The business landscape has undergone significant changes in the last three years. Supply chain disruptions, economic pressures and environmental changes have meant that companies are seeking more effective ways of assessing and managing the risk of default among their trading partners.
As a veteran in the trade insurance market, there is a constant need for Coface to adapt and evolve with the changing business environment. It is essential to stay ahead of the evolution and continually fine-tune Coface’s response to these changes. The company has built a business intelligence unit, bringing together the data and expertise accumulated from its underwriting work, and is now able to present that to users through URBA, a platform that provides trade insight, portfolio-level risk scoring and real-time monitoring.
Ian Chow, Coface’s regional product manager of business information for Asia Pacific, outlines how default risk assessment is changing in the new environment, and how URBA can help companies make more informed decisions.
GTR: How are changing market conditions affecting the way companies manage supply chains?
Chow: To set the scene, the business operating environment today has shifted significantly from where we were at the end of 2019, and we see this on a few fronts.
On cash flow, some businesses have traditionally depended on supplier financing of sorts to manage working capital, toggling the gap between payment received from clients and payment made to suppliers to optimise cash flow. This has become harder in recent years, as companies are now more focused on accounts receivable management and collection, putting further strain on companies’ cash flow as business and demand slows.
In terms of financing, the higher rates have also made it more expensive to finance working capital needs, stretching the funds needed to run day-to-day operations for some companies.
Operationally, heightened geopolitical concerns have also affected supply chain consideration and selection. This, together with high logistics costs, has meant that the practice of nearshoring and friendshoring is gaining prominence, in the bid to reduce supply chain disruption.
Unfortunately, these strategies are not always the most cost-effective option, nor the most operationally efficient.
All these can have an impact on the sustainability of a company, affecting its cash flow, competitiveness and business viability.
GTR: Historically, what kind of data or information has the market tended to use to assess a company’s default risk? Are there limitations to that approach?
Chow: The changing environment means that when a company is assessing default risk, it is no longer enough to make an assessment based on that company’s financial performance, ownership and operation.
This is quite different from the conventional approach in evaluating creditworthiness, because now, you not only have to understand the entity-level performance, but will also need to place greater emphasis on all these external factors and the environment in which the company is operating.
That could include the countries in which that company is active, the sectors where it has exposures and more importantly, its trade network: who it is trading with and whether it is part of a larger group. These are all factors you will to take into consideration before making that final trading decision.
From a trade insurance perspective, you need to understand everything there is to know, from political risk to environmental risk, as understanding just the entity-level risk is no longer sufficient.
Also, while companies might previously have been able to make these decisions based on their own internal networks and information, this is limited to whether the dealings are with companies that you are already familiar with, or if you are in a space where there is extensive domain knowledge and built-up expertise.
There are limitations there in terms of scope. For example, you might have significant knowledge in North Asia, but because of the current market situation, you need to explore new regions and find new counterparties.
Our response to that has been to bring the strength of Coface’s underwriting to a new space; tools that historically were used by our underwriters are being brought to the Asia Pacific market.
GTR: Why has Coface developed URBA, and more broadly, why is Coface expanding its trade credit insurance offering to a business information offering?
Chow: If you look at how we started as a company, we predominantly provide trade insurance, which means we protect against default. We have come to realise that as we carry out these assessments and continually monitor these companies, we are accumulating data and expertise that we can use to cater to our customers in different ways.
Imagine if traditionally, you’ve been buying insurance from Coface for the last 30 or 40 years. You probably have a sense that this is a good way of assessing businesses, and might start talking to us about that. Where customers used to buy insurance protection from us, they’re now also asking us for help with assessment. This is a fairly recent trend, and a lot of that is driven by those changing market conditions we discussed.
At the same time, the whole world is moving towards dashboard-style apps, for efficiency. Our new URBA platform gives our customers that dashboard view, so you have a holistic view of a company at the portfolio level, taking into account all those environmental and contextual points and evaluating risk based on a wide range of factors.
GTR: What kinds of information does URBA bring together, how is that presented to users and how does it fit into Coface’s trade credit insurance offering? What is different about URBA compared to other business information products in the market?
Chow: One feature of Coface’s assessment is an incorporation insurance indicator. That takes in who a company is trading with, what exposure they have, and most importantly, the instances of actual invoice default.
Coface also invests heavily in linking companies together to understand the total portfolio-level risk exposure, and we undertake our insurance decisions based on these trade insights.
The result of all we do is where URBA stands out: our ability to show the likelihood of invoice default over a 12-to-18-month period and understand the company not only at a point in time but how it has evolved over time, allowing you to make informed trading decisions on that company.
Another feature of URBA is real-time, 24-hour monitoring. With trade insurance, you need to understand whether there is any change in the operating environment, or within the trade network, that could have a material impact on the company.
For instance, if we see financial stress in any part of the company’s trade network, we will immediately re-evaluate our exposure to this company and alert stakeholders of these changes.
All in all, URBA is a dashboard that allows our customers to understand not only the company-level performance but also the network in which it is operating. Best of all, it has the ability to keep our clients informed of any material changes to the credit quality of their counterparts, allowing them the ease of mind to focus on growing their business.
It is a modern tool designed for the fast-evolving business landscape in a globally connected world.
GTR: What is different about URBA compared to other business information products in the market?
Chow: A quick example that springs to mind would be the exposure on a Japanese trading company for seafood.
Where most information providers would have tapped on and made assessments based on company information, last known financials and operational track records for its evaluation, it may lack the ability to provide for the shift in the operating environment arising from the decision to release the treated radioactive waters off the coast of Fukushima into the Pacific on August 24, 2023.
The UBRA platform, backed by the Coface underwriting expertise and its vast analytical assets, allows UBRA clients to be notified immediately of any change in the credit quality of their counterparts arising from the exposure of its trade network.
The information we are showing in URBA is the same that we use to make decisions on the €650bn in exposure that Coface as a trade credit insurer has.
As with the highlighted case, these changes can include countries that Japanese companies are exporting seafood to, as well as the regulatory reaction in destination markets, changes in trade volume in Japan’s seafood export market, observance of actual invoice defaults and consideration of trade interconnectivity, both domestically and globally, for the said company and its related industry.
In essence, with Coface, each assessment is differentiated not in what is considered for assessment, but the depth and width of what is assessed.
Tags: Business information, Coface, defaults, Fatr, Ian Chow, Insurance, supply chain disruption, URBA
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