PROTECTING THE BALANCE SHEET
By Paula Green
Companies using trade credit insurance to secure their bottom lines are finding a marketplace with ample capacity, expanding terms—and even new players.
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| Photo Credits: IGOR PLOTNIKOV / Shutterstock.com |
Trade credit insurance is an essential financial tool that can help corporations hedge against both commercial and political risks and—critical in today’s turbulent economic times—that gives multinationals the safety net they need to confidently sell their products around the world.
“Since the global financial crisis of 2008 and the European sovereign debt crisis, trade credit risk, as well as their insurance needs [to cover it], is on the list of risk managers as one of the most important risks to cover, only surpassed recently by regulatory and compliance risks,” says Isabel Martinez Torre-Enciso, whose job as head of the finance and marketing department at the Autónoma University of Madrid’s business school includes responsibility for risk management. She is also a senior lecturer in corporate finance at Autónoma.
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Braun, Coface: The US is becoming a driving force behind growth in the credit risk insurance market |
Whether or not to use credit insurance to transfer risk is a decision that each company must make for itself, according to Richard Talboys, executive director of credit risks, financial solutions, at global insurance broker Willis Group. Some of the deciding factors include the company’s risk profile, profit margin, balance sheet strength, bad-debt provisioning policy and customer base. Other factors are its access to insurance, the cost of insurance and the cost of funds. “Companies with lower margins, and perhaps a need for financing, may go down this route. But one company’s acceptable risk is not necessarily the same as another’s,” says Talboys.
When considering credit insurance, a multinational needs to clarify if it is seeking risk transfer or risk mitigation, says Mary Duhig, managing director at Aon Risk Solutions in Chicago. “Do they [the company] have a credit team in place that is underwriting the creditworthiness of the buyer and buying the insurance policy for an unexpected event [risk transfer], or are they interested in outsourcing the credit underwriting to mitigate the potential risk,” adds Duhig.
It is also important to determine if the internal corporate credit team has the savvy to analyze the financial statements of its foreign buyers or needs to secure an external expert. For rapidly growing companies, a credit insurance policy can be used to back up the corporate credit department by outsourcing the counterparty underwriting process, Duhig says.
LESS EXPENSIVE, MORE EFFICIENT
And compared with a letter of credit, credit insurance can be a less expensive and more efficient option for a corporate’s distributors and help all business partners streamline the supply chain. Alessandro De Felice, group risk manager, finance, administration, control and information technology, at energy and telecom infrastructure company the Prysmian Group in Italy, says that credit risk insurance is a viable alternative for multinationals to transfer receivables risk if a confirmed letter of credit or factoring agreement is not used.
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Talboys, Willis Group: One company’s acceptable risk is not necessarily the same as another’s |
But De Felice says corporate risk and finance executives are finding it more arduous to develop an integrated trade credit insurance program for all its corporate entities around the world. In some countries this type of insurance is unknown. In others, such as Brazil and Argentina, there is strict regulation of credit insurance. “And some local insurers want to indemnify from the first penny,” adds De Felice, which means it is not easy for a multinational to negotiate an aggregated first loss under the umbrella of its global insurance program to cover all entities around the world.
Martinez agrees that the administrative work surrounding credit insurance is expanding and becoming more difficult, “making credit insurance slow in response, short in limits and expensive in rates.” An alternative is the excess-loss insurance market, which, while efficient and less expensive, carries very high deductibles, she adds.
NEW BLOOD, NEW PRODUCTS
There are new entrants to the trade credit market ready to fill this need—including Ironshore in the United States and Equinox Global, a Lloyd’s of London coverholder. As a coverholder, a Lloyd’s syndicate can operate in regions or countries as if it were a local insurer.
But the needs of corporate clients go beyond insurance that compensates for losses. Companies want new services—such as defaulted receivables management or client portfolio monitoring.
“The market is changing, and traditional insurers must adjust their products to new trends and customer needs by developing solutions tailored to clients’ individual credit exposures,” adds Martinez, who is also a board member of the Federation of European Risk Management Associations in Brussels.
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Martinez, Autónoma U. of Madrid: Administration of credit insurance is becoming more difficult |
The three giant monoline trade credit companies—Euler Hermes, based in Paris and majority owned by Allianz France; Atradius, a mix of international trade credit insurers from around the world with headquarters in the Netherlands; and the France-based Coface Group—seem to be doing just that as they restructure and implement new types of coverage. Descendants of the government-run credit organizations set up after World War II to help foster international trade, these companies have roots in Europe but now hold about three-quarters of the global market in trade credit insurance.
In an attempt to stave off competition, some of the traditional trade credit insurers are beginning to offer noncancellable coverage on specific key customers within the usual cancellable portfolio policy. Two of the big three also offer an excess-of-loss policy—for the larger and better credit-managed companies—which includes noncancellable cover, says Talboys of Willis.
“Terms usually include a large annual aggregate deductible above the average historic bad debt losses, so it is often called ‘catastrophe’ credit insurance, as it is not designed to replace lost cash flow but more to protect balance sheets from occasional catastrophic and unexpected loss,” Talboys add.
Coface Group is preparing to roll out a supplemental, noncancellable credit insurance product that a corporation can buy for amounts over the credit limit approved by Coface. Called TopLiner, the new product is now being offered in Canada and a few states in the United States, says Kerstin Braun, executive vice president of Coface North America. It offers corporate customers a quick way to cover risks beyond the main credit insurance policy and is separate from the traditional underwriting. It is based on a price adapted to the risk. The customer chooses the amount to cover, between $5,000 and $5 million, and a duration spanning 30 and 90 days.
The United States, which has traditionally lagged behind Europe in the use of trade credit insurance, is becoming a driving force behind the growth in the credit risk insurance market, says Braun. Last year, for example, Coface’s overall premiums increased by 3.1%. Its premium growth in the United States was up 14.2%, while premiums in Western Europe went up by just 2.4%. Asia and the Pacific led its premium growth with 20.1%, followed by Latin America with 18.5%. Braun says growth was especially strong in Brazil, Argentina and Peru.
The most frequent users of trade credit insurance are now in the textile and apparel industry, retailers, electronics, food and beverage companies, and global industries such as steel.
