Managing Trade Credit Risk Through Innovative Technology
Although 2021 so far has signaled a quick economic turnaround compared to 2020, rising commodity prices, supply chain disruptions, and vaccine-resistant Covid-19 mutations pose significant threats for global economic recovery in 2022.
Against this backdrop, managing trade credit insurance exposure and risk are more important than ever. The ongoing pandemic and resultant economic uncertainty have tested many companies, sectors, and countries from a credit worthiness and sovereign risk perspective. Massive governmental support, including Trade Credit Reinsurance schemes, had to be extended way beyond original expectations, artificially propping up companies and economies. These schemes have recently come to an end, and the economic knock-on effects will start to work through the economy during 2022, when insolvency rates are expected to rise. The inevitable growth seen in the number of “Zombie firms” operating on the edge of insolvency, artificially kept afloat during the pandemic, will undoubtedly find the end of support the final straw.
So, what factors are creating the need to ensure that accumulations of trade credit risk are identified and managed robustly? Increased volatility in sector and country default risk, brought about by sudden changes in government action, be it ever-changing travel restrictions and lockdowns such as the Meishan terminal at the Ningbo-Zhoushan port in China being shut down by a single corona virus case, emphasize the need to know and spread your trade credit risk.
Supply Chain issues have highlighted a long-overdue rethink of the Lean and “just in time” economy and organisational dependencies, as relatively small disruptive events result in ever larger and longer delays in supply, delivery, and ultimately payment. Longer-term effects of climate change on default risk will vary widely by sector and country, and new ESG reporting will require insurers to understand fully, assess, monitor their portfolios to manage this risk.
Transforming Credit Risk Management Digitally
As Insurers look to grow their trade credit portfolios, they will be exposed to a greater number of risks in an increasingly unstable environment. Through innovative technology, insurers can quickly and efficiently understand how accumulations of risk are developing within the complex inter-connected structures of buyer organisations, countries, and industries.
The ability to quickly and efficiently process ever-increasing amounts of data on a growing portfolio in real-time will differentiate those that are agile, proactive, and responsive from those that act in a passive and reactive manner. Technological solutions available today allow underwriters, portfolio managers, and exposure managers to access interactive dashboards, reports, and charts in real-time, combining exposure and hazard data to spot (over or under) concentrations of Credit risk by Obligor, Industrial/commercial Sector, Region and Country. Cutting the time taken to check capacity limits, enabling faster and more profitable decision-making decisions.
As I see it, there are three ways technology can take Credit Risk Analysis to the next level:
- The integration and use of multiple third-party data sources to contrast and compare credit risk from a company, region and country and sovereign risk in a single place for underwriting and exposure management.
- The exploration of Artificial Intelligence and Machine Learning to analyse ever-increasing data, highlighting changing risk landscapes, to deliver insights to exposure and portfolio managers.
- Predictive Analytics in the fast-moving world of economic data will allow underwriters to react faster and work with clients on credit limits.
The opportunities for insurers to leverage new sources of information will enable them to be more flexible in their product offerings, and pricing and better meet their customers’ needs. As new and faster sources of data flood our digitised world, updating and changing exposures (e.g., credit limits per obligor) and credit default risk data seamlessly via API integration will allow prompt and proactive action to be taken, working with insured clients to actively manage potential claims sooner rather than later. Quick notification and active risk management will reduce ultimate claims and build added value and stickability with valued clients. As new data on the interconnectivity of organisations emerges, underwriters will be able to sift through and allocate dependencies between Obligors that seemingly were unconnected before.
As 2021 draws to a close, there is still so much uncertainty ahead of the new year. The withdrawal of government-backed reinsurance schemes will affect credit insurers´ exposure to specific industries that are still vulnerable and haven´t regained their strength from pre-pandemic levels. With the ever-growing instability of the geopolitical environment, mitigating credit risk has never been more critical than now.