Paris, February 2019 – Thanks to a combination of factors, from geopolitical uncertainty and Brexit through to the trade disputes between the USA and China, economic stability seems to be in doubt once again. You don’t have to look far to see that in some markets, trading conditions are challenging, and, given that recession is a not too distant memory, this has had a knock-on effect in the trade credit insurance and receivable finance industry.
When it comes to deploying technology that can help, however, these sectors are still hampered by the challenges of digital transformation. Some progress has been made, but for many there is still too much reliance on systems that fail to communicate with each other. Take any asset-backed lender, for example. They might have one division that specialises in overdrafts, another that loans money for leases, or a third that focuses on invoice finance. All three divisions are quite likely to incur exposure on the same counterparty, but if they’re not digitally connected to each other, they are likely to be unaware of the aggregate view, which means their exposure can easily be miscalculated and in the worst-case scenarios, underestimated.
No surprise then that Euler Hermes, has predicted that the UK will experience the second largest rise in business failures of any of the major global economies this year. Its Global Insolvencies Index reveals that UK bankruptcies will climb by +8% and only China will see a sharper rise. On a broader international scale, there is undoubted change in the risk cycle, and whilst the International Monetary Fund still anticipates growth, it’s understandable that insurers are exercising caution when it comes to managing risk.
In some specific market sectors, there is an obvious need for a prudent approach, nowhere more so than retail. Warning signs began to emerge last year, when the discount retail chain Poundstretcher was hit by a reduction in insurance cover. Other retailers including New Look, Paperchase and House of Fraser have faced similar restrictions, as did Maplin, which fell into administration in February 2018.
But insurers are wary about their exposure in other industries too. They took a large hit when construction giant, Carillion, collapsed in January last year and they are now in the process of helping firms in the supply chain to recover, costing them in the region of £31m, according to an estimate from the Association of British Insurers.
Against this backdrop, it is critical that insurers, insureds and receivable financiers know to what extent they are exposed if their clients get into difficulties. Although it seems obvious, not all organisations have a clear picture, nor do they all use technology to deliver the data and insight they need so they can take action before the worst-case scenario happens.
Calculating aggregate exposure
The only way to mitigate credit risk is by identifying the aggregate exposure, ideally in real-time, so that decisions can be made. It was a failure to assess the level of exposure that allowed the Carillion situation to develop.
Insurers and receivable financiers cannot expect to make informed decisions about their level of exposure on a counterparty if they don’t have the systems in place that deliver a complete picture. They may, for example, operate separate policies for different divisions of a company, and although this means they are likely to incur exposure on the same counterparty, unless they are digitally connected, they will be unaware of the aggregate view. They can’t possibly see the entire financial landscape in a timely manner.
Even as the digital transformation process evolves, insurers and receivable finance companies can still implement software solutions that deliver the level of in-depth intelligence they need to calculate risk in relation to every division, company, sector and country where they have exposure. They have to find ways now to enable them to look back up the chain to ensure the full debt is safe and fit-for-purpose technology is the only way to automate this process when it’s needed across the entire counterparty system. Discovering their aggregate exposure when its’ too late will limit any action they can take to manage their risk, and it could have a disastrous effect on the wider business.
The same dedicated systems also have a transformative role to play in differentiation. Critical mass, on which the big credit insurance companies and receivable finance firms relied to maintain market share for decades, is no longer enough to keep them competitive. Instead their flexibility and the benefits they derive from innovation matter more in today’s environment. This has prompted many to overhaul and update the services they offer to customers and find ways to overcome the restrictions of their out-of-date, restrictive databases.
Instead credit insurers are increasingly looking to third-parties for assistance in obtaining valuable local market intelligence and information on specific buyers. A recent example is information we supplied to a customer on the provision of piling/foundation services to the wind farm sector in Europe and Asia. This was accompanied by a detailed analysis of 12 individual suppliers within this sector. This type of intelligence is essential, particularly for small insurance companies so they can compete with the major and mid-size players and successfully re-engineer and transform their organisations. In the current uncertain climate, visible provision of best practice enhances processes and good governance and this reaps dividends in the form of support from reinsurers.
Credit insurers and receivable finance companies are fine-tuned to the risks they assess every day, but they can no longer do this without help if they are to remain competitive. They only have to look around and they will find technology experts who they can partner with in order to become more agile, more informed and more flexible. Supported well, they are in a position not only to tackle today’s uncertain economic and business environment, but to take full advantage of it.
By Michael Feldwick, Head of UK and Ireland at Tinubu Square
Julie Kirby, Ascendant Communications
Mobile: +44 (0) 7956 955625
Mitigating debtor risks in uncertain times
Founded in 2000, Tinubu Square is a software vendor, enabler of the Credit Insurance, Surety and Trade Finance digital transformation.
Tinubu Square enables organizations across the world to significantly reduce their exposure to risk and their financial, operational and technical costs with best-in-class technology solutions and services. Tinubu Square provides SaaS solutions and services to different businesses including credit insurers, receivables financing organizations and multinational corporations.
Tinubu Square has built an ecosystem of customers in over 20 countries worldwide and has a global presence with offices in Paris, London, New York, Montreal and Singapore.