Reach out to Us
info@financeotcconsulting.com
Reach out to Us
info@financeotcconsulting.com
Today's article aims at sharing latest developments in the complex area of trading risks with Credit & O2C Finance professionals, while raising awareness of Credit insurance still an effective risk-transfer tool at their disposal in today's world.
by Evelyne Legaux on 18-10-2022
According to a recent survey conducted by @Mazars, 92% of CEOs are optimistic about their ability to grow revenue, while 86% are confident in their resilience against crisis!
Performance improvement & ESG strategy – along with other external factors – are set to drive the transformation agenda of companies over the next 3 to 5 years, as the world moves to prioritize long-term value over short-term growth.
There is no doubt whatsoever that actively managing risk in today’s world is at the core of those ‘other external factors’, and a condition to long-term growth & sustainability.
We live in times of unprecedented risk…
At this stage, most businesses are accustomed to and have taken/are taking measures to identify & mitigate those ‘real’ risks related to supply chain disruptions, employee expectations, energy & food shortages, cybersecurity, new regulatory requirements or climate change.
What about those ‘financial’ risks however, that are becoming more prevalent every single day? Notwithstanding the rise in energy prices & the cost of maintaining higher inventories compared to pre-pandemic levels, the world is facing a flurry of other financial risks that require awareness, judgment & deep understanding.
Why? Because 2022’s inflation is in essence very different from the kind of inflation that the Western world is used to, that is inflation driven by a surge in aggregated demand across the board, causing the economy to overheat & a widespread price-salary-price upward spiral.
Instead, today’s inflation arises from a complex mix of demand-driven factors & supply-driven factors resulting from the Covid-19 pandemic & related public policies, combined with the consequences of the war in Ukraine. While a rise in aggregated demand - caused by households spending savings accumulated during lockdowns – has indeed been identified as one root-cause of inflation, it is only one factor amongst many others and surely not the main one as most economic actors’ confidence in the future is falling again…
Additionally, both the demand-driven factors & supply-driven factors at stake are sectoral as opposed to being general across the entire economic spectrum.
What does this tell us? Firstly, that managing today’s inflation is a complex matter that requires innovative ways of thinking by itself! This is the reason why we have witnessed Central Banks being late to react to the acceleration of the prices index.
Secondly, that the idea of applying the typical remedies of the past in today’s ever-changing world, is questionable. This though is what Central Banks have started to do with successive hikes to interest rates. Will those interest rates increases resolve the many supply-driven factors of inflation though? This is a legitimate question to which the answer is most likely NO, or Yes BUT to a very small extent… What is certain however, is that it will adversely affect people/businesses’ ability to purchase/invest going forward, thus causing an economic slowdown at best, if not a recession... The other side of the coin though, is that Central Banks also have a duty to protect their respective national or regional currency, hence are caught up in a competitive race when it comes to their respective levels of interest rates…
as a result of incurring ‘real risks’ which can trigger ‘force majeure’ clauses, thus causing further uncertainty & costs in turn…
therefore likely to lead to a surge in payment defaults on the part of actors located in those geographies…
So, what does this all mean for you as a business?
Truth is, with so much uncertainty out there, risk transfer is an ongoing need…
Credit insurance remains open for business…
When it comes to 3rd party Credit risk, a surprising 80% of multinational companies are not insured… due to a conscious decision to self-insure, despite insolvencies & default related claims now being on the rise & exceeding 2019 levels.
It is important to highlight though, that the Credit insurance market remains dynamic, with all key players featuring interesting trends. All insurers
This said, the Credit insurance market is also increasingly competitive, with new players entering and new products on offer.
As for the Re-insurance market – which is equally affected by new players & products – it has so far remained quite stable & liquid. This is due to the underlying trade Credit insurance market itself being much smaller in size of risk exposure & subject to a shorter lifecycle, compared to other areas of insurance.
Interestingly, the ongoing uncertainty & emergence of new risk factors have also lead those Re-insurers to raise trust levels & share more data with the primary insurers themselves.
So, if you are managing risk in a B2B organization, do keep in mind that the trade Credit insurance market remains definitely open for business today, and is available to you as a valuable option if you are looking for effective ways to transfer risk…
What are the latest news in the geopolitical risks arena?
With the return of a war in Europe, the past seven months or so have outlined the growing use of international sanctions by governments, thus increasingly taking businesses & individuals hostage with ever-changing compliance requirements and weaponizing global trade & energy supply security.
Looking at the US-China growing tensions, it appears more & more compelling for businesses to not only manage direct exposure to China but also indirect exposure through trade partners or clients.
Due to political instability, the US has now become a topic in this area while some other economically advanced countries should be watched as well as populism rises on the fertile grounds of uncertainty & anxiety.
Recent efforts to combat climate change are undermined by growing geopolitical tensions that also outline the emergence of a new polarised international order…
The political risk insurance market equally offers a variety of products depending on the type of risk at stake. While dominated by financial institutions & equity investors, it also remains open & accessible to exporting businesses that sell internationally.
Even more so than with commercial risk, political risk underwriters are now adopting a more granular & sophisticated approach to risk assessment & appetite by sector/country or even by sector/region within a given country, with China, oil-producing countries, India, Brazil & parts of Africa being in high demand.
Worth noting though that since the start of the conflict in Ukraine, market conditions have expectedly been hardening & premium levels rising.
So, what next?
With ‘not managing risk’ not an option, corporates should keep trade Credit insurance on their radar, not only as a key tool at their disposal to de-risk trading operations, but also as an invaluable source of complex knowledge & prediction of what might be coming next?
Unfortunately, the simple knowing of where on this planet those essential rare metals are being produced, doesn’t offer us any reassurance nor any prospect of the risk landscape softening once the currently remaining supply bottlenecks have been resorbed…
Increasing resilience is therefore a MUST to navigate volatility, and managing risk across trade operations is central to achieving just that!
Do let us know about your Credit risk assessment & mitigation challenges in the Comment box below, by email to info@financeotcconsulting.com or indeed through our Contact page.
Finance OTC Consulting Limited,
a Private Company Limited by Shares incorporated under registration number 667562 at the Registrar of Companies in Dublin, Ireland, with a registered office at 3 The Circle, Grange Manor, Ovens, Co. Cork
