What form of insurance are Australian businesses overlooking?

MD shares advice for minimising insolvency risk

What form of insurance are Australian businesses overlooking?

Insurance News

By Brendan Day

Kirk Cheesman (pictured) wants to change how trade credit insurance is perceived in Australia.

“In Europe, the take-up of trade credit is quite substantial and indicates its position as a standard sort of insurance product for businesses,” the managing director of NCI Trade Credit Solutions told Insurance Business. “Here in Australia, there’s more of a ‘she’ll be right’ approach, where it’s considered by many to be a discretionary spend. As a result, this oversight can leave Australian businesses in a riskier position than those in other countries.”

In Cheesman’s view, one of the biggest assets that any business can carry is its debtors’ ledger – something that is protected by trade credit insurance.

“For so many companies, accounts receivable is the lifeblood of their business,” he remarked. “They might have buildings and other tangible assets that they own, but these aren’t really liquid and won’t affect their everyday business in the same way.”

An expert on the topic of insolvency, Cheesman is insistent that businesses need to take into account not just their own financial standing, but must also recognise if their clients are in a precarious position.

“To protect themselves against insolvency, businesses need to have a good strategy, sell high quality products, and also understand the insolvency status of their own customers and get ahead of any potential issues with collecting debts,” he said. “I advise my clients to take a look at their terms and conditions, their terms of sale, and make sure that it’s up to date and gives them the ability to recover money if their clients aren’t paying them. Right now, businesses might be taking more risks by bringing in a new customer, so there also needs to be a robust onboarding process for these new customers.”

“Don’t just set and forget – monitor the risks of your customers’ financial positions,” he added.

The greatest overall risk that Australian businesses are facing to their everyday functioning over the rest of 2020 and 2021, as Cheesman sees it, is the uncertainty and fear caused by the COVID-19 pandemic. “The amount of uncertainty that it’s brought about is certainly having a huge economic impact – for example, the higher levels of unemployment leads to lower consumer spending, lower overall cash flows, and more fiscal issues on a mass scale,” he said.

He predicts that in the insurance world, the inability of customers to pay outstanding debts is going to become a bigger factor in the coming year, bringing about a much higher level of trade credit claims.

“We’ve got a big build-up of insolvency hibernation happening at the moment, and this will likely grow in the future. From what I’ve heard, a lot of people are expecting that global insolvencies will increase by something like 35% next year, though this will even itself out over a 24-month period,” Cheesman noted.

From his perspective, the Australian economy has proven to be pleasantly resilient throughout the pandemic, buoyed in part by the government’s widespread provision of wage subsidies. “It’s a bit surprising, but a lot of industries outside of retail, travel and hospitality are actually doing quite well during these difficult times,” he said.

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