Friday, 1 June 2012
Risk of client insolvency rises in Spain as crisis drags on
Spanish risk managers are facing growing difficulties as the country goes through a severe economic downturn that is forcing them to deal with risks of increased intensity, delegates at the annual conference of Asociación Española de Gerencia de Riesgos (AGERS), one of Spain's risk management associations, were told on Wednesday.
Non-payments by clients, labour disputes, cyber risks and damage to reputation were key issues dealt with during the one-day conference that took place in Madrid and was attended by the president of FERMA, Jorge Luzzi.
The insurance market has navigated the crisis better than other sectors such as banking, but it has felt its impact too, delegates were told.
One insurance line being affected, according to Fernando Vega, Head of Financial Lines at QBE in Spain, is D&O, where losses have gone up.
One of the reasons is that many more companies are going bust. Bankruptcies have shot up from 1,600 a year in 2009 to 5,400 in 2010 and more than 6,000 in 2011. This trend is unlikely to reverse any time soon.
“Both the manufacturing and service sectors are seeing an explosive increase in bankruptcies,” Mr Vega said. Loss ratios in D&O lines have risen from 17.3% in 2008 to 32% in 2011. Many of the losses have been posted by Spain's embattled banking sector, a hotbed for labour-related suits and complaints by consumers. The good news, however, is that there still is plenty of D&O capacity in the country, pointed out Mr Vega.
He told delegates that the threats faced by Spanish companies have increased in several areas, due in part to new regulations and operational risks like fraud. In the financial sector companies have faced problems with liquidity, currency instability, low interest rates and the effect of the deteriorating sovereign risk of Spain on their own credit ratings.
But one risk that is especially worrying is a growing inability of companies and families to pay their bills. “Credit risk has risen to levels never seen before in Spain,” Mr Vega said.
Not surprisingly then, one of the highlights of the day was a presentation by the man who is responsible for tackling the risk of non-payment at a company highly exposed to the mood swings of the consumer market.
Jorge Abril-Martorell, the Spanish head of the billing and collecting department at telecommunications giant Orange, explained that his company has made efforts to keep track of consumption patterns in order to help clients have more control over their bills. The aim is to reduce the risk of non-payment.
He said that Orange started to notice that clients were struggling to pay their bills more frequently around 2007, or about two years before the crisis hit Spain in full. As a result, the company began then to promote changes to its business model, he said, putting more focus on the solvency of clients rather than on boosting revenues with new initiatives.
“We had to make an effort to convince the people who set the tariffs that stable tariffs paid by lots of clients were better for the company than high tariffs which less clients are able to pay every month,” he said.
The focus on the ability of clients to pay is reflected in an effort to simplify the offer of products and services, so that clients are more aware of the real cost of their mobile phones. “If a client knows more or less how much he will spend every month, the risk of default falls significantly,” Mr Abril-Martorell said.
Investments in technology have helped to monitor patterns of use, so that Orange can identify when customers are spending much more than usual—an indicator that they may struggle to pay their future bills.
Thus the company can identify, for instance, cases where users are incurring high call costs by calling TV shows and other so-called‘premium messages’ without realising the expense. “They put our clients in some horrible messes sometimes,” he said.
Orange has managed to boost its levels of recovery of unpaid bills by 30%, despite the crisis. It has achieved this by setting up simple ways for clients to make payments at ATMs, by telephone and via the internet.
When the company notices that a client is struggling to pay bills because personal cash flow is not in sync with the date Orange sends bills, the company proposes to change the billing date.
Simple measures like this help to reduce non-payment levels considerably, said Mr Abril-Martorell. “The ability to adapt is key for companies who are doing well despite the crisis,” he concluded. “The risk management department in a company like Orange needs to be a team that is open to change.”
On 1 April the UK ushered in a new regulatory regime with two new bodies, the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA), replacing the Financial Services Authority (FSA) that was established in 1997 to replace the numerous regulatory bodies that previously supervised the country’s financial services industry.