Trade credit insurers foresee tougher times in 2012

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12 December 2011

The business outlook is for more gloom next year, judging by reports from trade credit insurers who point to rising insolvencies here and the ongoing crisis in Europe as indicators of a tough year ahead.

Atradius MD David Huey says there is still pressure on rates, and he feels there is a disconnect between “what we read in the papers and the perception of risk in our market”. 

“It is almost as if we feel a bit divorced from what is happening in Europe and the US,” he told insuranceNEWS.com.au.

National Credit Insurance (Brokers) MD Kirk Cheesman says claims have been steady in the last quarter, although he notes the Australian Securities and Investments Commission (ASIC) has reported an 18% rise in insolvencies in the September quarter.

Trade credit insurers expect to see more claims in the April-June period, from businesses that have struggled to maintain cashflow over the summer holiday period.

Mr Huey says retail continues to struggle but construction seems to be recovering. Atradius was prepared for Queensland businesses to experience difficulties following the floods and Cyclone Yasi, but he says they seem to have bounced back.

Mr Cheesman says he has noticed more interest in trade credit since of the middle of this year, with business owners finding it harder to collect debts and being shocked when long-established customers and suppliers have closed.

He told insuranceNEWS.com.au margins in the building and steel industries are tight. He is encouraging clients to look at their own clients’ finances annually, because a lot can change in a couple of years and then there is a domino effect when other traders don’t get paid.

Mr Cheesman says suppliers rather than banks or the Australian Taxation Office (ATO) instigated a large percentage of insolvencies in the last quarter.

“Getting free credit through your supplier network is getting tighter.”

Creditor-appointed court liquidations rose 33% in the September quarter, and ASIC Senior Executive Leader of Insolvency Practitioners Adrian Brown says this trend confirms reports that creditors, including the ATO and workers’ compensation insurers, are continuing to tighten up on debt recovery.

Atradius’ business is divided fairly evenly between exporters and domestic trade, and Mr Huey says the exporters have a stronger sense of risk from the international environment.

He says three-quarters of business that did not renew this year went to self-insurance, which was either because business-owners were confident about the outlook or because they wanted to cut costs in a tough trading environment.

“On the other hand, 80% of my new business has been new to this insurance,” he said. “People have recognised things are changing and they have to look at this product.”

Mr Huey expects a mild recession in Europe next year with a slow recovery to follow. He says the European crisis is not a case of “pulling a couple of fiscal levers” but relates to cultural factors and bloated public services that will take time to change.