Anticipating and mitigating pockets
of credit risk

The global economic situation remains challenging, with lackluster growth and the consequences of tightening monetary policies. Central banks, concerned about managing inflation, are keeping interest rates high. Geopolitical uncertainty is directly affecting supply chains. And to add to the uncertainty, countries representing 60% of global GDP will go to the polls in 2024.

Slow growth and low demand, high interest rates, and geopolitical risks are putting pressure on companies. We’re seeing profit margins narrow and insolvencies rise above pre-Covid levels in most developed markets. In 2024, insolvencies will exceed their pre-pandemic level in two out of three countries, up from half of countries in 2023. After two gradual rebounds in 2022 and 2023, global insolvencies are set to accelerate again in 2024 (+9%). It’s no surprise that credit risk is top of mind for business leaders and decision-makers everywhere.

But the impact of these factors is not uniform, with certain sectors and regions affected more than others. Even within affected sectors, there are pockets of risk and bright spots. Companies that can navigate these risks and leverage these opportunities will bolster their resilience in the long term. 

Among the sectors facing the toughest turbulences is the construction sector. Resource-intensive and investment-heavy, the sector was just recovering from the Covid period which had come with project delays, supply chain disruptions and cost inflation. The sudden increase in interest rates which took place last year has put a damper on residential and commercial property demand, especially in Europe. The sector is more resilient in the United States in part because of greater investment in infrastructure there, but the outlook in Europe isn’t entirely uniform either: for instance, the sector is faring better in Italy thanks to Next Generation EU investments.

The construction sector is extremely diverse when it comes to company size and services, from small specialists to large diversified corporations, raw materials providers to engineering firms. We’ve noticed that the construction companies suffering the least in this slowdown are the ones that have a diversified portfolio of activities and with a significant share of infrastructure and civil engineering work, rather than property, which is more heavily impacted by high interest rates. The energy transition is also another positive factor that contributes to sustained demand in the sector. While the credit risk factors affecting the health of the sector are broad and cyclical, the companies which have diversified their activities and are able to capture the positive trends in the sector are better positioned to face the current situation and economic headwinds. 

Whenever there’s an economic slowdown, households spend less and are pushed to make tough budgetary choices. The first sectors affected by this drop in discretionary spending are retail and agri-food, both known for being extremely competitive, and for their narrow margins and vulnerability to costs.  

When we assess credit risk on retail businesses, we look at two things that are positive indicators for risk mitigation. First, at their products’ price points: in a downturn, companies that sell mid-range products suffer the most, while discount products are buffered by necessity and luxury ones by perceived desirability. Second, their maturity on e-commerce, which helps diversify and grow their customer base, essential to mitigating credit risk. 

If some sectors are more vulnerable than others in this period, one risk factor doesn’t spare anyone: the looming debt wall. The easier access to cash and credit during the Covid-19 pandemic, thanks to national economic recovery plans, is catching up with businesses. Not only have rising costs put pressure on cash reserves, but a lot of businesses are facing repayment deadlines in 2024 and 2025 that could have a significant impact on their solvency. While this trend is global, SMEs are suffering more than larger corporations that are usually better able to refinance their debts. In this context, it is clearly important for risk managers to be forward-looking and to base their judgment on detailed analysis of each individual company.

Regardless of economic conditions, our primary objective is to provide a consistent, predictive and efficient risk management service to our clients. We provide our clients the insight they need to adjust their credit policies and improve their resilience. It’s in a period of uncertainty that you see the role of trade credit insurance in buffering risks for companies, and the necessity of an insurer that has a forward-looking, case by case approach to risk analysis. As a credit insurer, it's essential to understand the impact chains and domino effects, such as the impact of refinancing deadlines, the impact of financial costs on business, the positioning and the ability of business models to adapt to new trends and purchasing patterns affecting their sector.

Our customers turn to us for our ability to capture and analyze vast amounts of data from markets around the world, combining elaborate statistical models and a case-by-case approach to detect early warning signs of insolvency and risk of non-payment, to respond quickly to their requests, and for the open dialogue with our teams. Our underwriters around the world are sector specialists who are in close contact with businesses in their regions every day. This proximity, combined with a global outlook on sectors, gives them a sharp understanding of the challenges, risk, and opportunities that companies in each supply chain face. Our goal is to help our clients direct their sales efforts towards the companies that are most likely to be more successful than their peers and most likely to grow profitably with them. Our investments in digitalization and automation free up precious time so our analysts and underwriters can dedicate more time to our customers, working hand-in-hand to mitigate credit risk and find healthy business opportunities.