Trade credit insurance

From Wikipedia, the free encyclopedia

Trade credit insurance, business credit insurance, export credit insurance, or credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy. This insurance product is a type of property & casualty insurance, and should not be confused with such products as credit life or credit disability insurance, which individuals obtain to protect against the risk of loss of income needed to pay debts. Trade Credit Insurance can include a component of political risk insurance which is offered by the same insurers to insure the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation etc. This points to the major role trade credit insurance plays in facilitating international trade. Trade credit is offered by vendors to their customers as an alternative to prepayment or cash on delivery terms, providing time for the customer to generate income from sales to pay for the product or service. This requires the vendor to assume non-payment risk. In a local or domestic situation as well as in an export transaction, the risk increases when laws, customs communications and customer's reputation are not fully understood. In addition to increased risk of non-payment, international trade presents the problem of the time between product shipment and its availability for sale. The account receivable is like a loan and represents capital invested, and often borrowed, by the vendor. But this is not a secure asset until it is paid. If the customer's debt is credit insured the large, risky asset becomes more secure, like an insured building. This asset may then be viewed as collateral by lending institutions and a loan based upon it used to defray the expenses of the transaction and to produce more product. Trade credit insurance is, therefore, a trade finance tool. Trade credit insurance is purchased by business entities to insure their accounts receivable from loss due to the insolvency of the debtors. The product is not available to individuals. The cost (premium) for this is usually charged monthly, and are calculated as a percentage of sales for that month or as a percentage of all outstanding receivables. Trade credit insurance usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid as a result of protracted default, insolvency or bankruptcy. Policy holders must apply a credit limit on each of their buyers for the sales to that buyer to be insured. The premium rate reflects the average credit risk of the insured portfolio of buyers. In addition, credit insurance can also cover single transactions or trade with only one buyer.
Contents
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1 History 2 Credit insurance providers 3 See also 4 References 5 External links

[edit]History
Trade credit insurance was born at the end of nineteenth century, but it was mostly developed in Western Europe between the First andSecond World Wars. Several companies were founded in many countries; some of them also managed the political risks of export on behalf of their state. During the 1990s, a concentration of the trade credit insurance market took place and three groups now account for over 85% of the global credit insurance market. These main players focused on Western Europe, but rapidly expanded towards Eastern Europe, Asia and the Americas:

Euler Hermes, merger of the two credit insurance companies of the Allianz Group. Euler Hermes is the world's number one credit insurance provider.[1]

Atradius, a merger between NCM and Gerling Kreditversicherung. Later renamed Atradius after it was demerged from the Gerling insurance group.

Coface. Formerly a French government sponsored institution established in 1946, this company is now part of the Natixis group.

Many variations of trade credit insurance have evolved ranging from coverage that can be canceled or reduced at an insurers discretion, to coverage that cannot be canceled or reduced by the insurer during the policy period. Other programs may allow the policy holder to act as the underwriter. While trade credit insurance is often mostly known for protecting foreign or export accounts receivable, there has always been a large segment of the market that uses Trade Credit Insurance for domestic accounts receivable protection as well. Domestic trade credit insurance provides companies with the protection they need as their customer base consolidates creating larger receivables to fewer customers. This further creates a larger exposure and greater risk if a customer does not pay their accounts. The addition of new insurers in this area have increased the availability of domestic cover for companies. Many businesses found that their insurers withdrew trade credit insurance during the late-2000s financial crisis, foreseeing large losses if they continued to underwrite sales to failing businesses. This led to accusations that the insurers were deepening and prolonging the recession, as businesses could not afford the risk of making sales without the insurance, and therefore contracted in size or had to close. Insurers countered these

criticisms by claiming that they were not the cause of the crisis, but were responding to economic reality and ringing the alarm bells.[2] In 2009, the UK government set up a short-term 5 billion Trade Credit Top-up emergency fund. However, this was considered a failure, as the take-up was very low.[2]

[edit]Credit

insurance providers

AIG Europe Ltd Askrindo (Indonesia)[3] Aspen (United Kingdom/Switzerland) Atradius (Netherlands) Awbury Insurance Ltd.[4] AXA Assurcredit,[5] subsidiary of the AXA group (France) AXA-Winterthur (Switzerland) BPI - MS (Philippines) CESCE (Spain) China Export & Credit Insurance Corporation CLAL (Israel) Coface (France) COSEC (Portugal) Credit Guarantee (South Africa) Credit Systems & Techniques SARL (CST) (Lebanon, Syria, Jordan, Egypt and Iraq) [6] Ducroire/Delcredere, see Belgian Export Credit Agency ECICS (Singapore) Equinox Global (United Kingdom) Ethniki (Greece) Euler Hermes Executive Risk Insurance Services (Canada) Export Credit Guarantee Corporation of India Export Development Canada (EDC) Export-Import Bank of the United States Garant (Austria and Switzerland)[7] GCNA (Canada) Groupama Assurance-Crdit,[8] specializing in the agro-food segment (France)

HCC International (United Kingdom) ICIC (Israel) K-sure, Korea Trade Insurance Corporation (Korea) Liberty Mutual Insurance Europe Ltd (United Kingdom) Malayan Insurance (Philippines) Mapfre (Spain) Mitsui Sumitomo (Japan) Nippon Export and Investment Insurance (Japan) NicheTC [9] Oriental Assurance Corp (Philippines) Prisma (Austria) QBE Insurance (Australia, United Kingdom and The Americas) R&Q Risk Services Canada Limited Red Rock Insurance Services Ltd (Canada & Illinois)[10] SACE BT (Italy) Saudi Export Program (SEP)www.sep.gov.sa SID First Credit (Slovenia) Sompo Japan The Arab Investment and Export Credit Guarantee Corporation "Dhaman" (Multilateral, based in Kuwait) Tokio Marine Nichido (Japan) Trade Credit Re (TCRe) (Belgium)[11] XL Insurance (The Americas, Europe and Asia) Zurich Credit & Political Risk (USA) Zurich Versicherung (Germany)

Importance of credit insurance

In her 1970 song Big Yellow Taxi, American singer songwriter, Joni Mitchell sang You dont know what youve got till its gone. And, in the world of credit and finance, the current economic downturn is the Big Yellow Taxi taking away much of the financial support that many businesses 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 financing from their banks to compensate for a lack of cashflow. The effects of the global credit crisis have highlighted the important role that credit insurance can play in stabilising the flow of trade. Some have even laid the blame for the demise of well known brands on the credit insurers. But to do so shows a misconception of the role of credit insurance. Atradius aim is always to help businesses manage risk, to concentrate on profitable outlets for their products and services, and to trade safely in a challenging and changing business environment. 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. It would not be surprising if an auto insurer refused to insure an unlicensed driver, nor would we blink an eye if coverage was pulled on a previously licensed driver who lost his eyesight. The auto insurance company would simply be making prudent, common sense cover decisions based on the risk profile of the potential drivers. These decisions would help the customer avoid unacceptable risks. Even an increase in premiums would not change the fact that the very high risk of an accident occuring should these drivers get behind the wheel of a car makes these drivers are uninsurable. This is essentially what credit insurers do on a regular basis. Analyse the risk that a buyer will not pay for the purchases it makes on credit and guide its customers away from those buyers that are likely to fall into this high risk category. In the current economic climate however, they are finding it necessary to help their customers avoid unnecessary risks by reducing cover on potential buyers more often. 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 withdraw cover on those buyers who have gone beyond the tipping point from insurable to uninsurable risk. But lets put 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). Atradius has maintained cover on the vast majority 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 buyers impending demise. Credit insurers withdraw cover on buyers only as a last resort. Whats more, credit insurers are just that insurers and not finance houses. It isnt 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 protect its customers balance sheets by guiding the customer towards good risks and discouraging them from entering sales with buyers considered to be bad risks. When the credit insurer does insure a transaction that ends in default it reimburses its customer to the amount agreed upon in the terms of their insurance contract.

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 buyers financial status, in the current climate it has become necessary to look more closely at a buyers books in order to assess the risk. A credit insurer is unlikely to insure a risk it cannot analyse. While it is no guarantee of credit insurance coverage, buyers can increase the likelihood of maintaining cover and favorable credit terms from their suppliers by opening their books to credit insurers. Some buyers may perceive a credit insurers request for up-to-date financial information as a hunt for reasons to pull cover. To the contrary it is a search for reasons not to withdraw cover. How is a credit insurers role affected by the economic downturn? Its 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 settling valid claims and to recovering unpaid debts on their customers behalf. The use of credit insurance has grown over recent years and the current crisis has added impetus to this. There are more companies seeking the protection of credit insurance than ever before. With this increase also comes an increase in buyers with unacceptable risk profiles. That puts the number of deals that can no longer be covered in its true perspective. Solvency regulations limit the amount of exposure credit insurers can carry based on capitalisation levels. The increase in demand and claims places greater limits on the risks an insurer can and will accept. To a certain extent, it is a sellers market, but one in which it is increasingly difficult for the sellers to earn a profit. Sellers beware. In this market great risk will more likely result in great losses. As has always been the case, trade credit insurance 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, a letter of credit neither option likely to appeal to a potential buyer. But while it may be a buyers market at the business to consumer level, when it come to business to business transactions this may not remain the case. Inventories may not be turning as quickly as they were a year ago putting stress on cash flows and turning companies that had been good payers into potentially bad payers or default risks. That doesnt mean that sometimes some form of security wont attach to an insured contract it depends on the level and nature of the risk. But the aim of a credit insurer is, where 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 but now in the full glare of the public spotlight. Whats needed is better communication and understanding of credit insurance The credit crunch has made it clear that some people simply dont fully understand the role of the credit insurer. And maybe thats an indictment of the insurers powers of communication. Its in the insurers own interest to better explain what they do and why, and businesses, politicians and the media alike should find listening to what they say quite valuable. In the mind of many, for instance, trade credit insurance equals trade credit. In other words, theres 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 dont themselves provide finance, credit insurance can improve a businesses ability to secure trade credit when banks accept credit insured receivables as a more secure asset. And during the global economic downturn the safety net provided by credit insurance is now more than ever an important instrument in managing potential losses from payment defaults. Atradius aim is always to help businesses manage risk, to concentrate on profitable outlets for their products and services, and to trade safely in a challenging and changing business environment. Pay attention to the warning signs that your customer might be experiencing financial difficulties Most companies generate 80% of their business from 20% of their customers. If just one of their best customers stops paying, the strain on the cash flow of the seller of those products or services could severely damage its financial health. As many businesses are experiencing financial difficulties, it may only take one big event or many small events to bring a business to its knees. While it seems easy to count on a credit insurer to keep a watchful eye on these companies for you, companies can improve their chances of avoiding payment defaults by watching for and acting on the warning signs that a buyer [first time term 'buyer' is used, clear enough what is meant? In rest of article customer or contractor is used] may become a greater payment risk early. While many signs are more subtle, looking for some of the more obvious ones can give you an advantage in getting paid. 1. Fixed price contracts with customers can be subject to higher input costs due to volatility in that particular sectors commodity prices. In general, a good way to spot a potential fixed price with a contractors end customer base, is where the cost of materials in a particular commodity spikes i.e.- the plastics sector chemicals associated with making that product may have peaked considerably. Your customer may have originally paid $0.10 on every dollar for manufacturing their goods. If commodity costs have spiked since the contract was signed, under a fixed price contract your customers margins may have been negatively impacted and could result in a loss for them. This can be especially painful in the current environment where low consumer confidence levels have reduced sales opportunities. 2. Customer begins to pay more slowly or differently. This can manifest in a number of ways, all of which should immediately set off alarms. -Their form of payment has changed, possibly switching to using credit cards instead of a checks or direct transfers; -They have begun requesting extended payment terms : If you are seeing behaviour such as your customer asking for 60-day terms instead of the previously agreed to 30-day terms then this is a major indication that your customer is cash strapped, or clearly becoming cash strapped. This is just one of the methods that a business might use to provide their business with the additional time needed to pay their other creditors; - You begin experiencing numerous unreasonable charge backs; - You begin seeing damages and shortages being deducted from your invoices - Your customer starts requesting unreasonable shipping demands: This may occur with the customer giving ultimatums where originally they understood that the shipment may take 7-10 days and now are saying things like if my goods are not here within 2 days then the customer will subtract 2% 5% from payment due. This is another way of determining discounts, again to help free up their cash flow! 3. Your customer is unwilling to provide financials when you had no problem receiving them before. - This is self-explanatory but when excuses are given in reference to their financials AND where you never experienced this issue with this customer before, then this is an area that warrants further investigation. 4. Watch the Bank! Will the bank refinance or are they exiting the existing relationship?

- The current economic environment has been very difficult on the banks as well. Some banks are also fighting for their own existence. Therefore they are scrutinising their clients more making it more difficult for business to get business financing that just a couple of years ago was readily available. Not only do you need to watch out for a buyers ability to obtain bank financing, but also the financial strength of the bank itself. If your client is looking to refinance and the bank says, No then one has to wonder how they are going to keep their cash flow in line with their needs. On the other hand, if the bank goes bust then, your customer is left scrambling to try and secure new financing and, in times like these, it will no longer be as easy to secure financing and replace that relationship. 5. Black swan events!

- Natural disasters or other catastrophic events i.e. hurricanes, tornadoes, floods, fires, terrorist actsall of these are headline-making events. What we dont hear about, but many businesses experience, is the domino effect that these events have on businesses especially when these events effect raw materials, such as petroleum (effecting, gasoline, plastics, carpet makers and many more in this sector); crops (for example, corn this can have an effect on the production of ethanol), infrastructure, etc. 6. Be aware of what others are saying about the customer:

- Are you a member of a credit group or a member of a trade sector group? Go to the meetings listen / discuss your concerns they may be experiencing the same behaviour or different behaviours that might either cause you further concern, or alleviate further concern and maybe, by sharing your experience, it may very well help someone else. - Do your homework if you are beginning to experience any or some of the behaviours mentioned above, start to researchgo on the internet look for any information available on the company i.e.- Google information about the company, the owner / management, look for press releases, search LinkedIn, Face Book and other information streams.