Rising inflation leaves UAE businesses underinsured

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Rising inflation is leaving UAE companies at risk of being underinsured in the event of a potential claim, with industry experts urging companies to make sure they keep the valuation of assets up to date.

In the event of a claim, such as those being prepared by UAE businesses damaged by the severe flooding last month, the value of an asset is determined by how much it costs to return it to its previous condition.

If a company has not updated the value of the assets listed on its insurance policy, they may find they are underinsured, and any potential payout will not cover their replacement costs.

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“We have seen on a few occasions where unfortunately businesses failed to adjust asset values appropriately and, as a result, received less than what was expected on any submitted claims,” Sonny Ridgewell, managing director at Dubai-based insurance broker Beneple, told AGBI.

For example, a business suffers $100,000 in damage and it has insured the building and contents for $500,000. If the value of the assets is found to be valued at $1 million, due to rising inflation, then the company is underinsured by 50 percent and the insurance company will subsequently only pay out $50,000 of the claim.

“If a company is already underinsured, the inflation factor will increase that gap,” said Ayman El Hout, Dubai-based CEO of insurance brokerage firm Marsh UAE.

“You might have a company that’s well insured today, but [with] inflation it will become uninsured and need to review the value of its assets again.”

Forward-looking policies

The monthly S&P Global UAE Purchasing Managers’ Index (PMI) has found that businesses in the UAE’s non-oil sector are seeing costs rise at the fastest pace for 11 years, Insurance firms warned that these companies are becoming underinsured and running the risk of not being fully covered in the event of a claim.

“When you buy an insurance policy, you buy it for a year from now. You need to have that forward-looking view about the expected inflation, the expected increase in prices… because the claim might happen a couple of months down the line or six months down the line. You need to be well protected,” El Hout warned.

A Marsh UAE report found that, because of supply chain challenges resulting from the pandemic and the Ukraine war, the cost of some raw materials has risen sharply.

In addition, Dubai Chamber of Commerce found that in the first quarter of 2022 metal products surged 46 percent year-on-year and steel rose 25 percent over the same period. This means any repair work is more expensive, potentially leaving company assets underinsured in the event of any claim.

Marsh said the sectors where they are seeing the biggest inflationary impact, leading to underinsurance issues, included agriculture, construction, power and energy, food and beverage, hospitality, logistics, manufacturing, mining and retail.

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Supply chain issues

Business interruption insurance, which is insurance coverage that replaces income lost in the event that business is halted due to direct physical loss or damage, can also be impacted by inflation, experts warned.

“During the height of the pandemic, some businesses found themselves either underinsured or overinsured on account of projected revenues and turnover not being adjusted accordingly,” Ridgewell said.

El Hout also pointed out that supply chain challenges are also having an impact.

“The disruption in the supply chain is as important as the inflation as a factor,” he said.

“Previously you should expect to get spare parts in three months’ time. Now, if you cannot get this part in six months or nine months, it means that getting your machinery back operational would take a longer time and your business interruption period would go longer.”