FINANCE: Credit Insurers Feel Flagging Economy
Recent Western Cape Business News
Few people are better placed to witness the stress and strain of the current downturn than credit insurers. “The remarkable thing about the current situation is that we’re seeing claims across the board. It’s no longer about certain industries facing industry-specific hurdles. Instead, every sector is showing a marked increase in credit insurance claims as businesses fail to meet their obligations” says Bridgette Wood, Business Unit Leader, Credit and Political Risks, Alexander Forbes Risk Services.
What is particularly alarming about the current downturn is that businesses are being hit by a double whammy.
“Not only are business conditions tougher, meaning that margins are squeezed, but it is also much more difficult, and in some cases impossible, to access credit” explains Wood. This means that in the current cycle businesses that would normally have cash traded their way out of tight corners by raising short term capital from banks to tide them over no longer have this option. The result is an increase in credit insurance claims.
In response insurers themselves are experiencing difficulties and increased costs is re-insuring credit risk. “Swiss Re, for example, has recently exited the credit re-insurance market following a run of credit claims globally” explains Wood. In addition to the market becoming more expensive, compliance requirements and exclusions have also become more onerous. “Certainly businesses that had not credit insured in the past and might now be considering covering themselves for loss will find the current market a lot tougher” says Wood.
Various industries manage tough times differently. Some industries, like freight for example, which operate on high volumes and small margins can’t sustain a 40% slow down. Other industries, like FMCGs can insulate themselves against volume losses by increasing price - since people can’t stop buying food and other consumables. The steel industry, on the other hand, facing low prices and weak demand doesn’t have this option. Similarly, sugar is seeing a reduction of purchases from key luxury food, chemical and alcohol manufacturers even if household consumption remains constant.
While these examples are the result of unavoidable global slowdown, in South Africa the usually recession-proof pharmaceutical is, this time around, coming under pressure as a result of legislation which if implemented will compromise already strained margins.
Regardless of what industry Wood advises that “given the increased risk of failure in the current cycle businesses should try and transfer risk out. ”Businesses should move to downscale excesses and pay higher premiums. Even if this is more expensive in the short term it may save the business in the long run.
Furthermore, businesses should seriously ask themselves “whether they can really manage that first million of loss right now given current cash flow - or whether it would make more sense to pay a little more on credit insurance and decrease their excess” adds Wood.
Wood also believes that now, more than ever, it is important be on top of your debtors book. “You don’t want to be the last to find out that your biggest debtor is liquidating” warns Wood. When times were good even well run businesses tended to concentrate their energies on chasing sales, not payments. Now risky sales and unsecured payments are coming home to roost.
Wood nonetheless believes that “in the event of having to call on your credit insurance honesty remains is the best policy.” For example, if you discover that your biggest client, who takes R100 million of your product a month, is liquidating it’s really important that you start talking to your credit insurer.
“Involving credit insurance professionals at the earliest stages allows them to use their wide industry knowledge, relationships, and good credit standing to help solve problems before they become crises - destroying the business and ruining many people’s lives” concludes Wood.
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