Recently I spoke with representatives of two of the big three international credit insurance companies. The big three are Atradius Credit Insurance, Coface North America, and Euler Hermes ACI. What I heard is important to pass on to companies that currently have credit insurance as well as companies that carry a large balance of accounts receivable.
Credit insurance protects companies against the insolvency of their customers and, most important, it helps mitigate risk in today’s very unpredictable, volatile financial time.
Companies that export goods and extend trade credit to foreign buyers have been the most traditional purchasers of trade credit as the risk of collections from a foreign buyer is much higher than from a U.S.-based customer. Many banks and other lenders will not typically loan money against foreign receivables unless they are insured, which is another reason why companies will buy trade insurance. Lastly, companies that have large concentrations of credit to domestic customers or sell into markets that are shaky will use credit insurance to mitigate their risk of bad debt.
I see the big three credit insurers as a barometer of impending bad debt across a large sample of companies. Since all three of these firms insure billions of dollars of debt, their portfolio risk represents a pretty good sample of commerce throughout the world.
What I heard from my sources was that all three credit insurers were picking large classes of debtors that they will no longer write insurance for. One representative told me if the company being considered for insurance makes products for anything that moves down the road, they aren’t interested in writing insurance. That would of course imply the automotive and truck industries and all the companies that feed parts and services into that market.
I learned that premiums for new policies will very likely be significantly higher than they have historically been because of the increase in risk due to the shaky economy.
Most important, I learned that credit insurers were moving from a pricing formula that was based solely on annual sales to one that greatly considers the individual risks of the companies being insured. This is to say that the pricing model is becoming much more risk-based than it has been in the past.
I believe it is conceivable that credit insurance could cost twice as much for new policies written moving into 2009 then they were for this time last year.
This means that companies with credit insurance may have to weigh the risks and rewards of having credit insurance. They may have to raise their prices for sales involving trade credit to help offset the cost of the insurance.
Most important, what the information I obtained means is that the number one concern of business owners after having profitable sales is collecting the accounts receivable generated by those sales.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
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