Falling optimism and crashing commodity prices mean that money is tight at many Asian companies. As a result, trade credit insurers have had their fingers burnt.
Asia has been a hotbed of economic growth for years – propelled to the forefront of global trade by, to a large extent, a mighty Chinese economy.
Emerging markets such as Indonesia and Myanmar have added fuel to the fire, while more established but still growing economies, such as Japan and India, have brought further impetus to Asian economic progress.
More recently, however, a slowdown in economic growth in the region has put a dent in optimism and increased pressure on businesses there.
In fact, research from Aon, published as part of its 2017 Market Review, found that there has been a significant increase in defaults across Asia. China has seen a 20% increase, Taiwan 17%, Singapore 15% and Hong Kong 15%.
Australia is also in the doldrums. According to the NCI Trade Credit Risk Index, produced by specialist broker NCI, 2016 had the highest rate of insolvency activity since its records began in 2008.
IN THE RED
Trade credit insurance is considered the ultimate protection against bad debts, whereby debtors are insured against the risk of insolvency, protracted default or political events.
“Trade credit insurance is still widely unknown and despite the best e orts of our industry to highlight the risks of non-payment of credit risks, a bad debt does not hit home until it occurs,” NCI managing director Kirk Cheesman says.
“Companies insure their buildings, plant and equipment and cars, but for some reason do not place enough emphasis on the potential risk and damage a bad debt can have.”
But Aon head of trade credit risk for Asia, Helen Clark, says the increasing number of defaults has resulted in an increased interest in trade credit insurance from risk managers and insurance buyers.
“Over the last few years, there has been a greater awareness of the importance of risk management of receivables and non-payment,” Clark says.
“When I came to Asia seven years ago, there was little awareness of trade credit insurance, and the market has now evolved massively following investment and education around the abilities of the product.
“The increasing number of defaults experienced recently has helped re-focus people on investing
in managing receivables and choosing the right partners [to limit the risk of experiencing a default].”
AIG Asia-Pacific head of trade credit, surety and political risk, Christopher Shortell, agrees. He says the growing frequency and severity of trade credit insurance claims is leading to an increase in the number of risk managers looking to take out trade credit insurance.
“The frequency and severity of non-payment claims has risen across all markets in Asia, particularly in China and India,” he says.
“Ongoing global political and economic uncertainty is also feeding ongoing and growing interest in trade credit insurance.”
Clark goes along with this.
“The prices of commodities have gone through the floor over recent years and prices are still going down, particularly steel,” she says.
“In China and India there have been lots of defaults in the steel sector, driven largely by China moving away from a manufacturing economy [to one that is more service-based]. There is therefore an ongoing adjustment of the market as the environment rebalances.
“The commodities market has been a particular issue,” she adds. “Balance sheets are weaker and that is reflecting the tough market conditions of the past four or five years.”
But as well as leading to more interest in the product, the challenges in the Asian marketplace have created further difficulties for insurers looking to turn a profit and grow their books of business.
“Both 2015 and 2016 were not good years for most trade credit insurers in Asia,” Clark says. “At the end of 2015, there was a significant repositioning in credit lines and pricing, and that continued into 2016. Most of that has now stabilised, but rates have risen by between 5% and 15% in the past 12 months.”
Capacity has also fallen in recent years.
“Many insurers overheated in commodities and found themselves with something they didn’t understand as new business models evolved,” Clark says. “As a result, steel capacity has really reduced, and for a period in 2016, insurer focus was more on cleaning up what they already had, rather than taking on new business. But that is changing and we need to work hard to ensure we have enough capacity going forward.
“Insurers are being more selective in some sectors, and one or two underwriters are still trying to stabilise their books. But the majority of the market has repositioned and is focused on what business they want to take on.”
CHECKS AND BALANCES
Increased uncertainty surrounding the payment of invoices, and the increased risk of default, have also led to insurers completing more due diligence before accepting a client, particularly around the interactions between different trades and how that affects the risks they are taking on.
Clark says that such the benefits of taking out trade credit insurance are an important feature for businesses looking to limit risk exposures and maximise growth opportunities.
“The surrounding risk management support is important,” she says. “Businesses need to focus on their objectives and their ability to stomach a margin of error in their particular market.”
But for this to work, insurers and risk managers need to be aligned in their expectations and objectives. “Insurers need to understand the risk manager’s business, and the risk manager needs an insurer who wants to understand the business and have the knowledge and insight of the sector and fit with the corporate environment they are working in,” Clark says.
“Insurers are very di erent and the cover of each carrier is very di erent and it is important there is a fit, particularly in a specialist market such as Asia.”
It is also important, says AIG’s Shortell, for insurance buyers to assess the security of their insurance partners, to ensure that they will be able to provide the support needed in the event of a claim.
“Clients of trade credit insurers need to make sure that their insurance partners are financially secure and reliable when it comes to handling claims and default situations,” he says.
“Insurance buyers cannot focus solely on the price of the policy, and need to ensure that policy limits and restrictions don’t go too far, and that the policy is still suitable to the level of cover required.”