In many countries there is a direct correlation between GDP variations and corporate insolvencies. There is a benchmark found in some studies which states that for each drop of 1% in the GDP there is an increase of 5% to 10% in corporate insolvency levels.
Nevertheless, in more acute crisis this correlation can be even stronger. This logic seems to be confirmed in Brazil as, while the GDP dropped 3.8% in 2015, which would trigger an increase between 20% to 40% in insolvencies, the figures published by Serasa Experian, the largest credit information bureau in the country, show an increase of 55.4% in the number of filings for corporate reorganizations in 2015 (*).
The prolonged economic crisis experienced by the country increases the financial difficulties faced by companies and, as a consequence, the level of insolvencies which enhances the credit risk level awareness across all sectors. And this feeling fosters the search for credit insurance protection.
At the same time, the very same crisis and increasing insolvencies builds up the non-payment cases reported daily to the credit insurers, generating more claims and reducing the appetite of the entire market, making more difficult to place new policies and renew the existing ones.
The increase is caused by the deepening of the economic recession and consequent reduction of commercial activity, the depreciation of the local currency (Brazilian Real) and the fact bank financing is not only more expensive but also more restricted. These factors hit especially hard the small sized companies which represent 54% of the filings in 2015.
While companies are trying to acquire a credit insurance policy, the insurers have a weak appetite to take on new risks and are actively reducing their credit exposure in the country. The numbers are not publicly available, but our estimates are that the reductions have been in average 30% to 50%, depending on the insurer.
This movement was largely expected as insurance companies must take action to control their loss ratios and are not only reducing their risk exposure but also increasing rates between 10% and 30% in all renewals and requiring larger risk sharing from insureds through higher deductibles.
In the current context, companies seeking protection through trade credit insurance policies in Brazil need to be well supported as insurance companies are demanding greater information detail before accepting any new risk.
(*) The Judicial Recuperation (Recuperação Judicial) aims first at preserving the debtor’s business. Following the court’s acceptance of the reorganization petition filed by the debtor, an automatic 180 days stay shielding the debtor from external claims commences. The company’s Directors usually remain in possession of their managing powers and have the sole responsibility to submit, within 60 days, a re-organisation plan to the Creditors’ Committee, under the supervision of a court appointed trustee (administrador judicial). Each class of creditors (labor-related, secured and unsecured) must then accept the plan for it to be validated by the court. Failing which, the parties may shift to a bankruptcy procedure (Source: Euler Hermes Collection Profile Brazil (http://www.eulerhermes.com/economic-research/insolvencies/Pages/default.aspx).