Recently, the U.S. was devastated by a series of hurricanes that not only drastically affected personal lives, but our nation’s enterprises as well. U.S. News estimated damages from Hurricane Harvey and Irma totaled $290 billion dollars. Trade in these areas is still hurting, local businesses are destroyed, unemployment rates are expected to spike, and oil prices around the nation have surged. Although many analysts predict these are only short-term impacts, it still raises the question: how do these hurricanes and other natural disasters affect the accounts receivable management (ARM) industry?
First, these disasters can have wide-spread macroeconomic impacts. With infrastructure requiring drastic rebuilding, there will be huge costs just to return to previous levels. Initially when these disasters occur, insurance and reinsurance companies face unexpected claims processing, which may cause financial inefficiencies as we saw with Hurricane Sandy in the Greater New York City area a few years ago. Although there are federal programs (e.g., Federal Emergency Management Agency) in place to subsidize these financial buffers (e.g., state, local, and private insurance funds), federal officials are reinforcing that they “are meant to supplement, not replace” state and local efforts. The below illustration reveals how much in losses the worst hurricanes caused insurers to lose. These financial inefficiencies may force insurers to outsource collections to the ARM industry to better collect upon the distressed borrowers. Additionally, many consumers may be forced to borrow money in order to handle the short-term monetary difficulties they face from unemployment and other results from the disasters, driving up debt and perhaps delinquencies.
Aside from the standard economics-related impacts, we can’t overlook the effects that natural disasters have on destroyed houses and automobiles – tangible goods which consumers generally rely upon every day. Specifically, it’s estimated that 40,000 homes were destroyed. Although Fannie Mae and Freddie Mac offer forbearance for at least 90 days, interest payments will still accumulate. In short, although people don’t have to repay their mortgage payments back immediately, they will incur the same costs over time. Additionally, the automobile industry was significantly altered, with an estimated one million automobiles destroyed, and many automobile dealerships which were submerged during the flooding. As shown by the graph below, a large percentage of these prime hurricane areas don’t have insurance, meaning they have no alternatives to replace their automobiles. Not only do these consumers have to continue repaying their existing auto loan debts, but they presumably have to purchase another automobile, potentially taking out another loan, and accumulating more unrepayable debt.
In all, hurricanes and other natural disasters are terrible on many levels: safety-wise, societal, and economically, among many others. Small businesses and insurance firms are faced with incredible difficulties which may lead to significant financial woes. Consumers encounter terrible living conditions following these disasters and many are simply unable to repay their existing debts due to these disastrous circumstances. Many uninsured consumers are also forced to repurchase homes or automobiles, taking out more loans, and accumulating more debt. With the growing debt and potential delinquencies, there should be a growing desire for ARM services in the future. In the short-term, creditors and governments should require more technical and specialized ARM companies to better collect upon the distressed borrowers and increase cash flow throughout the economies of these harmed areas.
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