The pandemic is a once-in-a-century crisis that will leave scars in the form of persistent economic damage, and some insurance companies see the risks as a ticking time bomb.
Business operators plying their trade in the shipping industry may feel unease during this prolonged crisis. This is because they are still operational as they have sufficient liquidity, but their sales have not been good, said Warangkana Wongkhaluang, senior executive vice-president of the Export-Import Bank of Thailand (Exim Bank).
"We will eventually see a result from this situation. Our insurance partner's analysis is the remaining shipping businesses are insolvency time bombs, meaning every business that has not been ruined during the pandemic is a ticking time bomb for a liquidity crunch. This global economic crisis is similar to a world war, only happening once in a generation," she said.
A panoramic view of the Port Authority of Thailand's Klong Toey Port. Exim Bank is trying to educate SME shippers about potential risk, likely increased because of the pandemic crisis.
"Risk management would be beneficial for businesses, although current risks may not have been apparent only a few years ago."
As a state-owned bank established to support Thai exporters, especially small and medium-sized enterprises (SMEs) involved with the shipment industry, Exim Bank believes there is always a risk in doing business and the right tool is needed to manage such risks.
While this is not a good time to persuade exporters, especially SME operators, to manage shipment risks through export insurance, as global exports have contracted sharply due to the pandemic, risk management is still an integral part of exporters' financial planning for sustainable growth, said Mrs Warangkana.
If measured as a financial cost, export insurance premiums are only a small fraction of total cost. Without export insurance, operators could fall on their faces if a shipment does not receive payment for the merchandise, she said.
For large exporters, risk management is a key department in the corporate structure. If these exporters do not receive a letter of credit or are not insured with Exim Bank or another firm, they often would not proceed with shipment, said Mrs Warangkana.
SME exporters tend to view export insurance premiums as a financial burden and would rather manage export risks by themselves by self-insuring. As SME exporters typically only ship 2-3 orders, if one buyer fails to honour the agreement, one-third of exporters' revenue is lost.
Exim Bank's business, which offers export insurance products, has low to zero profit margins. The objective is to help SME exporters manage risks associated with shipments, she said.
Mrs Warangkana admits selling this type of insurance product is quite difficult compared with bank loans, where business operators typically compare interest rates offered by each bank before making a decision.
SME exporters tend to think having export insurance is unnecessary if there is a long-standing business relationship between operators and traders, she said.
Many SMEs are curious about how Exim Bank can better manage risks for their business given their existing relationships, said Mrs Warangkana.
Cars sit ready for loading onto cargo ships at Laem Chabang Port in Chon Buri province. Patipat Janthong
The preference is to manage their own risks, she said.
This means Exim Bank has to outline the scope of risk management, teaching customers risks are always prevalent no matter how good an exporter knows a buyer, said Mrs Warangkana.
"We had a case where an overseas buyer in Australia had run a business for nearly 100 years. The business went bankrupt and the company's mid-sized SME exporter was very lucky to be insured. The Australian firm was a large corporation, so it would have been extremely unlikely to predict this bankruptcy would happen," she said.
Risk insured
The insurance cost is very low compared with interest, with the former accounting for merely 0.2-0.3% of risk-adjusted cost, said Mrs Warangkana.
For instance, an insurance premium that costs 3,000 baht will insure export damages up to 1 million baht, with a coverage ratio of 85-90%, she said.
"We have been trying to tell SME exporters all along that they shouldn't look at export insurance premiums as monetary losses. Some exporters have paid insurance premiums for 10 years, but a single claim can exceed the cost of 10 years of premium payments," said Mrs Warangkana.
Exim Bank is the only export guarantor in the country for SME shippers, she said. These exporters pay an insurance premium of only 600 baht to insure shipments worth 100,000 baht.
"Some may perceive our business as without competitors, but the reality is SME exporters' mindset is our main competition," said Mrs Warangkana.
Exim Bank wants to roll out insurance products for every customer segment, from small exporters to large shipping corporations.
Cumulative sales of export products stand at hundreds of billions of baht, while the bank's loss ratio at around 30%, which is considered low compared with the insurance industry's average loss ratio, she said.
Durians are placed in large baskets before being freeze-dried in Songkhla and shipped to China. Pornprom Satrabhaya
"As an export guarantor, we have a risk management strategy. We must have information on the background of an overseas buyer as well as the buyer's history of purchases and credit history. We essentially buy this information for assessment," said Mrs Warangkana.
She said although Exim Bank analyses information on overseas buyers thoroughly, all buyer records are not always fully disclosed.
"For example, there was an overseas buyer for one of our exporters that didn't seem to have any issue upon first inspection. But this buyer resold the export products to another buyer residing in the same country and had not received payment, resulting in bankruptcy, which subsequently had a knock-on effect for payment of goods for the exporter," said Mrs Warangkana.
"This case shows we cannot always see the whole picture as it relates to overseas buyers, which is why there is an abundance of risks."