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  • Writer's pictureKarl

How Credit Risk Insurance Can Protect Businesses?

The credit crisis of 2007-08 was a critical, global economic crisis, which many economists consider as the most severe financial crisis since the Great Depression that took place in the 1930s. It had an impact on everyone, not just the employees of the bank. Because the ability to get financing changed and the price of debt changed, many things happened. So, credit impacts every individual each day, whether they’re aware of it or not.

If a global recession occurs, as economists predict, it can be difficult for firms to refinance any mature debentures they have coming. Leadership must not just be thinking about credit risks, but every risk related to their business.

Why credit risk happens, and what can firms do to protect themselves?

The chief microeconomic factors that lead to credit risk comprise poor lending practices, laxity in credit assessment, poor loan underwriting, massive licensing of banks, direct lending, low capital and liquidity levels, inappropriate laws, poor management, volatile interest rates, inappropriate credit policies, limited institutional capacity, government interference and insufficient supervision by the central bank.

Being able to conduct a robust risk assessment is a great idea for everyone within a firm. Once an evaluation is made as to how much risk they are exposed to, then they can come up with a strategy to help safeguard the business. If there is more risk in the system, than an organisation is willing to take, then they should consider acquiring credit risk insurance.

What is credit risk insurance?

Credit risk insurance may be referred to as a tool that supports portfolio and lending management. It shields a company against the failure of its customers to pay trade credit debts owed to them. These debts can arise following a customer failing to pay within the agreed terms and conditions or becoming insolvent.

What can impact credit risk?

The factors that affect credit risk range from market-wide considerations like economic growth to borrower-specific criteria like debt ratios. Plus, political upheaval in a nation can have a big influence too.

For instance, political decisions by government leaders about development priorities, environmental regulations, labour laws, wage levels, investment, barriers or trade tariffs, currency valuation, and taxes can affect the business profitability and conditions.

Certainly, political risks can impact credit risks. It is rare that political risks are impacted by credit risks. Currently, we have a plethora of different views on the political spectrum so until we know how that is going to work out, it is going to create risk within the system, and we’ll see how different firms react to that.

All of us talk about biases. Everyone thinks they are better off, and it is always someone else that has the issue. It is the same when reviewing someone’s financials or looking at a risk assessment; everyone thinks they are doing fine, but then they discount what is going on with other individuals. That is why it’s important for firms to self-evaluate as they assess those they transact business with.

So, know your customers, know your portfolio, and understand your risk tolerance. Also, keep in mind that there are a ton of tools available to assist you in mitigating against those risks.

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