The Perfect Storm! Be Prepared for the trade credit risks your business may be facing soon

By Ron Doyle

My last blog post asked whether you were losing any sleep over the debt crises in Europe and the USA. I then went on to suggest that perhaps you should be worried due to four factors:

1. The impact of sovereign debt on bank liquidity
2. The deepening debt crisis in the USA
3. The cuts to government spending in Europe and North America
4. European countries possibly having to leave the Euro and revert to old currencies

The likelihood of the events listed above all occurring together would have been fairly improbable a year ago, but now the level of probability has increased significantly as government leaders appear to be incapable of coming up with solutions.

Several years ago, my ICBA colleague, Roch Simard, summarized a book, Predictable Surprises: Disasters You Should Have Seen Coming, written by Michael Watkins and Max H. Bazerman, published by the Harvard University Press. The book’s main message explained that companies and governments often foresee possible disasters, but they are not prepared to take action or to expend the capital necessary to mitigate the catastrophic consequences.

This theme was picked up by Tom Rand in a column, “Reducing the Risk of Climate Catastrophe”, which appeared in Canada’s Globe and Mail on Monday, July 11, 2011. While using examples of the Japanese earthquake and the recession brought on by widespread reductions in house prices, the main theme of the column is related to the catastrophic cost of not taking early and aggressive steps to reverse the trend in climate change. Rand categorizes this action as, ”a kind of insurance policy against this collapse.” He states that paying something in advance to reduce the risk is common sense.

Most astute business managers around the world realize that we are experiencing unprecedented levels of uncertainty and risk in the financial environment and global leaders do not appear to be able to formulate plans to address the problems or commit the capital necessary to fund any possible, available solutions. The enemy is on the horizon and governments are out of ammunition.

The prudent course of action for financial executives is to rigorously scrutinize the financial position of their company with a view to identifying any probable risks that may have catastrophic impacts on the company, if they were to occur. Once these risks are identified, strategies can be developed to mitigate the effects of these risks.

From the perspective of using credit and political insurance as a risk mitigation tool, it is important to adopt the strategy as a corporate policy and to put it into place well before it is needed. When risks become readily apparent to everyone, coverage capacity becomes quickly exhausted and the price of coverage increases materially. Every company should have an annual financial risk review done by experts in the field. A small cost now, may protect against a large loss later. 

(Ron Doyle is a founder of Millennium CreditRisk Management – credit and political risk insurance specialists – www.mcm.ca. ICBA is the world’s largest team of independently-owned, specialist trade credit insurance brokerages. Partners combine local service with global coordination to provide credit and political risk insurance solutions for multinational companies.)