The power of three

Kirk Cheesman MICM Group Managing Director National Credit Insurance Brokers

There is an age old saying ‘good things come in threes’. The thought is if a fortunate event has already occurred twice, a third fortunate event is likely to occur.

But does the same apply to ‘bad events’?

I am sure as credit professionals, there have been times when you’ve considered the latter, via three insolvencies, three preference actions or three repayment plans.

Considering this theory, we’ve taken a look at the top three factors based on our statistics.

Given our close presence in the trade credit insurance arena, let’s first take a look at the top three industry sectors during 2022 by claim value:

First Place – Building and Construction – Not surprisingly, building and construction took the gold medal in the top three industries lodging credit insurance claims. Whilst a significant number of policyholders are related to the building and construction sector, many factors impacted the ability of end users to stay profitable during 2022.

No doubt the ‘stop-start’ environment during COVID made things more challenging for this sector. Labour shortages and increasing labour costs also played their influential parts. Product delays and shortages as well as inflation added to their woes.

Government incentives to ensure residential home building stayed strong during the pandemic period led to the overall high level of new builds and growing pressure on global supply chain issues.

Second Place – Electrical – Silver medal went to the electrical sector. Altough a broadly spread industry, most failures surrounded subcontractors who struggled to stay afloat during 2022. In addition to the key elements impacting the building and construction sector, subcontractors live in a highly competitive environment. Long lead times on quoting jobs with fine margins means on many occasions, work is under quoted, and losses occur.

Third place – Finance related losses – taking bronze medal was the finance sector in 2022. Finance related claims are generally made via a cross section of industries, whereby trade finance facilities are offered in support of early cash flow payments on debtor invoices. Increasing finance costs and banks tightening security requirements, lead to debtor finance being a good alternative. The number of businesses using debtor finance facilities has grown within Australia, which contributes to growth in credit insurance claims.

Companies entering external administration also returned to pre-pandemic levels mid-2022, the highest month being July with 717 company failures. August was the second highest month with 692 insolvencies and November coming in third at 655 insolvencies.

On the collections front, the top three months for collection actions were March, May and August.

The influx of credit insurance claims generally happens in March and April. Businesses after the holiday period continue to try to survive but eventually wave the white flag in February or March. This was no exception in 2022 with the highest claiming month being March and an influx also occurring in July after the financial year end and November just leading into the holiday period.

Despite activity increasing in both insolvency, collection actions and credit insurance claims, there is still much ground to make up for the low levels of insolvencies during the pandemic. Did the government incentive and support smooth the economy out during 2020 to 2022 only for hidden issues to appear during 2023?

The uptick in overdue reports and collection actions suggest there is normality returning to trade credit risk.

The NCI Trade Credit Risk Index is still much lower than in pre-pandemic times and has significantly dropped from the initial economic fears of March 2020. One of the contributing factors of the current trade credit risk rating is the level of cover available from trade credit insurers. The level of cover available continues to grow and the demand from policyholders is much higher than pre pandemic levels.

What are the top three economic factors that are going to impact businesses for the remainder of 2023?

NCI asked our expert economist for his top three factors:

1. The speed at which inflation falls and what this means for interest rate.

2. Slower economic growth, especially from the consumer sector, as interest rate hikes fully kick in.

3. Labour market costs/wages. The skills and labour shortage will likely be addressed by a surge in immigration and a broader economic slowdown. By year end, there is likely to be some emerging slack in the labour market.

I hope there are more good things that come in threes for our sector over the next 12 months. But one eye is closely on the impending risks and the unknown potential risks.