Benefiting
From Credit Insurance
(As seen in Energy Markets magazine
November 2003)
By Victor Sandy and Brent LeVasseur
Before
discussing the benefits of credit insurance, it
is important to stress that credit insurance is
not a tool that will help you extend credit to
companies that don't deserve it. The goal is to
avoid losses before they happen and have the coverage
to back you up when the unexpected occurs. With
that said, some of the benefits of a credit insurance
program include:
- Catastrophic
loss protection: Receivables are one of the
largest and most at-risk assets. They are prone
to unexpected losses that can rob working capital
and devastate the bottom line. It only makes
sense to insure the largest credit exposures
that can do the most damage should a loss occur.
While larger accounts may seem to be “good
as gold,” consider the impact of a sudden
unexpected loss. Unfortunately, these are more
frequent and increasingly unpredictable.
- Safe
sales expansion: Whether trying to expand credit
lines with existing customers or extend competitive
open credit terms to new accounts, using credit
insurance to reduce or eliminate risk is a great
way to safely grow a business. Credit insurance
can allow the offering of terms and credit limits
customers need. Typically, the addition of just
one or two new accounts will more than repay
the cost to insure an entire portfolio.
- Borrowing
enhancement: Cost effective access to working
capital can help a business grow and avoid cash
flow crunches. A credit insurance policy can
help maximize working capital availability from
receivables pledged to a lender. With properly
structured coverage in place, advance rates
can be maximized and the eligibility window
can increase to longer than the normal 60 or
90 days. By insuring the risk, the lender's
concentration concerns can be addressed and
the business can secure more working capital
to invest.
- Decision
support: A credit insurance program is not just
coverage on receivables. It provides a partner
in credit risk management whose goal it is to
avoid losses before they happen as well as provide
a backup when they do. Most debtors are current
on payments at the time they file for bankruptcy,
so timely payments can be deceiving. A credit
insurance program provides access to industry
specific underwriting analysts, offering tremendous
decision support assistance.
BASIC POLICY GUIDELINES
- A
typical credit insurance policy runs for 12
months.
- Credit
insurance programs protect against a range of
defined insolvency events as well as past due
default.
- The
policies will have deductibles and/or coinsurance
included as risk sharing elements of the program.
Deductibles are typically set at a level comparable
to the last three year's average historical
bad debt experience, and there is some room
to move these up and down with corresponding
changes in the premium. A typical policy deductible
is a one-time annual first-loss position.
- Coinsurance
is a percentage of the covered loss that the
policy holder retains as risk and is typically
set at a level between 10% and 20%. Most clients
select a coinsurance level at or below their
gross margins so they are not paying additional
premium to insure profits but focusing the coverage
on reimbursing costs.
- Premiums
can be calculated based on either a projection
of annual sales volume to the covered accounts
or based on the total amount of approved coverage
limits in the policy. An average domestic credit
insurance policy typically runs between .15%
to .4% of covered annual sales, while export
policies are at the higher end of this scale
up to .6%.
When
looking for a credit insurance policy, you can
go directly to the carrier or rely on a specialty
broker to negotiate with the major carriers
and competitively shop the market for you. Specialty
brokers have the experience and industry knowledge
in dealing with the carriers to ensure a custom-tailored
credit insurance program that fits your specific
needs. As all of the programs are custom tailored,
you will find substantial benefit in the objective
guidance and support a specialty broker can
offer. In addition to this, once the policy
is in place, the specialty broker supports your
credit department, staying active with your
policy; thus providing an additional resource
for you to utilize in managing your credit risk.
Whether it's account research or assistance
in filing a claim, your specialty broker can
help expedite the matter for you. More importantly,
you don't incur any additional costs by going
through a specialty broker. Most brokers don't
add fees, and simply receive a commission from
the carriers. The carriers will charge the same
premium whether you have a broker's assistance
or not, so it makes sense to take advantage
of this free expertise.
|
