Companies, including insurers told to use global economic momentum to power their transformation agenda
Companies, and in particular insurers should take advantage of the current benign economic condition to execute reforms rather than be on the retreat, Mr Ludovic Subran, Chief Economist, Euler Hermes, told Asia Insurance Review recently.
Global growth outperformed expectations in 2017: China grew 6.9%, topping the government target of 6.5%; the EU grew at its fastest rate in a decade at 2.5%; while the US economy gained real momentum expanding at 2.3%.
Looking at 2018, Mr Subran expects growth to continue accelerating in the US and Europe, and “decelerate very moderately in China and the emerging markets”.
“There will be political vulnerabilities and financial volatility but just like it was last year, I don’t think it is enough to derail economic momentum,” he said.
Thus, he urged companies to leverage on the expected growth over the next 12-18 months to invest in transformation to ensure they are fit for purpose moving forward. This also applies to insurance companies, whose business model is being challenged by pure players.
“If you wait for the next crisis to come before using the right risk management tools, lessening your debt, or doing the right investments, things would be much harder then so companies should be managing their transformation and enriching their toolbox instead of hoarding cash or piling debt,” said Mr Subran.
“Businesses need to repair the roof while the sun is shining.”
Charge the right price for risk
Commenting on the changing risk landscape that confront insurers, he said that insurers need to insist on risk-adequate pricing in order to be sustainable in the long run.
“The soft market trend cannot continue for very long: in the credit insurance world we still see many bankruptcies and a growing trend of large ones with potential domino effect; in the wider corporate risk segment, we see new risks emerge or transform that affect companies in a different way.”
“The frequency of risk may be lower but severity is much higher, so this is something we need to price in and make sure that companies are prepared for it,” he said.
Turning to Euler Hermes’ trade credit business, the positive outlook on trade means a stable export environment which ensures a healthy demand for credit insurance.
As a credit insurer, Euler Hermes is a unique look out post for companies’ balance sheet development, and Mr Subran expects industrial related sector, which are more debt intensive and sensitive to political risk, to experience turbulence, while the consumer related sectors, and services in particular will do well this year.
Trade & Asia’s competitiveness
The Trump administration’s move to impose tariffs on selected imports into the U.S. last month had resurrected the debate over rising protectionism. However, Mr Subran believes that such moves are proving the exception to the norm in a world which is moving towards more open trade.
“The number of new protectionist measures in 2017 is only half the number of new protectionist measures in 2016. The rhetoric does not match with the figures. More importantly, companies must look at new forms of protectionisms related to the legal and regulatory environment, currency and financial openness, or tax incentives. They can change the way you do business as a multinational”
From an Asian perspective, the challenge is not so much the prospect of a trade war but whether Asia can retain its attractiveness as the world’s leading outsourcing hub as competition from places like Eastern Europe intensify.
“I do see a lot more companies contemplating to re-shore closer to their home market which are now as cheap as some Asean countries. They may have a factory in Thailand and now they think that maybe Romania is as cheap,” said Mr Subran.
“So for them to stay on in places like Thailand, governments and the private sector need to continually improve labor productivity on the one hand, and the business climate on the other,” he added.