In 2023, statistics on insolvency showed a consistent rise across various business sectors. The Australian Securities and Investments Commission (ASIC) released data for December, revealing that all sectors, except the arts, have seen an increase in insolvency cases in 2023 compared to the previous year.
According to ASIC, the construction, accommodation/food services, and retail sectors have been hit the hardest, with the highest number of companies entering external administration.
The construction sector, in particular, has experienced significant challenges, with over 1,200 firms becoming insolvent in 2023. This number is up from around 900 the previous year and more than 450 in 2021.
Insolvency rates serve as an indicator of financial pressures, according to Shane Brady, the director of Stone Lane Broking & Risk Advisory. He emphasizes that these increasing rates reflect the tough economic landscape in the country.
Commercial businesses are struggling due to rising production costs, increased wages, and recruitment difficulties, explains Brady. All these factors have put significant downward pressure on businesses.
While manufacturing is not among the top three sectors facing insolvency, it still presents a concerning situation. According to ASIC’s data, 219 manufacturing firms were declared insolvent in 2023.
“The industry has suffered significantly over the past three years,” notes Brady, stressing the impact of global supply chain disruptions caused by the COVID-19 pandemic. These disruptions led to increased costs as manufacturers urgently needed goods and paid higher premiums for their timely delivery.
Brady states that manufacturing businesses are still recovering from this challenging period.
He further highlights the impact of the pandemic on the manufacturing sector, referring to it as a “hangover.” Although the sector remains in a strong position overall, there have been financial pressures that affect the bottom line and hinder the ability to obtain adequate insurance coverage.
Given the current economic challenges, Brady emphasizes the importance of providing clients with sound advice. Rather than focusing solely on transactional insurance, his firm has always prioritised advisory services.
Brady mentions that they have been adding additional services to their portfolio, aiming to consolidate insurance and risk management services in one place. While this may not offer immediate financial benefits, it streamlines overall risk management, ethos, and attitude, which can lead to long-term cost savings for businesses.
In order to identify risks that can be transferred to insurers or managed in-house, Brady emphasises the need for better risk identification across the business. This approach allows for more optimal insurance programs and ultimately saves businesses money over time.
Brady describes an example of his firm’s risk advisory approach, which involves deconstructing and reconstructing insurance programs tailored to each client’s needs. They also identify areas that can be better managed through risk mitigation techniques, which may involve consulting external experts to enhance risk management in specific parts of a business. This, in turn, reduces the pressure on insurance premiums that would typically be used to handle those risks.
ASIC’s insolvency data has been described as a “confronting reality” in a recent article on the Norton Rose Fulbright website. The authors stress the importance for companies to be aware of early warning signs and seek financial and legal insights to develop effective risk management strategies that consider the viability and capacity of all key stakeholders, including customers, partners, and suppliers.
