Credit Insurance - more important than ever 

 ‘You don’t know what you’ve got till it’s gone’ sang Joni Mitchell.  And, in the world of credit and finance, the current downturn is the Big Yellow Taxi: taking away much of the financial support that many business had come to assume would always be there.  The effect is twofold.  Businesses have found their customers unable to pay, and are often themselves unable to obtain trade credit from their banks to compensate for a lack of cashflow.

The effects of the global credit crisis has turned the spotlight onto the importance of credit insurance.  Some commentators in the media have even laid the blame for the demise of well known brands at the door of the credit insurers.  But to do so shows a misconception of the role of credit insurance, a misconception that needs to be redressed. 

The Irish writer Brendan Behan once said ‘there’s no such thing as bad publicity … except your own obituary’ and, even though much of it may be based on misunderstanding, the publicity that credit insurers have received of late has at least focused attention on a vital element in a business’s credit management armoury - and allowed credit insurers themselves to explain their value.

Insurance – any insurance - must have boundaries.

Credit insurance is just that – insurance.  Like any form of insurance, credit insurance is there to protect the insured customers.  And again, as with any insurance, there are limits to what can be insured.

A potential motor insurance customer would not be surprised if he or she couldn’t insure their 10 year old son to drive… and would not expect their insurer to be able to do so simply by increasing premium.  Likewise, they would not be surprised if motor cover was withdrawn from an aged parent if he or she lost their sight – the extent of risk would have changed dramatically.  The motor insurer is simply making a common sense decision and helping the client avoid unacceptable risk.

There is an analogy with credit insurance.  The economic landscape changes constantly and, during a downturn such as the current one, the changes are rapid and precipitous.  Credit insurers are therefore having to review their portfolio of risks, and - where absolutely necessary - withdraw cover on those buyers who have gone beyond the tipping point from insurable to uninsurable risk. 

But let’s get it in perspective. 

In terms of total portfolio, the number of withdrawals of cover is very small – a single figure percentage, and focused on an even smaller proportion of companies (that is to say, a number of withdrawn limits will apply to a single risk).  In fact, Atradius has maintained cover on over 90% of risks, providing invaluable cover and a financial safety net in the current economic downturn.

Just like the prudent motor insurer, credit insurers have a responsibility to guide their customers away from unacceptable risks and not simply cover every transaction, however perilous.

As always, credit insurers are simply doing their job.

There are numerous examples of credit insurers maintaining cover for their customers’ trade way beyond the early signs of a buyer’s impending demise. Credit insurers withdraw cover on buyers only as a last – not a first – resort.

What’s more, credit insurers are just that – insurers – and not finance houses.  It isn’t their role to shore up ailing or failing businesses:  that may be the job of those businesses’ banks or investors, but not of a credit insurer whose customers have chosen to trade with those businesses.  The credit insurer is there to guide the customer towards good risks and away from deals that are likely to end in tears. 

And, if there is the risk of cover being withdrawn, buyers can help themselves by keeping their lines of communication with credit insurers open.

While, in relatively benign economic times, credit insurers may be willing to make some assumptions about a buyer’s financial status, in the current climate it has become necessary to look more closely at a buyer’s books in order to assess the risk.  Buyers can help to keep their doors open to continuing trade by making those books available to credit insurers.

How is a credit insurer’s role affected by the economic downturn?

It’s tougher.   The rapidity of change in the global economy makes it imperative that credit insurers monitor risks constantly, not just regularly – ‘real time’ risk assessment, if you like.

Of course, while, as always, the insurer will steer customers away from unacceptable risk, they are committed to settle valid claims and to recover unpaid debt on their customers’ behalf.  And make no mistake; credit insurers’ claims and collection departments are working flat out at the moment.

The take-up of credit insurance too has grown over recent years and the current crisis has added impetus to this. That also puts the number of deals that can no longer be covered in perspective, as the value of insured contracts is actually growing exponentially.  

And, as has always been the case, credit insurance not only protects the customer’s sales, but eases the way to bank finance (as the bank’s investment is assured) - and allows the seller to offer attractive credit terms: a must in any competitive market.  Without the safety net of credit insurance, that seller would have to either get cash up front or stipulate the security of, say, letter of credit – neither option likely to appeal to a potential buyer… and at the moment, at least, it’s a buyer’s market.

That doesn’t mean that sometimes some form of security won’t attach to an insured contract – it depends on the level and nature of the risk.  But the aim of a credit insurer is, wherever possible, to find a way to say ‘yes’, not ‘no’.

So the true picture that emerges is of credit insurers continuing to do what they have always done – act in their customers’ best interests. 

What’s needed is better communication and understanding of credit insurance

It’s clear that that some people simply don’t fully understand the role of the credit insurer.  And maybe that’s an indictment of the insurers’ powers of communication. 

But thanks to the ‘credit crunch’ that will hopefully change.  Insurer’s will see that it’s in their own interest to explain better what they do and why, and businesses, politicians and media alike will find it a fruitful exercise to listen.

In the mind of many in the media, for instance, trade credit insurance equals trade credit. In other words, there’s a false impression that the role of the credit insurer is to step in and provide finance to businesses when the banks fail to do so. 

While credit insurers don’t themselves provide finance, they can help a business secure trade credit when banks accepts credit insured receivables as a more secure asset.  And credit insurance is now more than ever a vital weapon against the global downturn.

Atradius’ aim is always to help businesses manage risk and concentrate on profitable outlets for their products and services, and to assist our clients trade safely in a challenging and changing business environment.