Managing Risk at the End of a Tumultuous Year

The efficiency and effectiveness of vaccine rollout, rising commodity prices and insolvencies in Europe continue to pose significant risks for a global economic recovery throughout the rest of 2021 and into 2022.

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While the world has seen a slow recovery in 2021, the efficiency and effectiveness of vaccine rollout, rising commodity prices and insolvencies in Europe continue to pose significant risks for a global economic recovery throughout the rest of 2021 and into 2022.

Vaccine rollout and potential complications

No one was prepared for more than a year and a half of lockdowns, restrictions and supply chain disruptions. There is hope, however, now that various vaccines are in distribution. Risks remain for supply chain disruptions, new vaccine-resistant virus strains and overall vaccine effectiveness.

Additionally, mutations of the virus continue to emerge and some of which could be resistant to currently available vaccines. If the mutations cannot be contained, this could pose significant risks to recovery.

While vaccine progress is underway, many emerging economies still continue to struggle to vaccinate at the pace of new cases of the Coronavirus disease (COVID-19).

Rising price of commodities raises concern for consumers

There has been a sharp increase in commodities pricing globally in 2021. During the shutdown, most businesses suffered from depleted inventories and reduced production levels, but now with spending ramping up again, there is tightness in the supply chain making it difficult to acquire materials on time.

As a result, prices are rising throughout global industries, including industrial metals, building materials and oil. If this continues, inflationary pressures could rise and potentially cramp a robust economic recovery.

Runaway inflation is not expected. However, businesses can take steps to mitigate the risk of customer payment defaults by understanding the supply chain risks as it relates to their specific industries.

European insolvencies likely to increase

In 2020, Europe faced many provisions that placed moratoriums on bankruptcy and requirements to repay leases were delayed. These provisions are still in place today and are expected to unwind in the middle of the year. As a result, the impact on insolvencies and default payments in the European region remains unknown and will likely ramp up in the coming months.

European businesses and their global partners will need to be particularly careful about managing customers and keeping a close eye on their payments.

Industry sectors related to face-to-face services -- such as travel and hospitality – are directly impacted by the pandemic and the most likely to default payments and struggle with insolvencies.

The benefits of trade credit insurance for risk mitigation

While the pandemic was the most shocking “black swan” event of 2020, it certainly was not the only one. The California wildfires, mass social justice uprisings, and a historically contentious U.S. presidential election also posed major risks to businesses across industry sectors. With trade credit insurance, companies are able to monitor industries with particularly high risk. This helps keep track of customer payment habits to give an early warning of deterioration before it becomes critical.

When a large company defaults on their payments, it can have a ripple impact throughout the supply chain. If extreme events continue this year and beyond, businesses should make sure they are as prepared as possible for the unknown, by having a contingency plan in place for extreme, external business disruptions. 

One way to do this is by keeping a close eye on your customers’ payment habits. If you notice any delays or cash flow problems, it’s time to pause lending. Companies can also halt open terms with particularly risky customers or require upfront payment.

Another option is incorporating trade credit insurance into your business plan. This can assist your company with assessing customers holistically, rather than relying solely on payment history that is subject to falter during extreme events. Trade credit insurance assesses credit health by monitoring the industry as a whole, watching supply and demand trends, and analyzing the profitability and liquidity of customer assets.

With so much uncertainty in this new year, trade credit insurance can help provide businesses with peace of mind and thorough risk evaluations in many industry sectors globally.