Credit Insurance - still a value add

We insure most things in life that are precious to us, our life, our home, family, and of course our cars.

A business insures its buildings, its employees and other valuable aspects of its business so given this therefore, where does the argument start and finish when it comes to credit insurance?

One reads challenging articles on consolidation and lessening of choice, rising cost and reduced return and one is almost guaranteed a dozen different viewpoints from a dozen different Credit Managers on whether or not to insure receivables. This is borne out by any excursion into discussion forums within credit or other social and business networks

Nobody likes paying for insurance but the pain of losing something of great value with no return is generally too terrible to contemplate; as a consequence, we bite our lip, shop around for what appears to be the best deal and hope when the time comes to claim, we made the right choice

A concern is that in a climate of increasing and much publicised fraudulent claims, rising premiums have put so many people off simple things like insuring their cars, making driving that much more dangerous for everyone. It’s a worrying trend to see Insurers these days even being labelled and classified alongside those more traditional pariahs, Estate Agents.

For a business, the biggest asset by far is the value of its accounts receivable ledger, in other words the amount owing to it by its clients on open credit terms. Depending on the nature of the business, this can be as high as 75% of total assets and generally not lower than 40%. It can be argued that if you are a business selling exclusively into FTSE 500 companies, the risk associated in trading on open credit is negligible; similarly, if you are selling largely or exclusively into the public sector, then again the risk is low.

One is also less likely to find credit insurance a widespread option within manufacturing (particularly Software) or service organisations where gross margins are so high as to make a loss immaterial. Where you do find it, it may be restricted to major clients or trading territories deemed high risk.

For wholesalers and distributors however and those selling to large client bases with varying degrees of risk, whether nationally or internationally, credit insurance is not an option so easily discarded. Yes, increased premium costs are tough when margins are decreasing and availability of cover is strained but timing a decision not to insure wrongly can lead to disastrous loss and business failure.

Some years ago, one could turn to at least a dozen players in the credit insurance market; some large and some more specialised aimed at the SME sector. Premiums and options were flexible and cover was never really an issue. Consolidation, take over and drop out (NCM by Girling, Hermes and Euler, and Royal Sun Alliance) to name but a few, has meant less choice and a limited number of very big players. Add a post millennium issue, 9/11, Enron, Worldcom and a host of major failures and political unease around some parts of the world and one can understand the pulling of hair and screaming from cliff-tops by Credit Managers in recent times.

Getting the right credit limit has been a problem when many businesses in some key industry sectors performed badly with resultant erosion on balance sheet strength and market presence. Insurers found themselves paying out far too high a proportion of premium income and indeed the latter began to drop as those that chose to avoid rise in premiums decided not to renew policies. This not unnaturally created an unusual predicament for Insurers who on the one hand had a responsibility to shareholders to steady the ship and to their clients who had begun to desert them in droves. Some of these moved to “self insurance”, a means of paying oneself the premium into a high interest account hoping to build up a reserve while losses were low and other more resourceful people moved to consider captive insurance. Neither in truth may realistically be deemed a long-term alternative. Indeed in the case of the former, it would be hard to keep anyone’s hands off a reserve that could so easily reverse decreased bottom line.

Those businesses that outsourced their credit risk management function totally to Insurers could not let go, as doing so would add cost in providing it themselves. Others found Factors and Invoice Discounters accommodating in provision of complete packages including risk management and insurance. It must be understood however that to most businesses, Credit Insurance is not the driver, in other words it does not determine the extent of credit granted nor does it dictate the company’s credit policy or the constitution of the Credit department.

We insure our cars but we still lock the doors and turn on the alarm; we still look both ways before crossing the road and we certainly don’t leave the front door open when we leave the house. It is inconsistent therefore to hear some Credit Managers say they would not consider credit insurance, as it would question their very being. Insurance is a safety net feature, sensibly and cleverly managed, it is designed to minimise the risk to business of major catastrophic loss, be it either the insolvency of a buyer or protracted default (simple non-payment). Credit people control and understand risk and it is they that must negotiate the best possible coverage for their company’s receivables. Negotiating the deal is one thing but managing the policy is quite another and how successful a company is in doing the latter is what really counts.

The market has recovered somewhat in recent times. Cover is coming back and while this may still be a case of insurers willing to support big clients with a good track record (retaining premium income), there are visible signs this may not be the only reason. Some newer smaller and niche payers have entered the market making the field more competitive once more and brokers themselves have begun to earn their crust by getting to know their clients more intimately, delivering a much improved service and doorway to insurers and underwriters.

Insurers have also listened to demands for fairer treatment in terms of removal or reduction in cover on major clients and are more willing to give “notice” periods or “intent”, giving the Insured time to question and understand reasoning. This level of service may be accused of being more evident in large value relationships but this is a start and movement in the right direction and should hopefully filter down to those with smaller premium values and standing.

Insurers have also increased their coverage across regions and countries and headcount is less of a problem in terms of getting out and meeting both Insured clients and much more importantly, those clients on which cover is requested or granted. Underwriters still retain a criticism that is unlikely to disappear and that is evaluation of clients and risk purely on financial grounds with little material understanding of commercial risk and the real needs of the insured. There is a glimmer of hope in seeing some limits now being underwritten when they weren’t before but one suspects perhaps, this may be a case of satisfying major clients, retaining premium income from those that do at least show a measure of control and have good claims records.

Some underwriters are more willing to sit with Industry Credit Managers and discuss major issues and clients and this has to be applauded. It is only through working together in these instances that the required degree of service levels can be reciprocally provided. If this is not evident in some quarters, it should be demanded. Insurers should also be formally invited to attend and present at Industry Credit forums (circles). This gives them an opportunity to put their case and insured (or indeed those sceptical and scornful of insurance), a chance to air their concerns openly and share experiences with others.

Despite the perennial problem of constantly changing account managers, there are definite signs that Insurers are applying themselves more toward customer service and frequency of contact and communication has scaled noticeably upward.

Those that use Brokers as a link must demand more from them in truth than they do from Insurers. They are supposed to fight your corner, get the best possible deal and coverage, deal with issues arising and ensure your processes are lucid enough to manage the policy effectively – a watchdog in effect even though some fail in this task

Loss of clients to both Brokers and Insurers is dreadful news at any time but given what we have seen in the last few years, it has become far more critical. Demand more therefore, because now is the time they are providing more. Remember however that this is a two-way thing. One has to earn the right to be insured and one has to demonstrate a credit policy that provides the required degree of control.

Communication, contact, rational argument, gentle persuasion and demonstrated control are the key ingredients for a successfully managed credit policy.

Credit insurance is still extremely good value for money and provides greater leverage in seeking additional inward investment. Banks and Invoice discounters still like to see it and for many, in truth, it still makes sense.