Why managing trade credit risk is now more important than ever
As I write this, Brexit is again dominating the news headlines, as it seems to have done every week since the beginning of time. The prospect of a no-deal Brexit is now looming larger than ever, and with this comes a flurry of new reports on the potential impact this may have on supply chains and cross border trade agreements. The probability for bankruptcies and credit defaults are on the rise and lead to insurers needing to be more cautious about underwriting risks in the UK.
This all comes against a backdrop of steadily increasing numbers of insolvencies and defaults. According to data published from the Association of British Insurers, the number of claims made by UK firms in the first quarter of 2018 to cover non-payment of debts were at their highest level since 2009. The collapse of Carillion serves as a reminder of the vast potential for credit losses. In this case, it is estimated that only 31m of the 1bn owed by Carillion was protected by insurance, but it still highlights the potential for huge losses in this line of business, especially when considering that one firm’s insolvency can often have a trigger effect through the entire supply chain.
Looking more broadly outside the UK, we can see several economic trends which increase the risk of businesses failing. Increased trade protectionism, uncertainty over economic policy and the possibility of financial market disruptions all contribute to a challenging business environment and the increased likelihood of insolvency.
On the other hand, there is an expectation of increased take-up of trade credit insurance. James Daly of Euler Hermes (the world’s largest trade credit insurer) stated that closing the protection gap is a significant growth opportunity, particularly outside of the traditional strong market of Western Europe. Many insurers have identified that a key element of their growth strategy is to be more agile in responding to their clients’ needs. Providing greater flexibility in allowing policy holders to select which risks to include under the insurance cover, rather than protecting the whole turnover, would be a step towards giving a better fit.
My perspective on this is that all the above factors create an environment where it is more important than ever before to ensure that accumulations of trade credit risk are identified and managed in a robust way. As insurers look to grow their trade credit portfolios, they will be exposed to a greater number of risks, in an environment that is increasingly unstable. It is critical for insurers to be able to quickly and efficiently understand how accumulations of risk are developing, within the complex inter-connected structures of buyer organisations, countries and industries.
As with all other insurance lines, it is also increasingly important to give underwriters access to the best possible information in order to apply their expertise and make the most informed decisions possible. Being able to immediately access the latest credit rating information, pro-actively flag accumulations of risk, and check underwriting guidelines are all important elements of this process. All of this must be done automatically, to eliminate unnecessary manual processes and allow those companies at the cutting edge of technology to take advantage of the expected growth in demand.
There are also huge opportunities for insurers to leverage new sources of information to allow them to be more flexible in their product offerings and pricing and better meet their customers’ needs. The IOT and connected systems will allow insurers unprecedented access to information on their clients and their supply chains, allowing them to create tailored insurance offerings.
At AdvantageGo, we are excited to play our part in this, having recently partnered with a leading trade credit insurer to ensure they have the right technology in place to underpin their ambitious plans. Watch this space for more information.