Insurer warns of potential domino effect following Cyclone Gabrielle

Insurer warns of potential domino effect following Cyclone Gabrielle | Insurance Business New Zealand

Insurer warns of potential domino effect following Cyclone Gabrielle

In times of natural catastrophes, damage to property and disruption to business rank high up the ladder when it comes to the prevalent consequences. There is a less obvious risk, however, that an insurer warns has the potential to turn into a domino scenario to the detriment of firms.

“Businesses need to be aware of the potential for an increase in insolvencies due to the recent storms and Cyclone Gabrielle,” Coface New Zealand commercial director David Meys (pictured) told Insurance Business.

“The risk of insolvency increases significantly if a business has not taken the necessary steps to manage its credit risk. Companies should review their debt levels and ensure they have sufficient liquidity to cover any potential losses resulting from non-payment.”

It was suggested that the inability to pay debts, or insolvency, is a real possibility amid the losses resulting from the recent disasters.

Domino effect

The trouble with insolvency is it can be an unfortunate chain linking companies that do business together.

Meys noted: “For many businesses, their biggest concern is the sudden increase in overdue accounts receivable and the potential for non-payment from affected customers. The flooding has caused significant disruption to supply chains, causing businesses to be unable to deliver projects, goods, and services on time.

“Slow or non-payment then becomes a major concern, as businesses are already feeling the financial strain on their own working capital. This makes themselves vulnerable, where their buyer’s insolvency can lead to a domino effect dragging them down as well.”

According to the insurance executive, Coface is already fielding calls from businesses looking to manage the credit risk associated with the massive weather events of late.

Managing credit risk

While it might not be an apparent need for some, Meys said reviewing options with insurance brokers with a view to transferring credit risk to an insurer should be a yearly activity for Kiwi businesses.

He told Insurance Business: “Businesses can take steps to manage their credit risk and improve their solvency. This includes reviewing customer credit profiles and taking steps to reduce the risk of non-payment. This can be done by implementing stricter credit policies, placing limits on the amount of credit extended to customers, and requiring customers to pay upfront or on delivery.

“Businesses should also review their terms and conditions of sale and ensure their payment terms are well defined and enforceable.”

Impact on property insurers

Meanwhile, in a related development, property insurers in New Zealand are expected to take a hit in terms of profitability following Cyclone Gabrielle and the Auckland Anniversary floods.

“The current [natural catastrophe] events are expected to further increase property premiums leading to GWP (gross written premium) growth during 2023-2026,” said Chandini Sharma, an insurance analyst at data and analytics firm GlobalData, in an emailed release.

“However, insurers’ profitability is expected to remain severely challenged in the coming years due to the increased frequency of weather events and rising inflation that will lead to higher claims payout.”

On Monday, the state of national emergency that was declared on February 14 was extended for a further seven days as the response to Cyclone Gabrielle continues. Information about the available support for those impacted can be accessed here.