Brazilians are accustomed to working in a volatile macroeconomic scenario, but 2014 was a challenging year for the specialised trade credit insurance brokers and 2015 could prove to be as difficult.
Trade Credit Insurance is a relatively new line of insurance in Brazil and the main lines of trade credit insurance written are Global Portfolio Domestic and Export Trade Credit Insurance.
Although the official numbers for total annual market written premiums in 2014 have not yet been published by SUSEP (the Brazilian insurance market regulator), we estimate that the annual figure for 2014 will be around BRL250m.
The market has grown double digits every year since 2003, except for the years of 2008 and 2009 during the credit crisis. Domestic trade credit insurance represents 90% of written premiums, while export credit insurance represents the remaining 10%.
According to preliminary SUSEP premium-claim loss ratio publications have deteriorated substantially over the last couple of years. We estimate the loss ratio to be at approximately 55% for the 2013-2014 period. The worsening of the trade credit insurance loss ratio is a direct consequence of the recent deterioration of Brazil’s macro-economic scenario.
The causes
1) A general slowdown in the Brazilian consumer market. This has seriously impacted Brazil’s industrial manufacturing output, affecting many industrial sectors simultaneously. This slowdown generates lack of confidence in investors to finance and increase industrial production, which in turn reduces production
of capital goods of industrial machinery and equipment.
2) Unemployment in the industrial sector has been on the rise for eight consecutive months and the accumulated industrial unemployment retraction between January and November 2014 was 3,1%. Just the state of São Paulo alone reported a 6,1% increase on unemployment.
3) Lack of confidence and financing by the private sector in infrastructure projects, such as highways, railroads and ports, brings huge logistic problems, which in turn makes Brazilian exports uncompetitive in the international markets.
4) Brazilian manufacturers are suffering stiff competition from Chinese imports and losing local market share.
5) The Brazilian Agro sector is presently enduring severe droughts in the south of Brazil, which will continue to affect farmers in 2015. Munich Re recently reported that the droughts in the south of Brazil have affected 27 million people and initial estimated damages of US$5bn.
6) The recent drop in commodity prices (not only regarding crops but also in the mining sector) has caused additional
hardships to large, medium and small organisations. The drop in commodity prices also reduces Brazil’s export revenues, while Brazil continues to increase import of manufactured goods, especially from Asia. This will have a serious medium- to long-term effect on the balance of payments and consequently reduce foreign exchange reserves, which will also undermine foreign investors’ confidence.
7) Recent corruption allegations at Petrobras will continue to present a serious ‘cash flow’ and ‘knock on’ effect in the ‘Oil & Gas’ sector.
8) Both private and, to a lesser extent, public banks have tightened up on credit concessions causing a serious effect on many companies’ cash flow, forcing them to file for the legal pre-bankruptcy protection known as Recuperação Judicial (judicial recovery).
These are the main reasons for the trade credit insurance loss ratio’s substantial deterioration over the last two years. This will continue to seriously impact many of Brazil’s industrial, agricultural and service sectors, which will generate a larger number of company insolvencies during the coming year.
The market is experiencing a significant increase in judicial recoveries and this is covered under the regular trade credit insurance policy. Once the insured has received the indemnity the insurer has an average ‘collection period’ of eight years, plus a very high ‘discount’ on the face value of the debt to try and recover.
These are clear ‘early warning’ signals, and we are strongly recommending using trade credit insurance to protect one of most valuable assets on the balance sheet, the ‘Account Receivables’… ‘Cash Flow is King’!
(author: Phillip Krinker)
(font: Latam Insurance Review http://www.insurancelatam.com/)