WOA Online Event: Credit Risk Assessment and Insurance in Turbulent Times

The online event provided an overview of the role of credit risk management and risk hedging through credit insurance. As a specialist in credit risk management, SCHUMANN is a key solution provider and excellent advisor for integrating trade credit insurance processes into credit risk management.

Allianz Trade expects a global GDP growth of +1.4 % in 2023, albeit with significant differences between countries and a slight recession expected in advanced economies. Despite easing supply-side constraints, global trade will slow with slight growth.

This is due to cost increases, high inflation - averaging 6.4 per cent globally – high interest rates and a continued weak demand, particularly in Europe and the US. High interest rates will make it significantly more expensive for companies to finance investments and to procure raw and production materials. The cost of materials will remain high in 2023, whereas supply chains are stabilizing in an environment of weakening demand. Companies in Europe are currently benefiting from high order backlogs. However, the volume of new orders has already declined in some sectors.

The global increase in corporate insolvencies in 2023 will be +19 per cent according to Allianz Trade estimates, a significant increase from +10 per cent in 2022. While in many countries insolvencies were at a low level even during the Corona crisis thanks to extensive state aid, increased attention is now required in credit risk management in view of the negative influencing factors.

Initial indicators, such as payment arrears by borrowers, are already pointing to increased insolvency risk. Causes of potential default risks currently must be analyzed and monitored comprehensively and continuously on a sector- and country-specific basis.

Credit risks do not occur simultaneously in all industries. In particular, industries that suffer from sharp cost increases and cannot pass on higher costs to their customers, experience declining cash flow. Therefore, these customers and buyers must be identified and subjected to credit default risk monitoring.

Banks, financial institutions, corporates, and trade credit insurances should combine credit portfolio analysis with credit default risk monitoring to identify an up-to-date state of affairs of potential default risks at country level, per industry, and for customers at risk. The findings from analyses of sector and individual risks may make it necessary to adjust credit policies. A credit policy regulates the desired purchase, transaction or limit volume and their risk hedging.

Credit insurers currently anticipate an increase in insolvencies and claims. Credit insurers are paying close attention to risk quality. However, the appetite for trade credit insurance of banks and corporates is expected to increase in 2023. We also expect an increase in surety bonds for long term projects. In doing so, Specific IT solutions support integrated, digital surety processes as well as trade credit insurance processes to support the quality of risk-based decision-making and contracting.

In any case, credit risk management requires state-of-the-art IT support to provide both early warning indicators based on historical and, above all, current data, and full transparency of the credit risk portfolio at the push of a button, as well as automated monitoring and adjustment processes. In trade credit insurances business relationship with banks, financial institutions, and corporates, it is important that adjustments to policies and related obligations, as well as adjusted limit allocations, are implemented directly in the policyholders' business processes.

In addition, debt collection processes need to be reviewed. Automatic interfaces to professional providers, such as Atradius debt collection, are essential tools for fast and professional debt collection, which are also required by obligations with trade credit insurance.

Credit risk management provides answers to the current framework conditions to shape businesses. In this context, credit risk management is at the heart of the transformation towards digital processes between business partners.