Credit
Insurers: The Road Ahead
Property,
casualty, and business-interruption insurers are taking
a beating following the destruction of the World Trade
Center. How are credit insurers doing?
By Joanne Y. Cleaver
Reprinted from CollectionsWorld.com
- December 2001
The
rubble is still being cleared from Ground Zero in lower
Manhattan and from the ledgers of businesses whose customers
were affected by the Sept. 11 terrorist attack. Even
in late fall, it was still too soon to tell which businesses
were permanently felled by the attack - and would default
on payments to suppliers - and which were pulling their
operations together and would eventually make good.
One
truth is cutting through the haze: Financial executives
have been shocked into awareness of an often-overlooked,
previously little-understood financial tool: credit
insurance. Widely used by European countries to guarantee
payment, U.S. companies have been reluctant to spend
money on premiums when it seemed routine credit analysis
and bank-issued letters of credit could do the job.
Those
days are abruptly gone, say executives at credit insurance
companies and industry analysts. "The attention to risk
has increased and companies are now focused on it like
a laser beam," says Peter L. Aitken, vice president
of trade credit for the Chubb Group of Insurance Companies
based in Warren, N.J.
Companies
that have used credit insurance are now filing claims
and counting their lucky stars for their foresight.
Those that haven't "are waking up," says Gerald L. Mize,
a partner at Alston & Bird LLP, an Atlanta-based law
firm that is handling claims stemming from the attacks
for insurers. "Everybody is now at increased credit
risk because of the deep impact of the events," he says.
"Even if it's just some small incremental factor, we're
all a little less certain of our ability to pay."
Perversely,
the attacks come at an excellent time for credit insurers.
Several are rolling out new products and services designed
to reposition them as rich sources of advice and data
for assessing credit risk, not just plain-vanilla underwriters.
A situation that is proving disastrous for most American
companies has a silver lining for credit insurers. Reality
has relieved them of the burden of conjuring up fictional
worst-case scenarios for balky customers. The truth
is sufficient to scare customers into the fold.
"We
are defining a new norm, and that will take time," says
Joseph A. Ketzner, executive vice president of Euler
ACI, based in Baltimore and the U.S arm of leading international
credit insurer Euler. So far, this 30-year industry
veteran is mainly seeing an exaggerated version of the
classic recession playing out - traditional industries
such as apparel, textiles, and steel have been in a
recession for a year now, and the ripples are finally
spreading to the service and technology sectors, with
concurrent interest in credit insurance.
Spike
in Applications
By mid-October, Euler had seen a 26% jump in submissions,
or applications, for credit insurance compared to last
year's levels. That's spurred by suppliers worried about
being blindsided with defaults by seemingly solid companies
- companies that seem stable according to traditional
credit scoring yardsticks. "For the second year in a
row, we are seeing an unprecedented number of investment
grade entities that have failed," he says. "Obviously,
that gives us good press in the underlying risk [factors]."
However,
Ketzner echoes the opinions of other insurance executives
when he points out that this recession is likely to
permanently change corporations' habits because it was
so dramatically exacerbated by the terrorist attacks.
Companies of all sizes that trade internationally are
accustomed to factoring in political unrest into their
credit analysis. But until now, nobody has contemplated
the credit risk of terrorist attacks in the U.S. Not
only are U.S. firms getting a crash course in supply
chain credit exposure, but they are also gaining a whole
new perspective on how to size up the risks of doing
business internationally where terrorist attacks, political
unrest, and regional wars are much more common.
The
booming economy of the late 1990s had undermined the
urgency of insuring transactions, even for relatively
risky international accounts, says Daniel N. Boccara,
chief executive of Coface North America, the Manhattan-based
U.S. division of the Paris-based firm. Companies that
were growing quickly were more willing to take on credit
risks because they were more concerned with increasing
the top line than they were with minimizing exposure.
In other words, they could grow their way out of defaults.
Credit policies were gradually becoming looser at many
U.S. companies, migrating from, say, automatic credit
approval of transactions below $5 million to automatic
approval of transactions below $20 million.
Though
recessionary pressures had largely reversed the easy
credit trends, U.S. companies also found that they didn't
necessarily have the internal expertise to assess complicated
international credit situations. Bank-issued letters
of credit not only carry administrative costs twice
as high as corresponding credit insurance coverage,
but also are inflexible and burdensome to implement.
And, letters of credit include only factors deemed critical
by the bank's credit risk department, which might not
reflect risk factors that the company considers crucial.
Complicating
the international scenario further is the fact that
traditional credit analysis for countries is only updated
quarterly and doesn't provide extremely specific detail
and projections about particular industries and companies,
Boccara says. "Post-Sept. 11, we definitely see customers
wanting credit information to refresh their files,"
he says, explaining that if they have to choose between
current information and detailed information, customers
value current data more. With terrorist threats escalating
into war, immediate assessments of the business climates
in various countries is critical.
Now
that credit insurers have the unwavering attention of
American financial executives, they are making sure
they explain all the bells and whistles they've been
adding. European companies have used credit insurance
for decades to smooth transactions across their many
borders. But until recently, U.S. companies could grow
for decades within this country's borders. Still, recent
trade agreements have made it easier for even small
firms to trade easily with Mexico and Canada.
Growth
Spurt
Internet-based trade and the perception that it's smart
to get an early foothold in other countries fueled an
unprecedented growth of international trade among American
companies of all sizes in the past decade. Credit insurance
firms have been trying to grab their share of growth,
but it has taken a while for American firms to get the
message. The gradually deepening recession has delivered
the fast growth that the industry has been seeking.
NCM Group, for instance, based in Amsterdam and operating
in the U.S. since 1992, has hit a 25% annual growth
rate in the past two years. (NCM and Cologne-based Gerling
Credit, another leading international credit insurer,
have announced their intention to merge, with the combined
entities accounting for 25% of the global market for
direct trade credit insurance.)
The
recession accounts for some of the growth, but not all
of it. Credit insurers also realized that they had to
offer much more value than simple risk mitigation. So
in the past 18 months, they have been gradually rolling
out a variety of new credit analysis, information, and
consulting services designed both to squeeze more revenue
from their rich internal databases and to position themselves
as consultants to the whole credit analysis process.
"We are moving away from only risk mitigation to credit
enhancement, to support banking institutions, which
are supporting companies' bigger deals," explains Arjan
G. van de Wall, vice president, marketing & sales U.S.
with NCM. Its online product, eCredible, is run as a
separate division. "People know that it can't be business
as usual, but it has to be business of some sort," he
says.
The
hunger for information is so great that Coface Group
is supplementing its ongoing underwriting partnership
with Chicago-based CNA Credit with a new suite of online
credit management products known as @rating. The service
lets companies tap into an always-fresh stream of information
fed by Coface's offices in 93 countries and ongoing
business relationships with 70,000 clients.
Credit
insurance professionals predict that corporations will
start to weave the service into an increasing number
of transactions. "In a year, usage will be higher, there
will be more U.S. companies that are aware of credit
insurance and sensitized to the utility of it, and there
will be a greater demand," says Nick Pearson, a partner
in the Manhattan office of law firm Edwards & Angell
LLP and head of the insurance and reinsurance practice.
At
the same time, he and others are confident that premiums
for credit insurance will rise significantly. After
all, some significant risk has now been introduced into
the American scene. As well, greater usage of credit
insurance sops up more of the capital in the industry
available for backing the policies. That escalating
cycle alone will force premiums up.
Mize
says that the federal government's attempts to relieve
pressure on insurance companies could backfire on customers.
If customers believe that insurers will be protected
from future risk by the government, they're more likely
to file all possible claims now, while they can still
get a good return for the cost of coverage. "If future
insurance losses tied to terrorist events are capped,
then commercial insureds may become more aggressive
[in making claims now]," he says. As of late October,
the Bush administration's proposal called for the federal
government to cover up to 80% of terrorist-related losses
up to $20 billion in payments in the first year. Insurers
are still on the hook for losses incurred in the September
attacks.
Even
before Sept. 11, the credit insurance outlook seemed
healthy. Coverage for exports has been rising for the
past five years, says Euler's Ketzner. "In the broadest
terms, credit insurance premiums have doubled in the
past five years driven by market awareness and export
demand," he says. Euler has added a variety of related
services, such as "swapping," a more sophisticated version
of factoring that doesn't actually require the sale
of accounts receivable.
Soon
customers can expect to be pitched credit insurance
directly through their banks. That marketing channel
is such an obvious fit that banks and insurers are racing
to get their partnerships organized and to market, says
Ketzner. About 20 of the country's largest banks have
established insurance brokerage arms to sell credit
insurance. "It's an untapped gold mine that they have
in their own backyards," he says. "The product sells
itself. People scratch their heads and once they understand
what it is, they don't understand why they don't have
it."
