I remember watching the movie starring George Clooney and Mark Wahlberg back in 2000 called The Perfect Storm based on a real-life event when the commercial fishing vessel the Andrea Gail was lost at sea with all hands after being caught in the perfect storm of 1991.

Whilst the film is a dramatization (and put me off ever going on a cruise!) I’m sure facing waves reportedly 30 feet high (10 metres for the younger readers) whilst being battered by strong winds would terrify even the hardiest of sailors let alone us landlubbers.

I think the Perfect Storm idiom is probably overused but it is worth considering if the current and impending economic and trading conditions are creating a Perfect Storm for insolvencies.

“I have heard this all before” I hear you say and yes to a point you are right. Back in Q4 of last year we saw several Insurers predict the coming storm from the pandemic (especially the disruption to the economy from global lock down) would create big waves of insolvencies.  But despite the grim reaper warning, insolvencies have been much lower than last year and even lower that the previous year before the pandemic began!

In fact, despite several warnings relating to Brexit and then the global pandemic, we still haven’t seen the giant waves of insolvencies that were being so frequently and loudly predicted.

So, does that mean they were wrong?

Well not necessarily, based on the evidence to hand at the time it is fair to say that the signs were there. After all whilst predicting future events and their impact on economic trends is at the heart of what risk analysis do, it’s not an exact science. What they didn’t know at the time was the extent and duration of measures the Government in the UK and in many other European countries would introduce and sustain to support businesses affected by the pandemic – and let’s face it that was pretty much every business at some point or other through the last 18 months or so.

So why is now the time for the Perfect Storm for Insolvencies?

Well, the term ‘The Perfect Storm’ is defined in the dictionary as follows.

‘A perfect storm is an unusual combination of events or things that produce an unusually bad or powerful result.’

I believe we are now seeing that unusual combination coming into being, let me expand a little.

Firstly, it is important to note that business always face challenges and it is their ability to adapt or overcome that ensures their survival but what they are facing now is a combination of unforeseen and unprecedented circumstances. These circumstances are made up of:

Brexit/protocol – Trade between Northern Ireland and Great Britain has been made frustratingly difficult for some sectors due to the protocol, which has resulted in some suppliers simply giving up on this market, and thereby affecting their revenues. It is only because of extended ‘grace periods’ that these difficulties haven’t been more widespread.

Brexit/staff shortages – due to people relocating out of the UK, some sectors are facing staffing issues and are facing larger wage costs to entice people to fill vacancies. I have recently seen advertisements for ‘Field Operatives’ in the food sector where the hourly rate could be as high as £30!

Increased shipping costs/ HGV driver shortages – well documented and reported evidence shows the massive increase in costs to ship goods around the globe, with the shortage of HGV drivers meaning getting goods from the ports to the warehouses or shops is adding time delays and costs.

Supply Chain issues – with lockdowns affecting different countries at different times causing production outages or reduced capacity, the knock-on effect is causing difficulties and shortages in many sectors including construction and manufacturing.

Cashflow/liquidity problems – after spending considerable time closed due to lockdown restrictions many businesses could be already experiencing cashflow issues and having to delay payments to suppliers in a bid to stay afloat. In a recent survey over 60% of UK SME businesses said they had seen an increase in late payments this year.

Consumer habit changes – Can businesses adapt to how the pandemic has changed people’s shopping habits? Retail faces perhaps the biggest mountain in regard to this and with footfall in city and town centres still mostly below pre pandemic levels. Will consumer’s old habits return any time soon?

And finally,

Removal of Government support measures – As the furlough scheme has now ended and the moratorium on winding up petitions is being phased out. Both will have considerable impact on already struggling businesses and could be the final nail in the coffin.

It is the combination of all of these factors coming together at the same time that could create the Perfect Insolvency Storm which could be very bad for business.

If you want to discuss how we can help your business safely navigate through the ‘storm’ then get in touch with us at Arden on tcs@ardeninsurance.co.uk

Ivan McFarlane – Client Director, Trade Credit, Political Risk & Surety

 

 

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