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The evolution of credit risk
We spoke with four leading voices from the credit insurance market about the future of the industry, inflation, globalization and talent acquisition, and addressed how credit insurance is supporting clients in their efforts to make better business decisions.
Featuring insight from:
Anil Berry, Group Board Member at Allianz Trade
Andreas Tesch, Group Board Member at Atradius
Corine Troncy, Global Head, Trade Credit at AIG
Nicolas Garcia, Group Commercial Director at Coface
Stuart Lawson, Global Head Credit Solutions at Aon
Back on the agenda
Global crises and disruptions have taken center stage over the past several years. In that time, risk has been in the background. How has the current moment changed that?
Stuart Lawson, Aon
Successful companies are companies that can navigate an increasingly complex and volatile, yet interconnected world. How do you see risk evolving from a credit risk perspective over the next few years?
Anil Berry, Allianz Trade
Great question Stuart. I definitely think that risk is back on the agenda after two years. You only have to pick up any newspaper, the energy crisis, supply chain issues, labour shortages. When we are speaking to clients, they recognize the credit risk dynamic has changed. At Allianz Trade, we conducted a recent survey, albeit pre-Russia/Ukraine crisis, and 22 percent of our clients said that they expected an increase in payment issues from their customers. Now it is over 50 percent, and within the next six to twelve months, businesses will experience even more payment issues. I definitely think that credit risk is back on the agenda. Our solutions are now more relevant than ever.
Andreas Tesch, Atradius
I fully concur. In terms of where businesses might see the risk evolving, it is actually globally: in developing markets, as well as in our well-established markets. We also expect to experience an increase in terms of frequency of defaults as well as severity. We see some very large buyers that could run into difficulties fairly soon, once the government support runs off. We also forecast an increased frequency of defaults, especially in certain sectors, namely construction.
Nicolas Garcia, Coface
If I might just add, I think it is the level of unexpected events which are at a very, very high level. It is not a traditional cyclical change that we are experiencing. You should expect the unexpected in this environment. That is pretty new. Companies are really asking a lot of questions about what the future holds. However, the reality is that you have to plan and protect your business for different scenarios.
Stuart Lawson, Aon
Yes, great takeaway “expect the unexpected and have a plan for different future scenarios”.
Corine Troncy, AIG
In terms of risk being back on the agenda, during the pandemic, we have definitely seen the weaknesses of the existing supply chain processes and many businesses are rethinking their current arrangements. This will increase risks potentially everywhere. It also means that banks will probably undertake a more stringent assessment of who they are financing at a time when corporate clients will need more financing to pay for their stock and inventory.
Globalization and de-globalization
Stuart Lawson, Aon
The disruption to global business and trade has led to a re-examination of the benefits and risks inherent with globalization. How do you see this impacting companies in terms of how companies buy and sell globally? Will we see a shift in focus or strategy?
Nicolas Garcia, Coface
I think it is more than globalization and de-globalization. It is about diversifying the supply channels, and the sales channel. I think that the big change is that companies tend to understand diversification has a value. It may have a cost, but it also has a strong value. It is really a mix between suppliers that matters. The same, in terms of market overdependency on one side of the world, is a model that is changing now. Companies are realizing that we are hitting tension points in terms of globalization.
Corine Troncy, AIG
In respect of “inshoring”, there is still a lot of work to be done. It is not going to happen overnight, but companies are thinking about it for sure. The deconstruction of globalization trend we have seen for a while, but I am not completely convinced that it will be a total shift to inshoring, probably what we will see is a bifurcation between corporations, because there are sectors where companies can repatriate or “nearshore” or “friendlyshore”, some of their production. That will be when they can actually pass on the additional cost to the end user. There is a lot of industries such as Food & Beverage, for instance, where the margins are very, very tight, they will not be able to achieve this. So, we are likely to see two streams going forward.
Anil Berry, Allianz Trade
Yes, it is interesting, I think firstly, you are right. I was in the US and you saw the big queue of ships and some of the bottlenecks that exist in term of importing goods. Then when I visited more recently, there was much less of a queue. Maybe that is because companies and consumers are sourcing goods locally. Conversely, our customers are telling us export is back. I am seeing customers come to us and say, we want to grow, we want to export, we want to go beyond our core markets, can you help us grow and grow with the right customers in terms of credit rating and credibility within their market. So yes, I think there is a shift of “globalization to localization” but in order to achieve growth ambitions, the need to access new markets and clients. Exporting is key irrespective of the challenging geo-political environment.
Stuart Lawson, Aon
Yes. Frictional globalization then!
Andreas Tesch, Atradius
I think there is something in between also, which is what we call regionalization. They are not putting all their eggs in just one, but a few baskets. Businesses are far more aware of the inherent risks and volatility and risk management is back on the boardroom agenda. I also believe that this risk element features far higher in their investment decision making than has been the case in the past. Companies are also looking at diversifying their distribution as well as their supply, but it might not go as far as China or Latin America, we are seeing a more regional approach. What we hear from a lot of clients, is that they may be prepared to accept a slightly lower margin for the sake of an improved risk profile of client/supplier in a more stable legal environment.
Better information leads to better decisions
Access to the right Information is at the center of smart business decisions, maybe none more so than credit risk. Information gathering is one thing, but the differentiator is how that information is applied.
Stuart Lawson, Aon
You all lead businesses that are at the forefront of how data is used to enable companies to make more informed and better decisions about how they trade. How do you see this part of your business evolving? Is information going to be more key as we get into a world that requires quick decisions based on the most relevant data points?
Andreas Tesch, Atradius
It is key today, and it will be key in the in the future. The value we provide our clients is both how we retrieve information, and how we process information to enable this to be used by our clients in a way that supports sustainable business growth. In our underwriting process, we are monitoring 165,000 sources, 24 hours a day, seven days a week, matching data against the buyers that we are insuring. This is absolutely key to our core business. Next to that there is also the element of custom-made solutions on risk assessment, particularly in debt workout situations with companies that are in distress. Of course, information, again, is key. However, you will not be able to retrieve that information from the internet or from any annual accounts, only from face to face meetings with the debtor that allow us to build a true picture of their financial health.
Anil Berry, Allianz Trade
Information is so key to our business that sometimes I wonder - are we a data business that offers insurance, or an insurance business that offers data insights? I think there has been an explosion in the sources of data that Andreas touched on and I feel that as an industry we are very good at making sure we digest that data and convert it into relevant insights that support decision making. This is achieved partly through Machine Learning, but also expert analysts who have a deep understanding of both country and industry dynamics. Without this part you can get lost with raw data and information.
The second is the need for speed. What client would wait two, three days to make a decision in respect whether it should make the trade? The expectation is to be able to receive instant decisions. Indeed, we are meeting this expectation as an industry. It is exciting to be able to enable trade with the power of data.
Corine Troncy, AIG
I think there are very few companies who could afford not to invest that much into information, processing it and delivering it back to the client in a way that adds value.
Nicolas Garcia, Coface
We are also integrating new types of information to support our clients decision making, such as looking at sanctions of individuals for example. It is really the cornerstone of our service that facilitates sales growth for our clients. We are capable, because we have the infrastructure to have access to all this data. And our information can be used for different purposes, obviously for credit risk, but not only and I think our clients are valuing that more than ever.
Anil Berry, Allianz Trade
You make a really good point Nicolas. It is not just will you get paid, but how will you get paid, impact of sanctions today for example. It is important we are continually adapting to meet the needs of our clients.
Nicolas Garcia, Coface
To adapt is the new reality.
Rethinking access to capital – Does inflation change the game?
Aside from making everyday life more expensive, an effect of rampant inflation is that it could change the way companies seek to fund their operations. The landscape is changing, but it is not changing the same way for everyone.
Stuart Lawson, Aon
Let us focus on inflation and the continued interest rate hikes we are likely to see throughout the rest of the year and beyond. Do you think that we are going to see a change on how companies look to fund their business? Also is access to liquidity and working capital going to become even more important?
Nicolas Garcia, Coface
I think we are starting from an economic situation where a lot of companies have had access to cheap funding and inflation and interest rates are changing accessibility and cost of funding. It will not be as easy to access cash so the need for cash itself is increasing. In contrast, we have observed that with our Receivable Financing business, in Germany and Poland, that we have seen many more enquiries over the last few months for this very reason. So definitely, yes, it is a game changer. It is a new reality.
Stuart Lawson, Aon
Andreas, you made a comment earlier about “not having all your eggs in one basket” so is diversification of funding also important?
Andreas Tesch, Atradius
First and foremost, what we currently see is that a lot more clients are able to pass on the higher energy prices, higher supply costs to their customers, but nevertheless, it creates the needs for higher working capital. You are absolutely right, as Nicolas said as well, monetizing their receivables is one of the key additional assets they can draw on. What we observe now is that the banks are tightening their lending criteria, so trade receivables are a great asset to use for accessing alternative financing.
Anil Berry, Allianz Trade
I agree Andreas, our job is still to help our clients capture the upswing that, despite the volatility, we are going to see in trade following the pandemic. This requires working capital and, with inflation continuing to rise, companies are certainly looking at credit insurance to enable the banks to lend more competitively. I think it is an opportunity for the product to really show its value in the product by reducing their lending costs and helping them grow as well.
Talent acquisition and retention
The key to winning the war for talent is to help employees build a sustainable working life. How we do that must go beyond compensation, and into values.
Stuart Lawson, Aon
I am going to change tact now as whilst not related to trade, it is a key issue for all companies, talent. Retaining, developing, attracting key talent is the key to success for us all. As senior leaders within your own firms, I am sure talent agenda is a hot topic. What is your experience and learnings, especially in a post pandemic world?
Anil Berry, Allianz Trade
Yes, there is going to be growth in our industry which will increase demand for talent. I think people think much more about their careers, where they want to be, work-lifestyle balance. I think young people today are looking at what a company can offer beyond purely financial reward. Work flexibility, career pathway. I think that is good. It is pleasing that they are taking time to think about their long-term career and future. We also must fight for talent with other industries as well. Fintechs are a new talent competitor, banks, so we need to make our industry as attractive as possible. I think all of us here are very lucky, we have all experienced global roles and travelled around the world, meeting interesting clients and partners. I think we have got to highlight these benefits to attract the best talent.
Andreas Tesch, Atradius
The challenge continues to evolve. A couple of years ago, it was very much about work-life balance. Today, it is also about having a “purpose” that talented people are drawn to. ESG comes to mind.
Some of the questions new joiners ask is; as a firm, how do we position ourselves in terms of gender equality, what are we doing in terms of a carbon footprint and of course, work life balance still plays a key role too, but in a different way. For instance, how can employees work more efficiently with us and make best use of their working time as well their private time. Especially where people have a 1 hour or more commute, it is absolutely key for them to have flexibility with their employer. We need to be agile as an employer in applying different rules from one country to the other, and maybe from one individual to the other, despite the need to deliver our service consistently as an organization. There are ever changing challenges in how to attract and how to retain talent. As Anil referenced, there are a lot of competitors out there in certain areas beyond our direct market. The world is their oyster, they can work at any firm, and they can work from any place. It is such a fungible resource now.
Stuart Lawson, Aon
You picked up on a really important point, it is not just financial reward and work flexibility, but also an alignment of values and purpose.
Corine Troncy, AIG
I am quite impressed by how our industry has adapted during the pandemic. That is what we need to explain to potential new hires, as insurance is often perceived as not being as dynamic as some other financial services. As a matter of fact, I think the opposite is true. We all have people working in different parts of the world, even though they operate in global roles as part of one global team.
We have also adapted our leadership style. As leaders, we were used to working physically with people, training and coaching them, or our managers were. But today we have developed tools where we are actually working, training, coaching, onboarding people that we may never meet physically, or not for long periods of time. That is a game changer. I am very impressed by how it has been done throughout the whole industry.
Nicolas Garcia, Coface
I think we have moved a lot over the last few years, and we have very, very good things to offer to our employees. I mean, we are at the heart of the B2B relationships. There is always something happening. There is always an exciting event that we need to act upon, or a problem to solve, we need to be creative. We are in permanent interaction with many key functions whether it be commercial, risk or IT as examples. As we are service orientated, we are not producing goods; we are producing a service at the heart of the B2B business.
Anil Berry, Allianz Trade
We talked about working from home, I think we have also got to be open with people coming to enter our industry, personal interaction is a must. This creates innovation, collaboration, and team unity. That is how you make the best decisions. I think, again, we have got to be open with people that we recruit. It is an open partnership we have with them.
Stuart Lawson, Aon
I certainly agree that you accelerate learning by interacting together with colleagues, and also clients and markets.
Corine Troncy, AIG
The daily office has also changed to make the workplace more engaging. You can find playrooms for colleagues to relax and reset, in most of our offices, which I would never have thought before the pandemic. I thought it was exclusively for the tech sector, but its proven to be great.
Andreas Tesch, Atradius
One other particularity of our businesses is our international reach. There are very few firms that can allow talent at a very young age, at a very early stage of their career, to literally travel the world, and really make best use of the platform of an international company like ours.
The challenge ahead
Every industry will be defined by how they handle the current set of risks and challenges ahead. The industry’s response to these challenges may see leaders having to go above and beyond to ensure the future for their firms.
Stuart Lawson, Aon
One last question. We touched on a number of economic and political headwinds companies will have to navigate both on a macro and micro level, but we should not overlook the ESG agenda?
Nicolas Garcia, Coface
This is on everybody’s agenda. We cannot skip these topics. On the environmental topic, I think we are in a learning phase and building ways to integrate ESG in our daily decisions and the dialogue we are having with our clients? We certainly need to accelerate. We mentioned data earlier, it is another area where we need to gather and process this data to enable our clients to make informed decisions. It has to be integrated in our models.
Andreas Tesch, Atradius
It is absolutely front of mind for us as a firm, for all stakeholders. We spoke about being attractive for talent. That is one of the key points for employees to see their employer put ESG high on the corporate agenda and priorities. I think there are some great initiatives within the insurance industry, like the Net Zero Insurance Alliance, which has committed itself to work with its client base to reduce the carbon footprint in the coming years, with very clear milestones already set.
Anil Berry, Allianz Trade
I think Andreas makes some very good points. I actually think it is a core pillar of our business. You see that in the way we underwrite our business and the products we develop and the dialogue we have with our teams. It is now part of our core strategy. It is what our stakeholders, our teams, our broker partners and most importantly, our clients want.