Africa’s largest credit insurer sees 2013 claims increase by 119% on 2012

Credit insurance claims have soared in 2013 with South Africa’s largest credit insurer, Credit Guarantee reporting a 119% increase in claims paid in 2013 compared with 2012.  On the back of this, Statistics SA data released 24 March 2014 paints a bleak picture as liquidations rose to 171 for February 2014 compared with 132 in January.  Most liquidations were voluntary and sectors most affected were community, social and personal services, transport, storage and communications, financing, real estate and business services.

Maria Teixeira, Trade Credit, Surety and Political Risks manager at Aon South Africa says that South Africa’s economic and trade environment remains tenuous and unpredictable at best, a key reason why trade credit insurance has become a business imperative for businesses seeking to protect themselves against defaulting debtors. “Small and medium businesses are certainly at greater risk of facing a fatal closure if a major debtor defaults as their balance sheets usually cannot carry them through a major default – it’s exactly this sector of the economy that needs to be protected with regards to its mooted role in job creation and economic growth. But it would be foolhardy to believe that large businesses don’t fall too.

“Factors such as liquidations, a stalling economy and flagging investor confidence are all culminating in a melting point of serious business challenges, exacerbated by the fact that we are fast approaching the elections.  We can expect business confidence all round to take a knock during an election year, not so much because of the outcome of the elections, but rather the fact that many key policy decisions will be delayed until after the elections.  The biggest frustration for business will come from indecision.  This in turn creates a slew of challenges for business in terms of driving profit margins and managing liquidity in a depressed economic environment, which in turn leads to greater levels of business defaults,” warns Maria.

“The reality is that although liquidations have decreased when compared to the same period in Feb 2013 when 271 liquidations were reported, there is still a significant and worrying 30% increase between Jan 2014 and Feb 2014.  I also believe that due to the significant increase in business rescues which took place in the last year – a last ditch resort for companies before liquidation – that these figures could actually be under reported.  Research shows that the vast majority of companies in business rescue do liquidate in the end,” adds Maria.

Credit Guarantee also reported that the number of its clients seeking formal business rescue climbed from 137 in 2012 to 202 in 2013 – an increase of almost 50%. It’s number of potential claims notifications - essentially warnings from insured clients that their debtors are falling behind in payment obligations – also increased by 91% compared with the same time a year ago. 

Luke Doig, Senior Manager of Investments & Economic Services at Credit Guarantee adds:  “Operating conditions are extremely tough at present with challenges facing business on many fronts. It could be argued that the economy is all but at stalling speed. Our experience certainly does not reflect the 41.3% fall in liquidations reported by Stats SA for the first two months of this year.  We also need to highlight a trend that began last year that while the number of defaults has not increased markedly, the monetary values involved certainly have. Large-scale liquidations have become the norm and we do not see a catalyst that will cause a reversal hereof in the short-term.”

Voluntary liquidations have also increased dramatically and when one couples this with the increase in business rescues, it’s very evident that businesses are still struggling to survive and that cash flow has become imperative.  In such an environment, credit insurance for business has become an absolute necessity.  Companies need to put appropriate measures in place to insure their debtor’s book against liquidations, non-payment and business rescue scenarios.

“However, there is still a misperception that credit insurance is expensive and complicated, and many companies never venture into the credit insurance space to their detriment, particularly small and medium sized businesses.  The other misconception is that credit insurers only insure good debtors.  Although credit insurers do not insure very bad debtors with serious adverse records, they do still insure marginal debtors.  But the important question that remains for any business leader is whether you would you want to deal with a potentially bad debtor and not know about it?” says Maria Teixeria of Aon. 

Creditors and all suppliers should not underestimate the dire implications for their business if major debtors default.  Job losses and retrenchments are on the up again as business struggle to maintain high sales volumes.  Drastic cost reduction programmes seem the order of the day as companies seek to avoid compromising their long term sustainability.  The lack of spending and extended non-payment of accounts by debtors is exacerbating already volatile markets.    

“Under these conditions, even with tight cash flow controls and working capital, companies would be foolhardy not to have payment protection in place given the tough trading conditions.  Business rescues are becoming commonplace and it is important to note that when a company is placed under business rescue, payments to suppliers and creditors are put on hold, usually for months until a plan is approved by all stakeholders.  This creates serious cash flow problems for suppliers.  Couple this with lack of payment or delayed payments by any other debtors and one has the makings of a vicious circle,” warns Maria.

In the current environment where credit facilities are increasingly in demand, credit insurance becomes a necessity.  “Even defaulting companies battling to get credit insurance on themselves should protect their debtor’s book by obtaining credit insurance.  If they find themselves in distress, they should liaise early with credit insurers and get payment arrangements approved before they destroy their total credibility,” she advises.

The key premise of credit insurance is to protect your debtors book, and in turn ensure that cash flow remains in the case of a bad debt.  It also allows management to get a deeper understanding of their debtors book due to the extensive credit vetting done by the insurer.  In addition, another benefit of having credit insurance in place is that it allows a business to explore new markets and suppliers that may not ordinarily be possible under restrictive credit policies. 

“Many businesses are looking to new markets in Africa for growth which is hardly surprising in light of our sluggish local growth.  For any business considering trade with Africa or any other new market for that matter, export insurance is an absolute must along with complementary products such as guarantees,” concludes Maria.  

Credit insurance is not complicated or expensive, and with rates stabilising it should be an integral part of a well-conceived risk mitigation strategy.  Payment protection through properly scoped credit insurance is a non-negotiable given the current market volatility and threats to business sustainability.