Avenue Credit Insurance‘s in-house Credit Risk Analyst Sam Ashdown took time out of his busy day to share his opinion on the outlook for insolvencies and the credit risk environment ahead.
Q: There’s a consensus within the credit insurers that insolvencies will rise sharply this year. This feels like déjà vu, having received similar messaging last year. As somebody working with supply chains across a broad range of trade sectors, what did you see?
Sam: It will be no surprise to anyone that the insurers are all predicting a steep rise again this year. Last year’s new year messaging was initially very similar of course but at the time nobody envisaged the incredible scale and reach of the ‘whatever it takes’ approach adopted by the Government and how successful that could be.
Inevitably, there was an element of panic everywhere and not least in the credit insurance markets which resulted in State Support packages, rising prices and shortfalls in credit limit appetite. Thankfully, the insolvencies did not reach anywhere near the forecast levels.
I agree insolvencies will rise and I think we will also see more CVAs and the continued use of pre-pack administrations as a restructuring tool, to the detriment of creditors and HMRC.
Q: How would you summarise the detail of the forecasting right now?
Sam: If you look at the top 3 credit insurers, whilst there is consensus insolvencies will rise across the board the degree to which this will happen is debatable. Atradius estimate a 32% increase on 2019 levels, while Euler Hermes initially forecasts a more modest (albeit still high) 20% increase. Irrespective of the precise level, the message is relatively stark.
Q: So is there a danger of being too dramatic in the insolvency forecasts again this time around?
Sam: Absolutely not – although the exact levels expected are debatable Insolvency levels are now rising year on year to dangerously high levels. As the Government support measures fall away and companies are left to source their own forms of working capital we expect a ‘cash crunch’ to drive insolvencies higher. And of course, a return to the legal process by trade creditors, including a more aggressive HMRC, will add to the spike in insolvencies.
Q: Do you think our industry is sometimes guilty of talking mass generalisations?
Sam: Yes! I think sometimes it’s more helpful to become more granular and consider the outlook for trade sectors individually. I’m very concerned about the Retail sector at the moment and most parts of the of casual dining/hospitality supply chain have strong head-winds ahead of them. Whereas the Construction Sector, normally a sector associated with greater insolvencies in a downturn has fared much better than originally anticipated. But we are still seeing a number of Construction insolvencies as they battle rising materials and labour costs which cannot easily be passed on within a fixed price contract. And then there is the Energy sector, which is currently moving through a well-documented and market changing correction.
Q: So a real ‘witches brew of risks’ for Insurers to consider when underwriting credit risk?
Sam: Absolutely – whilst the outlook for the UK economy is strong, companies still need to grapple with supply chain issues, inflation, rising energy costs, increased regulation and rising interest rates. And of course there is always the impact any new variants of Covid-19 may have on consumer & market confidence. It does feel like a considerable rise in insolvencies is somewhat inevitable!
Q: We hear a lot about Zombie companies, what are they?
Sam: Zombie companies essentially generate just enough profitability to service debt and meet operating costs but cannot pay down debt, hindering growth. These are companies which have previously benefited from State bailouts but at the same time are very vulnerable to such debt being called back in and whose recent profitability may be propped up by such payments. But on the upside, there will be some businesses that will turn the corner as the re-engineer themselves to prosper in the new economy. We all have to hope that the government support throughout COVID-19 has done more than simply kick the insolvency can down the road. However, we anticipate there will be more losers than winners, more likely pushing up the insolvency rate.
Q: The worst of Brexit is now behind us and Doomsday has been avoided – might that help to keep insolvencies in check?
Sam: It’s true that the doom and gloom of Brexit has lifted but Brexit still brings significant challenges one year on – remember many elements of the deal agreed with the EU are still to come into force.
Rules of Origin & full customs controls for certain products only became enforceable in January this year which itself represent significant changes to the ways imports and exports are managed. It would be fair to say that Brexit is no longer front and centre in the media’s or the public’s eye but that does not mean that significant barriers to trade (and profitability) remain in a lot of cases.
Q: How are the trade credit insurers reacting to the uptick in insolvencies?
Sam: In summary, in a measured and proactive way. I believe the credit insurers took pro-active and robust measures during the second half of 2021 to set their risk parameters at a sensible level and to protect insureds from losses and at the same time keep credit moving through the supply chain. In general terms we have seen good levels of risk appetite and a number of insurers have been very pro-active in reinstating cover that may have been held back last year. If you overlay the work we do for our clients to monitor decisions, we can see risk appetite is certainly increasing.
Q: Sounds positive, could this change?
Sam: We don’t see this positive underwriting mindset shifting anytime soon. I’m keeping an eye on overdue accounts within our portfolio as this can be a lead indicator of things to come. The trend is certainly showing an increase and as the saying goes ‘the trend is your friend’. How the insurers transition from a historically low claims environment to a higher one will be critical to maintaining confidence in the industry and the products they offer.
Q: What advice can you give to insureds looking to maximise their insurance lines in this environment?
Sam: Be prepared to not get every limit you apply for and be equally prepared to work with the buyer to supply up to date financial information to the insurer carrying the risk. I always encourage an open dialogue between insurer, client and broker as it paves the way for a long-term mutually beneficial relationship.
Q: And finally, what would your message be to users of credit insurance who think the worst is behind us?
Sam: Insolvencies will rise and more claims will be paid so it’s important to stick with credit insurance; it’s the only way to guarantee payment in return for extending credit terms. We do know of companies that have stopped insuring trade receivables, crossing fingers in return for a cost saving. This strikes me as a high-risk and low reward strategy in difficult trading times. We aim to show that credit insurance is much more than bad debt protection and a safety net for the balance sheet; we see it as a facilitator of growth and a key component of our clients’ credit management strategy. We also have a large number of clients who use credit insurance as security to support invoice financing.
Today’s high-risk environment provides an opportunity for credit insurers to show their worth – and become the lifeline for businesses that want and need to grow, more than just survive another year.
Sam Ashdown is Senior Credit Analyst for Avenue Insurance Partners, a leading independent credit insurance broker. Using his experience and skills gained as a senior underwriter with a leading insurer, he helps Avenue’s clients achieve an open and beneficial relationship with their credit insurer. This results in increased credit lines running into millions of pounds worth of extra cover which is translated into secure, top-line revenue growth for our clients. This is our unique source of added value and is unable to be replicated easily by others.