Effective Use of Credit Insurance: A Time of Challenge and Opportunity for Lenders
Written by Paul Bower
As headlines across the globe increasingly include words like inflation, recession, and insolvency, it is clear we are in challenging times. Business failures are on the up and expected to rise significantly and impact larger companies in 2024. Companies are feeling the effects of repayment of government backed Covid-19 measures. Implementation of Basel 3.1 has brought a renewed focus on security for lenders. This list merely scratches the surface of issues facing businesses. However, historically, times of challenge have brought with them opportunities for change, improvement, and growth.
Landscape
Long periods of high inflation, combined with a stagnating economy (many European countries are forecast to enter recession next year) and spiralling interest rates, hark back to the mid-1970s period of Stagflation.
On a nuts-and-bolts level, businesses are further impacted as the repayment of government backed Covid-19 measures is now biting. Traditional supply lines are disrupted, transport costs spiralling, and labour and raw materials supply is uncertain in the post-pandemic world.
Thousands of businesses filed for bankruptcy last year (Coface reports more than 23,000 in the UK alone), and 2024 forecasts expect that number to increase with an uptick in bad debt
Impact
Lenders need to prepare now to weather the coming storm. Traditional banking solutions may require the support of alternative lenders to get deals across the finish line. Receivables finance is seeing increasing appetite and attracting investment as banks and investors often see it as a safe haven.
Basel 3.1 (and in the UK the PRA’s proposed changes to it) has set requirements around the amount of capital banks need to reserve against the risk they have in their portfolios. Lenders may need to go back to basics and be very clear on their collateral base as it is what investors ultimately buy into and what differentiates asset-based lending and receivables finance from traditional bank lending.
The question needs to be asked whether some lenders have lost sight of what it means to be secure. Being comfortable with a customer’s historic financial performance or checking the proof of delivery of goods is one thing, but are the credit risks of the businesses that underpin their exposures in this coming environment being considered as well? Are we prepared for this upcoming period of volatility?
Effective lenders need to bring more focus onto credit risk and using the right tools to help them stay safe. Credit Insurance is a growing industry ($10bn in 2022 to forecast $16bn in 2027) and an increasingly important mitigant for businesses and lenders alike
Opportunity
The lenders who are best prepared, stand to win big and will profit from increasing customer demand for liquidity. Being able to offer attractive lines on a sustained basis will be THE big point of difference for the market over the next few years.
Optimising insurance policies effectively is going to be key. Every spend is significant in this climate. It is no longer about “ticking a box” to meet a credit policy. Lenders need to know they can draw on those policies when needed. Getting the right credit strategy and monitoring solutions in place is therefore critical. As 40% of exporters fear a rise in non-payment risk in 2023 according to the 2023 Allianz Trade Global Survey (up from 31% last year), most firms see digitalization aka “investment in technology” as an important resilience strategy.
At FGI, we understand the value of properly managed communication and connections with the insurer, and our T.R.U.S.T.™ solution is used worldwide by corporations, brokers, and lenders to seamlessly monitor, manage, and maintain policies across various carriers. While there may be situations in the coming months beyond our control, having the proper partners and strategies in place makes opportunities possible.
This article is for informational purposes only and does not constitute professional advice. Investments always have the potential for loss. FGI, including its affiliates, makes no warranties about the accuracy or the completeness of this information and disclaims any liability (including direct, indirect or consequential loss or damage) related to the materials. Please consult your financial professional for advice relating to your circumstances and refer to our show notes and website for the full terms and conditions.