Finding trade credit market opportunities amid the uncertainty of Brexit
By William Clark, Canopius.
At a time of raised geopolitical volatility, with fewer than one in five UK exporters buying trade credit cover, there are significant opportunities for London market insurers.
Geopolitical developments around the world over the past 18 months have surprised some people and satisfied others. For all, they have created uncertainty.
For import-export sector businesses, political and socioeconomic uncertainty create day-to-day operational challenges. Daily headlines about Brexit, China, the US, North Korea, Middle East and Russia, as well as the usual suspects of interest rates, access to capital, foreign exchange and commodity pricing, all permeate the corporate psyche and affect decision-making.
Unsurprisingly, business managers seek certainty, especially regarding their ability to collect outstanding receivables, which can comprise 40% of a company’s balance sheet value. Fortunately, trade credit insurance helps to eliminate this uncertainty by protecting receivables. In recent years, amid the climate of international political, social and economic change, it has become a more useful risk management tool than ever, while at Lloyd’s, product innovation has made it increasingly accessible and flexible.
Brexit is generating uncertainty about future trading relationships, both for UK exporters to the EU (the country’s largest market) and for EU-based suppliers of UK imports. The UK exports some £300bn ($410.39bn) and imports some £450bn of goods a year, of which roughly half is to/from the EU. Brexit is likely to see these numbers change and perhaps more significantly the composition of these figures will alter with greater emphasis on non-EU trade.
These changes to existing relationships should not be underestimated, while forging into new markets presents risks which should be managed. Evidence from D&B Payment Data shows payments beyond 90 days of terms varies greatly across the globe.
An average of 3.5% of debt is unpaid after 90 days beyond payment terms in Europe and this is replicated in the US, which are the two larger trading partners of the UK. China is more than 6%, while in Russia small business debt reaches 13.8% over 90 days late and for large companies it is 2.7%. Turkey reaches an average of 5.3%, South Africa 7.7% and the Philippines hits the heights of 51.5%. Caveat emptor should apply not only to the purchasing of goods but the timing and indeed certainty of receipt of payment.
The UK is a significant player in international trade, therefore movements in its trading relationships will have consequences greater than its own profit-and-loss. Increasingly, as the realities of Brexit inside and outside the UK are being digested, companies have become more aware of the risks and their potential impact, but many have yet to act. This is understandable with the level of uncertainty in Brexit negotiation outcomes.
However, a company relying on its receivables pool to provide liquidity and access to borrowing should probably hedge its bets on Brexit’s impact, particularly where there is a significant direct trading relationship with the UK. It is also worth considering that in today’s complex global trading patterns, supply chains can mean indirect trading with the UK takes place and the implications of Brexit may be more far-reaching than many realise. Recent large corporate failures in the UK, particularly within the retail sector, serve as stark reminders.
Already we are seeing “Brexit demand” for trade credit insurance, and many more companies are likely to seek insurance support over the coming months. Credit insurers are experts in the business of managing and acquiring risk to remove volatility from a business, allowing that business to have consistent results. Now is certainly the time to act, since waiting until the day will probably not lead to an optimal outcome and approaching the insurance market after suffering a loss will be even less productive.
New export markets
If UK businesses take on new clients in new export markets, it is likely they will acquire more risk than they obtained through their more traditional trading as a UK domestic supplier or an exporter to the EU. As companies make the long-term investment that will be required to grow into new export markets, a non-payment could destroy the prospect of returns. Free trade deals alone will not create success; for that, companies venturing into new markets will require support and this should include adequate risk management and transfer.
Encouraging the drive to export, recent World Trade Organization figures show world trade has evidenced slowing growth in 2016 but with a positive outlook for 2017. More encouragingly still, potential has been building in emerging markets, particularly in Asia and Latin America. The economic, legal and political environments may appear to recommend a cautious outlook, but some industries, such as agriculture, offer significant opportunity in some countries.
In Brazil, for example, the political and general economic landscape may give cause to pause. However, in the longer term the country’s prospects are strong and its agriculture sector is a very important component of GDP. This sector is leading the country out of recession, with Brazil predicted to become the breadbasket of the world. For businesses adopting a long-term strategy, this and other emerging market opportunities have impressive potential but experience tells us the road will be a bumpy one. Having a credit insurance programme to iron out this volatility will lead to more successful outcomes for those seeking to maximise opportunities.
During the course of the past couple of years Lloyd’s has expanded its trade credit offering. Underwriters now offer excess-of-loss trade credit insurance, which differs from conventional ground-up or single risk cover in that there is much more flexibility for the business to have more credit management autonomy within the policy together with non-cancellable cover. Critically, this gives them the insurance they need to cover against bad debt.
In a year of geopolitical upheaval, the motivations to buy trade credit insurance have multiplied and the opportunities for insurers have therefore increased. With fewer than one in five UK exporters buying cover, we see plenty of room for growth. We see even greater growth in non-UK clients. Meanwhile, with a greater array of products available in the Lloyd’s market the choice for customers is greater than ever.
For once, this may come just at the right time.
William Clark is head of trade credit insurance at Canopius.