In recent weeks, an upturn in inflation to over 5% and a slight rise in interest rates have some economic commentators concerned about the outlook for Australia’s economy. What are the challenges facing the country’s insurance companies in the coming months?
“We can see that supply chain disruptions and rising costs have impacted business investment and production,” said Hugh Burke (pictured), CEO in the Asia-Pacific region for Coface, the global trade credit insurer.
However, Burke said the rise in interest rates will actually have a positive impact for insurers.
“The rise in interest rates will also increase government bond yields which are generally positive for insurers and pension funds,” he said.
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The CEO said this is because the negative shorter-term impact that rising interest rates can have on the value of holdings of government bonds is often mitigated by insurers’ ability to hold investments until maturity.
He said there’s also the reduction of the present value of liabilities on account of higher discount rates. However, Burke said the interest rate rise for small businesses is not positive in terms of how it will increase borrowing costs.
“On the other hand, the average interest rates on new fixed-rate loans for SMEs have risen recently. Interest rates on variable-rate loans may increase in the coming months following the rise in the RBA’s policy rate,” he explained. “We could also see a rise in large business lending rates due to a rise in the three-month BBSW (bank bill swap rates) rates.”
The CEO said SMEs are still getting help from government loan guarantee schemes.
“This would help support bank lending to SMEs, therefore maintaining access to loan financing for businesses,” he said.
However, he suggested that the added economic pressures on SMEs will make it hard for insurers to raise the cost of their premiums.
“Nevertheless, the higher financing costs will restrict the flexibility of insurance companies to increase the premium,” said Burke.
He warned that companies with weak financial strength are “highly vulnerable” if they are not able to increase their prices and transfer the increasing cost to their customers.
“In the current complex environment of supply chain difficulties, uncertain recovery from COVID, high-interest rates and inflation issues, we are forecasting that the number of corporate bankruptcies will increase,” said Burke.
Burke said ongoing capacity pressures in the construction sector due to employee absenteeism and supply constraints have contributed to slower growth in investment and activity.
“Accelerating inflation has also harmed household budgets and may affect private consumption,” added the Hong Kong based CEO.
The economy is still feeling the negative economic impacts of the Omicron outbreak, he said, including labour shortages with employee illness and isolation that have caused disruption across a swathe of industries including farming, retail, restaurants and logistics.
On a positive note, Burke said despite the fact that Australia is facing supply-driven inflationary pressure it’s yet to see a negative impact on employment and economic growth.
“In fact, labour market conditions are tight, with the unemployment rate falling to 4% in March, they are among the lowest in over 40 years. Economic activity has also remained resilient despite the Omicron wave and heavy flooding on the east coast in early 2022,” he said.
Burke said if a stagflation situation does occur, businesses, including insurers, can expect to be impacted by a combination of rising costs and stagnant, or negative, economic growth.
“Stagflation will likely raise working capital issues and contribute to longer payment delays,” he added.
Burke’s firm specialises in credit insurance and he suggested that their global footprint with 700 risk underwriters around the world could come in handy for Australian companies concerned about economic stresses and how they’re impacting who they do business with.
“If I have a client here in Australia who wants to sell to a company in London then we would ask our risk underwriter in the UK to assess the creditworthiness of that company,” he said.
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Burke said the information Coface gathers can help their clients “enhance their decision-making” around whether they can or how they should confidently trade with customers.
“This underwriting model allows us to assess the impact that adverse events like stagflation and geopolitical situations have on regions, counties, trade sectors and individual companies,” he said.
Burke said “the uncertain economic environment” leads to greater interest in trade credit insurance.
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“With more Australian companies exploring solutions to protect their receivables and strengthen their internal credit management tool,” he said.
The Coface CEO said, regardless of the current economic clouds, Australia’s business environment is well suited to trade with its developed market with strong economic, financial compliance and visibility and low corruption.
“Moderate growth is expected in 2022 as Australia continues to reopen its economy and relax border restrictions,” he added.
