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Feeling the ripple effect.

In a highly interconnected world – where the links between businesses are better viewed as a supply web than a chain, the effects of events on the other side of the world are being increasingly felt in local markets. Very few, if any, are insulated from the swings of the economic cycle and perhaps today’s world is a prime example of this.
During the 1970’s, the flexing of muscles by OPEC and the subsequent rise in the price of oil caused shock waves that catapulted the world into recession. Today the fall in the price of oil is seen as one of the significant indicators of the world struggling with a lacklustre economic performance and outlook. The underlying issues that have led to downturns tend to be somewhat common and largely a result of political events, asset bubbles and debt. At some point in time the chickens will come home to roost and today this is the big picture of the world economy.
For many businesses, the decline in commodity prices may seem to be far removed and indeed the immediate impact could be a positive one for some by being able to shed input costs. Eventually however, these downward movements impacts not only the underlying asset, but also feeds through to the many businesses and institutions who form a complex web of suppliers, manufacturers, retailers and even governments. For example, when the value of platinum drops, this directly impacts the miner but there is a ripple effect into budgets of the government of the country where the mine sits, who may depend on this commodity to generate taxes to pay for social and welfare expenditure. It impacts the banks who may have lent against high asset values or cashflows that are no longer sustainable and therefore dries up liquidity. Mines closing result in many feeder businesses facing uncertainty and higher unemployment in local communities who may take decades to recover from the impact. Thus the impact of the commodity price crash has been far felt and wide ranging. And this is not just metals – it is felt across all commodities – hard and soft, food stuffs, minerals, oil & gas – it is a genuinely global issue.
And the businesses feeling the pain are equally widespread. In the US, companies who borrowed heavily to extract shale oil are finding that the low price of oil and gas means their ability to sustain production is limited. The recently announced closure of Tata Steel in the UK, and the decision by Arcelor Mittal to mothball its Spanish plant in Sestao near Bilbao, are the results of lower Chinese demand and increased global supply. Further down the chain, or maybe more accurately further along the web, the consequences are felt in lower demand in the surrounding areas for goods and services provided by seemingly unconnected businesses such as retailers. In the UK in the last 18 months, 39 retailers have gone into administration – affecting 1717 stores and over 27,000 employees.
It is increasingly evident that no company can be completely confident that global events will not have a meaningful local effect on them and active steps need to be taken to look at how best to protect the one of the most valuable assets on the balance sheet, namely the receivable – and trade credit insurance is a key tool in helping to do this.
In the current market conditions, the last few years has been a good time to be a buyer of this type of insurance, with strong competition amongst providers making for good coverage and keen pricing. However, the tide may be turning as a rising level of claims will result in insurance companies readjusting to the deteriorating environment. Claims are certainly on the rise and we expect to see them increase further over the next one to two years as asset values are restructured, causing a sharp shock. The ABI recently released its annual figures for trade credit showing that 11,000 more claims were made by businesses in 2015, an increase of 19% from a year earlier. Confidence may be further eroded by ongoing liquidity issues and political uncertainty around the solidity of the European Union as well as world-wide leadership issues; order books being depressed as major economies flat-line will add to the mix and the ever nascent threat of terrorist activity will provide depressing shock events. Outside of the major events even relatively small incidents can become more meaningful as a drip feed of bad news causes confidence to erode and economic black clouds to gather at a faster pace. During uncertain times, securing one’s valuables seems like a sensible strategy.
About this Issue's Sponsor: AIG
AIGTrade+ is a trade credit product which uses technology to combine “ground up” cover with non-cancellable credit limits and is suitable for businesses with an annual turnover between £5 million and £50 million.
 
Features & Benefits
AIGTrade+ provides credit limits that are non-cancellable for 12 months. Credit limits are calculated automatically using trading history or set by an AIG underwriter, relieving the client of responsibility for setting discretionary limits and the customer analysis this involves.
AIGTrade+ uses an online platform to analyse how the policyholder’s buyers are performing. It displays an up to date picture of exposure cover, provides stop shipment alerts and ensures policy compliance by removing the need for overdue reporting and turnover declarations.
AIGTrade+ enables a simplified claims process due to pre-approved limits and invoice data being already captured within the IT platform.
To find out more please contact Jon Barnes on 020 7954 8347 or via email: Jonathan.Barnes@aig.com or speak to a member of the UK Trade Credit team.
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