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A proactive, forward-thinking approach to credit solutions is a positioning exercise for future success.
Published on August 15, 2023
By Crystal Dsouza, Head of trade credit and senior underwriter
Markel Dubai
We live in challenging times. COVID 19, geopolitical tensions relating to trade disputes between major economies such as United States and China and the Russia-Ukraine conflict have shaken the foundations of the developed and emerging global trade landscape.
According to the World Economic Forum’s 2023 global risk report, the world is beset with risks that feel both wholly new and strangely familiar1. The current business environment is subsequently complex and beset with operational challenges. A leading example of cause and effect is the rise in global insolvencies, which were in decline during the two year pandemic period. This is largely due to the ending of fiscal support measures, shockwaves from the war in Ukraine leading to ripple effects on the global economy, and the disruptive impact of extended lockdowns in China on global supply chains.
As insolvencies rise the demand for credit insurance tends to increase, as it can help to unlock available working capital and give banks the confidence to lend while helping businesses protect their balance sheets from large losses.
According to the IMF’s world economic outlook update in July 20232, global growth is projected to fall from an estimated 3.5 percent in 2022 to 3.0 percent in both 2023 and 2024. This slowdown is likely fuelled by the stagnating combination of high inflation, falling savings and tighter financial conditions. In August 2023, news headlines announced that the Chinese economy has fallen into deflation3 after consumer prices turn negative for the first time since early 2021, again due to the challenges of economic recovery post COVID.
In 2023 the US Federal Reserve and European Central Bank (ECB) implemented hike in rates, creating disruption in the banking sector with several banks filing for bankruptcy. Credit Suisse was one of the big names amongst them, which led to Swiss authorities stepping in to sanction an all-share buyout by Swiss banking giant, UBS.4 There are also examples of repercussions occurring in emerging economies; the Turkish Lira saw a steep currency devaluation due to the increase in interest rates by the Federal Reserve as a result of the country’s high debt levels.5
This turbulence and the associated regulatory scrutiny means that liquidity is a primary focus for the majority of businesses. In the wake of several large corporate defaults, such as Hin Leong Trading in Singapore and Virgin Australia, creditors have been impacted globally and companies are looking for reliable solutions elsewhere.
Credit solutions provided by the insurance industry are more than just a cover for bad debt and have played a vital role in helping large corporates utilise a full range of credit solutions for their short to long term business needs. Recent statistics suggests that credit insurers have underwritten almost USD 3trillion+6 trade globally, as large corporates consider certainty of coverage as a key part of their long term strategy. Non-cancellable excess of loss solutions, such as that offered by Markel, are particularly valuable when financial stability is the overarching goal. Certainly, there has been an increased interest in the MENA and Asia region for this coverage more recently.
Preparation, particularly in turbulent times, is vital. Companies that actively seek credit solutions that protect their balance sheets against bad debts and maximize working capital efficiency are more likely to mitigate default risk and secure a more sustainable, stable financial position. Insurers and clients alike need to consider their long term position in the credit market, and strategize accordingly.
A proactive, forward-thinking approach to credit solutions is a positioning exercise for future success.
1 https://www3.weforum.org/docs/WEF_Global_Risks_Report_2023.pdf
2 World Economic Outlook Update, July 2023: Near-Term Resilience, Persistent Challenges (imf.org)
3 China slips into deflation as CPI falls for the first time in more than two years | CNN Business
4 UBS agrees to buy Credit Suisse for more than $2bn | Financial Times (ft.com)
5 Lira plunges more than 7% as Turkey edges towards free market | Reuters
6 https://icisa.org/news/press-release-trade-credit-insurance-and-surety-strongly-increase-support-to-businesses-worldwide-in-an-uncertain-economic-environment/
About Markel International:
Markel International is a division of Markel Group Inc, a US-based holding company trading on the New York Stock Exchange (NYSE: MKL). Markel International writes insurance and reinsurance business through six divisions and through offices across the UK, Europe, Canada, Latin America and Asia Pacific. Markel International’s insuring entities include Syndicate 3000, Markel International Insurance Company Limited, Markel Insurance SE., and Markel Resseguradora do Brasil S.A. Its UK national markets business also provides legal and professional fees insurance cover as well as legal and tax consultancy services.