"Trade credit insurance is not a novelty"
“The prognostic for New Zealand’s economy is obviously not a clear one,” Meys told Insurance Business. “Right now, the economy is gradually recovering from an unprecedented shock, while consumer confidence is at a historical low, as well as Omicron taking a major toll on labour supply.
“Q1 GDP (first quarter gross domestic product) is flat, with Q2 starting a slow reversion to normal with the weight of a perfect storm affecting the economic recovery. With consumer price inflation the highest in 30 years, Kiwi businesses are definitely bracing for the most uncertain business environment in a generation. Debt collection and winding-up proceedings are on the rise in NZ, including an increase in IRD-initiated (Inland Revenue Department) winding-up proceedings.”
By “perfect storm,” Meys means a combination of supply chain woes, the Russia-Ukraine conflict, rising interest rates, as well as higher commodity prices worldwide and inflation.
“Global supply chains are still in dire straits, particularly in China, where we have not yet seen the full impact of Omicron on their economy,” noted the Coface executive. “Lockdowns in key port cities such as Shanghai and Shenzhen continue to intensify pressure.
“Compounded with the ongoing war in Ukraine raising fear of further conflict between the West and Russia, global food prices are also being impacted, being among the largest wheat-producing areas of the planet.”
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In New Zealand, worthy of note are recent corporate insolvencies, including that of construction firm Armstrong Downes Commercial, which owes hundreds of unsecured trade creditors more than $9 million.
According to Meys, over 40% of a company’s assets are typically in the form of its outstanding sales ledger – the biggest chunk of the pie that can be secured by credit insurance. Here’s the usual breakdown, based on data from Coface:
Company’s assets
Percentage
Accounts receivable
41%
Lands & buildings
17%
Machinery & equipment
17%
Inventories
17%
Cash
7%
“As history teaches, people typically delay taking actions to protect themselves from predictable risks, but many that traded through 2007-2009 GFC (global financial crisis) will remember trade credit insurance ensured their survival,” highlighted Meys. “Directors need to look through the fog of their current increased workload to consider the impact of non-payment in fallout of the storm still to come.”
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He went on to tell Insurance Business: “Trade credit insurance is not a novelty; in fact, this type of financial service has long been available in New Zealand. Why would now then be the moment where Kiwi companies should consider a trade credit insurance policy? The answer is the aforementioned economic outlook. New Zealand is a small and well-interconnected economy, heavily reliant on the import of intermediary and capital goods… Inevitably, higher international commodity prices will pass through to producers and consumers.
“Businesses’ profit margins will be impacted, and that is to take place at the same time capital costs will go higher for the entire economy as the RBNZ (Reserve Bank of New Zealand) Official Cash Rate moves higher. Meanwhile, higher inflation forces consumers to reduce discretionary spending and be more diligent on where money is spent. Logically, in that context, corporate insolvencies are expected to go up to levels unseen in recent years.”
Meys added that the risks from high inflation and weaker economic growth manifest in many different ways, including higher credit delinquency.
“As accounts receivable is typically 40% of a company’s assets, creditworthiness becomes a serious question for suppliers negotiating credit terms with their customers,” he said. “Every business needs to sell, but too often it’s forgotten that a sale isn’t a sale until the money is in the bank, and how can you be sure the money will be paid after goods are released?”
In Meys’ view, trade credit insurance – which protects companies selling on credit terms from losses arising from payment defaults – may have never been more necessary than it is now.
