INCREASED COVERAGE
1. A record £314bn of UK trade is covered by credit insurers. This marks an increase of more than 40% from 2016 and is the highest amount paid out since 2009.
2. The number of claims made in 2016 also peaked to its highest level in seven years at 12,221, which corresponds with the total number of company insolvencies in the UK rising by 12.6% from 2015.
3. A fifth of policies in 2016 covered businesses exporting goods and services, with just over three-quarters covering domestic trade with 93% recorded as going through an intermediary.
GENERAL BENEFITS OF TRADE CREDIT INSURANCE
1. This type of insurance can help the company grow by allowing an increase of the credit limits of existing customers.
2. By using credit insurance to extend the terms to $10 million a quarter, or $40 million a year, from $5 million in sales each quarter or $20 million annually. Gross profits would increase by $2 million assuming the same 10-percent profit.
3. The accounts receivable asset is not secure until it is paid, but with trade credit insurance on the asset, company’s bank or other lending institution would view it as secure and would allow as collateral.
4. The secure status of the receivables also would allow your company to reduce any bad-debt reserve it might carry.
5. Businesses unable to bear the brunt of non-payment will lead to detrimental impact on their financial health and can also have a negative knock-on effect rippling down the supply chain.
SARBANES-OXLEY RELIEF
1. According to National Association of Credit Management on on the the impact of the Sarbanes-Oxley Act on the credit, unexpectedly high credit losses could be viewed as a misstatement of earnings upon Public Company Accounting Oversight Board (PCAOB) review.
2. Collecting more than anticipated could be questioned by the PCAOB, i.e., did the company knowingly deflate anticipated earnings.
3. The best defense against such an interpretation is to have detailed documentation that the reasons for granting the credit were solid.
4. Credit insurance underwriters help support internal credit management procedures by conducting thorough risk assessments on the creditworthiness of customers and providing a documented second opinion on why and how credit decisions were made.
5. A separate independent entity making a decision to insure a transaction provides an added “line of defense” against anyone thinking there was a misstatement of credit risk. defense” against anyone thinking there was a misstatement of credit risk.
QUALITATIVE ASPECTS IN OBTAINING TRADE CREDIT INSURANCE
1. Quality and consistency of applicant's credit and collection people.
2. Applicant's history of bad debts, the market or markets the company sell to and the credit quality of applicant's accounts, particularly ones with large balances.
3. How the program should be structured; what size deductible would applicant be comfortable with.
4. On applicant's smaller exposures, the blanket limit is optimal; credit insurers call it the “discretionary credit limit” or DCL. The DCL is the limit the insurer will offer on a blanket limit basis on a number of small exposures that do not require specific limits of coverage.
5. What accounts will applicants want specific limits of insurance on (and the maximum amount of credit needed).
6. It is also an appropriate time for the applicant to look at policies and procedures that need to improve or to institute within applicant's credit and collections group.
TAILORED COVERAGE OPTIONS
1. Polices can be structured to be based on the total of a company’s top line revenue or it can be done on a customer-specific basis. Typical protection covers customer insolvencies and protracted defaults.
2. However, credit insurance may incorporate political risk coverage for clients exporting product. This can include, for example, coverage for cancellation of licenses, foreign government intervention, embargos, war or civil violence, and other foreign related risks.
3. Policies will have a waiting period for filing claims after a default, loss deductible, insured percentage of cover, and other terms and conditions.
4. Certain trade credit insurers allow customers to tailor coverage more specifically to key account or even single-buyer transactions. Policies also can be designed to provide "first dollar" coverage using coinsurance, or a policy can be structured choosing from a variety of deductibles. These and other coverage choices are used to create an appropriate risk/cost ratio for a given insured.
5. Whole turnover policies cover a company’s entire eligible buyer base, with larger accounts approved by buyer underwriters and smaller accounts covered under a discretionary limit. Premium is payable as a percentage of insured turnover, which must be declared monthly, quarterly or annually by the policyholder. Whole turnover policies can be based on domestic or export trade, or a combination of both. Underwriting is done on the basis of previous loss record, future turnover and trade expectations, and the financial strength of the customer base.
6. Key account coverage gives policyholders an opportunity to move credit concentration risk off the balance sheet and cap company exposure. These policies are structured to cover a company's largest accounts following pre-approval by a trade credit insurer's buyer underwriters. This type of policy can be tailored to fit any portfolio of risk, often resulting in more targeted coverage with lower premium payments.
7. Single buyer policies cover single or multiple shipments to one buyer and protect the seller from the date of the contract until the date of payment. A credit manager specifies the shipments to be covered and the length of time needed for the shipments to occur. The maximum policy period during which shipments can be made is generally one year, and can be written on a non-cancelable basis.
8. Some trade credit insurance policies are now available in a modular, or “building block” format. This allows coverage to be custom-fit to the specific needs of even small and medium sized companies more quickly and more cost effectively than with traditional policy structures.
THOUGHTS
1. The premium for Credit Insurance is based the following of factors: industry default rates, customer credit quality, spread of risk of A/R’s, and the effectiveness of credit policies and procedures, the deductible and coinsurance. On a rule of thumb basis credit insurance will cost somewhere between .05% and 2% of total insured values.
2.In a climate of economic uncertainty, businesses are increasingly using trade credit insurance to protect themselves against the risk of non-payment.
3. Economic volatility and subdued UK growth across the manufacturing and services sectors will see the trade credit insurance market continue to increase as businesses look to protect themselves from insolvency.
4. Brokers play an important role in in raising awareness of the coverage.
(Source: willisprograms, theactuary, riskprotection, William Gallagher Associates)
