What is the Business Risk Index?
The Business Risk Index (BRI) is a new economic indicator that provides unique insights into the health of Australian businesses by region. It draws on a wide range of data points to produce a dynamic measure of future insolvency risk for more than 300 regions across Australia. Each region is ranked from best to worst in terms of the potential for businesses in the region to become insolvent. The index can also measure the potential for insolvency risk at a state, street, suburb and individual business level.
The BRI ranks each region on a scale from zero to 10, where 10 represents the best credit quality regions, that is, the lowest risk of insolvency, and zero represents the weakest credit quality regions, that is, the highest insolvency risk.
This is the first time forward-looking insolvency risk has been measured in this way. The BRI provides a regional credit rating analogous to the credit ratings CreditorWatch assigns to each Australian business.
What is a credit rating?
A credit rating is an assessment of the probability of default for a business or individual. A default happens when a business or individual fails to pay back debts. This probability translates to the zero to 10 scale, to help gauge and compare entities in terms of their relative risk of default.
How is the index constructed?
CreditorWatch compiles many different types of data connected with all businesses in Australia. Our data science and credit risk teams look for trends between these data elements and the probability of insolvency. Trends are brought together using statistical modelling techniques combined with economic analysis, so each business and region’s data quantifies its estimated probability of insolvency.
There are some regions without an index, what is the reason for this?
There are 20 regions that are not assigned an index as they are low-population areas with insufficient numbers of active businesses to accurately measure insolvency rates or calibrate the index to.
What data does the BRI draw on?
The BRI draws on data from1.1 million ASIC-registered, incorporated entities that have had credit checks or credit enquiries in the last 10 years. Data is modelled and reported for 335 Statistical Areas Level 3 (SA3) regional zones that match the Australian Bureau of Statistics’ regional reporting standard. The BRI can also compare relative insolvency risk across the states.
The BRI is also determined by unique data sources including business-to-business trade payments, business cash flow and geodemographic risk. Geodemographics classify geographical areas by their social and economic characteristics.
The BRI model combines real-time, dynamic factors unique to CreditorWatch and traditional, structural economic indicators to provide an holistic assessment of long-run insolvency risk.
- Population average credit score (multiple factors are aggregated into scores)
- Population trade payment default rate rolling 24-month average
- Population average default rate rolling 24-month average
- Region rental costs
- Region index of economic opportunity
- Region median income
- Region unemployment rate
- Region personal insolvency rate
How is the BRI unique?
Two components make the BRI unique:
- Unique real-time data
- Unique model design
In terms of data, CreditorWatch monitors trade payments and trade activity for more than one million businesses across the country. This data is a highly predictive, early warning indicator for future insolvencies.
The model brings together a collection of traditional and cutting-edge algorithms to which the data is applied. A new modelling technique predicts insolvency risk on pools of businesses in geographic regions.
What is the BRI’s value to the Australian economy?
This is the first time there has ever been an index that can predict insolvency risk on a regional basis. The BRI is an invaluable early warning system for businesses, banks and other lenders, as well as governments and other public sector agencies.
It will help businesses making expansion plans to determine which regions are the most economically healthy. It will help lenders when making decisions about which areas to which they want to increase and decrease exposure. And it will help governments, their departments and agencies when making public policy decisions about which areas require support and services.
It’s an invaluable and one-of-a-kind measure to support the economy as a whole.
Case study: Gold Coast North
Gold Coast North is a high-risk business region, consistently in the bottom 10 per cent of all regions as shown below.
Two factors contribute to the low rating:
- Dynamic indicators including trade payment defaults, regional average credit scores and recent default rates all indicate near-term stress in the region.
- Structural economic drivers such as relative rental costs, unemployment and socio-economic indicators point to challenging conditions to operate businesses throughout the economic cycle.
The chart below shows the rolling 24-month average business-to-business trade payment default rate for Gold Coast North, indicating a recent increase in defaults.
The chart below shows the 12-month, rolling average liquidation rate for Gold Coast North indicating elevated recent insolvencies in a period where insolvency rates nationally had been dropping due to government support and the moratorium on insolvencies.
The chart below shows Gold Coast North’s structural economic indicator ranking relative to the rest of Australia for key economic factors contributing to the business risk index.
Relative rental costs, individual bankruptcies and unemployment rates are low ranked relative to other regions whilst average income is also slightly below average.