Our senior manager of risk services, Eric Morgan, recently discussed the economic challenges associated with the rise in insolvencies.
Insolvencies occur when a company or person is unable to pay their debts in one of two forms; cash-flow or balance-sheet. Insolvencies are expected to rise in 2022 as the government withdraws some support measures that were put in place to help companies during the pandemic. The overall increase of insolvencies will directly impact the global economy. When firms are unable to pay off their debts, the general distribution of cash will always be at risk. Eric discusses the fact that while this is temporary as we’re adjusting to post-pandemic, insurers and major financial players need to account for the effects that it will have.
Eric describes the link between rising inflation and insolvency levels:
“There is a strong correlation between the recent rise in insolvencies and the recent rise in inflation. When the costs associated with performing certain functions increase—including the acquisition of raw materials, manufacturing of these materials, shipping of finished products, labor, and many others—and the revenues yielded in producing these goods are not proportionately compensated, insolvency issues are likely to emerge.”
“This problem is particularly exacerbated by the simple fact that many firms that have large amounts of debt to service are locked into inflexible contracts. As inflation rises and the costs associated with performing any sort of institutional function directly increase, firms around the world are finding it harder to maintain their economic status quo.”
For more on the impact of rising insolvencies to the U.S. and the global economy, read the full article here.
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How many different ways can this link affect you and your industry? What is the pattern of inflation going to look like further into the future? How long might this period last? Our USMCA Payment Practices Barometer report also discusses correlating topics going more in depth into inflation. Stay up to date with our publications to see some of your questions around inflation get answered moving forward.