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Inflation-fuelling credit risks

As the world enters the third year of the COVID-19 crisis, economic trends have been both encouraging and troubling. The good news is that international trade has picked up, and there have been fewer insolvencies than expected. However, the global economy looks set to recover much more slowly this year.

This is due to ongoing pandemic-related restrictions, bottlenecks in the labour markets and disruptions in supply chains. Accordingly, our clients' expectations for the first half of 2022 – until recently slightly optimistic – have become pessimistic.

Rising insolvency risks

Furthermore, companies have recently had to deal with significant price increases. For example, the inflation rate in the US rose to 7 per cent year-on-year at the end of 2021, reaching its highest level in 40 years. The eurozone saw prices increase by five per cent while the inflation rate in Germany stood at 5.3 per cent, its highest level in almost 30 years.

There will be increasing focus on credit risks in the future.

Jannis Gutbrod

The reasons are manifold: disruptions in supply chains and (geo)political risks have driven energy costs to record highs, while factors such as raw materials shortages and, ultimately, tighter monetary policy have proved to be additional drivers of inflation. Unlike in the European Union to date, interest rates in the US are expected to rise this year. This would have negative consequences, particularly for highly leveraged companies, as they would have to refinance their debt burden. This would inevitably increase the risk of a rise in insolvencies.

Outlook

Rising prices, higher interest rates and an increase in insolvencies are leading to a tight financing situation in nearly all industries. We are all noticing, for example, that our customers' suppliers are increasingly demanding collateral from them. This is because down-payments are exposed to a potential default risk until delivery of the goods has been completed. That's why there will be increasing focus on credit risks in the future. Aon uses the wide range of opportunities in the credit insurance market to provide companies with individual risk-transfer solutions. For example, accounts receivable coverage in conjunction with (reverse) factoring offers opportunities to optimise financing situations.