensuring stock awards are purposefully allocated to the highest performers and critical new hires.
“
Increasing use of equity
Aria Glasgow
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“
Companies are anticipating higher overall salary budgets than last year to keep up with the market. The starting salaries of many key positions are at market rate highs, turning companies to the use of sign-on bonuses to help attract talent. Focusing on long-tenured employees is also critical, as they look for ways to catch up to rising numbers. When firms don’t have sufficient cash for increases across the board, targeted increases for hard-to-fill positions or top performers are being used.
Additionally, special adjustment budgets are on the rise, which companies are using in response to market increases and internal equity issues caused by the extremely hot talent market. Many businesses are considering accelerating these adjustments and merit cycles to the end of this year or early 2022, allowing delivery of awards to their people sooner.
Even though these can all be effective strategies, it’s becoming more and more apparent that firms are not able to tackle attraction and retention with merit and market adjustments alone. “This is just one piece of the puzzle. It is more important than ever before for employers to look at the total employee value proposition, rather than just focus on one aspect of rewards,” explains Aria Glasgow, a partner focused on the life sciences sector for Aon’s human capital practice.
Evolving compensation programs
While the pandemic played a part in the rising costs in the Food, Agribusiness and Beverage (FAB) sector, the reasons for the increases go much deeper. Increased fertilizer costs, adverse weather, labor shortages, fuel costs, supply chain issues in addition to cyber attacks have led to dramatic price increases and put pressure on crop yields. These conditions are hampering efforts to get to market in an industry where an efficient end-to-end delivery model is critical. Food inflation, which stood at a modest 2.2 percent in 2021, jumped to 7 percent at the start of 2022,⁷ its sharpest rise since 1981.⁸
The price of meat, dairy and cereals trended upward from late 2021. Prices for feed grains and wheat, rice and soybeans are all higher. Global production of commodities such as wheat, corn and soybeans have decreased due to a variety of factors including current global political disruptions. Such disruptions are also impacting traditional supply routes. Between April 2020 and December 2021 alone, the price for soybeans increased 52 percent and corn and wheat grew 80 percent, according to the International Monetary Fund.
Supply chain issues can certainly be felt across most global industries, however, they are particularly acute in the FAB sector where speed to market is essential and the delivery delay of just one commodity -- when multiple ingredients must come together in the process of creating a single product -- can be devastating for businesses that operate on the thinnest of margins.
The pandemic is one reason behind the current supply chain issues – according to Aon’s Operational Resilience in the Food Agribusiness and Beverage Industry report, 42 percent of businesses surveyed experienced supply chain acceleration, however, 40 per
cent faced raw material supply issues due to the impact of COVID-19.
Issues in the FAB industry go beyond the pandemic. Climate disruptions, including drought, flooding and freezes, and also recent global conflict, have put serious stress on traditional global supply routes, and the FAB industry overall.
Further, a lack of labor in the fields, processing plants and in the supply chain, together with high turnover, are some of the FAB sector’s biggest obstacles as well. The lack of skilled labor can lead to potential food safety issues, and a deterioration of workplace safety.
These issues are compounded by the threat of cyber attacks, which can disrupt production and distribution and cause business interruption issues. Such attacks can destroy operations and supply chains, resulting in significant revenue loss, material costs and reputational damage. Aon reports that nearly eight in 10 FAB leaders surveyed rank cyber risk as a top five corporate threat.⁹
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Global natural resource prices have risen sharply, from March 2021 to March 2022: Coal (up 275 percent), aluminum (up 56 percent), copper (up 13 percent), nickel (up 163 percent), brent crude oil (up 63 percent), and natural gas (up 97 percent).⁴ Metal prices have increased in the past 12 months due to increased demand for base metals and a fall in Chinese steel production. U.S. steel prices rose more than 200 percent in 2021, however, prices have since retreated in 2022.
Alongside legacy pandemic-related forces, currency exchange rates, interest rate hikes and political upheaval are increasing the cost of natural resources.
In the short term, energy prices remain highly uncertain. Recent international volatility helped push brent crude oil to well over $100 a barrel in March, leading gasoline prices to record highs. Natural gas also rose steeply, averaging $4.69 per million British thermal units. Global renewable energy, meanwhile, continues to grow. Renewables are set to account for nearly 95 percent of the increase in global power capacity through 2026.⁵
Monetary conditions have also tightened. The U.S. Federal Reserve has begun increasing rates; the European Central Bank, meanwhile, has committed to maintaining its key interest rates at current levels awaiting progress toward stabilizing inflation at its medium-term target.
Less friendly monetary policies in advanced economies will likely pose challenges for central banks and governments in emerging markets with developing economies. Higher returns elsewhere will likely incentivize capital to flow overseas, putting downward pressure on emerging markets and developing economy currencies and raising inflation. Without commensurate tightening, this will likely increase the burden on foreign-currency borrowers, both public and private.⁶ Businesses with international exposures, both in property and equipment, are likely to be impacted.
Transportation and logistics issues also compound inflation. Interconnected supply chains continue to be hampered by container shortages and lack of dock and truck driver labor. Global shipping container rates rose from less than $2,000 to a peak of nearly $11,000 in late 2021.¹⁰
Shipping costs continue to increase overall – ocean freight costs are up 29 percent and shipping by truck is up 18.3 percent in January 2022 in the U.S. alone.¹¹ As ocean cargo supply chain delays have continued, shippers have increasingly turned to air freight to deliver their goods. However, recent political conflicts have caused a surge in jet fuel costs and shippers have paid the price. Air cargo rates from China to Europe jumped 80 percent to $11.36 a kilogram in early March, according to Freightos, a freight booking platform.
Aon classifies complex supply chain risk as one of the six largest risks facing businesses today, along with loss of intellectual property, cyber attacks, damage to reputation, climate change and the COVID-19 pandemic. All are interconnected and evolving fast.
Supply chain disruptions due to the pandemic are well-documented and substantial. According to Aon’s COVID-19 Risk Management and Insurance Survey the largest percentage of disruption in the supply chain due to the pandemic was because of a drop in consumer demand (36 percent), which affected hospitality and energy sectors that are heavily led by demand.
Increased cyber attacks have also caused broad disruptions in the supply chain. Ransomware attacks are threatening the shipping industry, which relies heavily on the interaction between a number of different digital systems, from ports and cities to individual ships and the companies that own them.
Loss of income from this risk in the past 12 months has risen from 21 percent to 35 percent, whereas risk readiness has declined from 70 percent to 63 percent. The results are consistent with those in Aon's COVID-19 survey, in which 36 percent of surveyed companies cited disruption to their supply chains and nearly 20 percent had trouble sourcing materials.
Economists initially felt inflation would be a transitory issue. However, many now believe inflation may be more persistent -- there are too many interconnected variables present to suggest this is a short-term phenomenon.
The International Monetary Fund expects ongoing supply chain disruptions and high energy costs to continue to boost inflation, only decreasing in late 2022 as supply demand imbalances wane and monetary policy in major economies responds.¹²
Food, Agribusiness & Beverage
Transportation & Logistics
1. Trading Economics Commodities, as of March 17, 2022