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Credit
risk insurance is rapidly becoming a preferred financial tool
for companies facing a wide range of problems and opportunities.
In this article, we'll explore how credit risk insurance can
be of value in your business and outline the best approach
to shopping for this unique and highly valuable coverage.
This article is broken down into 6 key sections,
with the intent of helping you understand the process of determining
your credit risk insurance needs and then how to buy it.
Determine
Why You Want to Buy Credit Risk Insurance- summary of benefits of credit risk insurance
Locate
the Right Credit Risk Specialist to Assist You- why this is important, what to look for
Designing
a Credit Insurance Program to Fit Your Needs- budget considerations, risk retention, establishing
coverage limits
The
Application Process-
what to expect, turn around time, selecting carriers to solicit
Evaluating
Credit Insurance Offers- apples and
oranges, how your specialist can help, key points to compare
for credit risk insurance
Implementing
and Managing the Program- getting started, ongoing management items, how your
credit risk specialist can assist
Determining
Why You Want to Buy Credit Risk Insurance
Before
actually going to the market for quotes, you would be best
served by clearly identifying what your interest in credit
insurance is and how you think it will benefit your company.
As a custom tailored financial tool, there are many practical
benefits to having this type of coverage in place. That said,
there are also some common misconceptions about what this
type of coverage can be used for.
At the
most basic level, credit risk insurance is designed to protect
you from unexpected losses due to the insolvency or past due
default on the part of your insured customers. The limited
number of underwriters who specialize in this unique coverage
will in most cases, conduct credit evaluations on the accounts
you wish to insure and approve them for specific credit limits
based on your requests and the results of their research.
Given this active credit evaluation on the part of the insurer,
credit insurance should not be approached as a tool you can
use to grant credit to companies that don't merit it. Likewise,
it should not be sought when you have an imminent loss that
you are looking to shelter.
Credit risk insurance is a proactive management tool
that best helps you in the following specific areas:
Catastrophic
loss protection: Across most industries and companies
of all sizes, it is generally true that the top 20% of accounts
represent about 80% of the company's revenue. In some cases,
the concentration of credit exposure among a few or even one
key customer is even greater. Just one sudden, unexpected
loss could have a devastating impact on the business. If you
consider that your receivables are a concentration of all
of your cost and your profit, and that, in many cases, you
create them based on nothing more than a customer's promise
to pay; you can see that there is a tremendous amount of risk
facing your business. Even with customers you believe are
"good as gold", the risk of unexpected default persists. Credit
insurance is a great tool to remove this catastrophic risk
from your balance sheet and cap your company's exposure.
Safe
sales expansion: It is not uncommon for customers
to request more credit than you are comfortable giving them,
or to have new customers you aren't familiar with seek meaningful
amounts of credit from you. While you may invest in a professional
credit practice to review these requests and manage the exposures,
if you are limiting sales as a result of concern over the
risk, credit insurance is an ideal answer. Many companies
use credit insurance to be able to expand on existing credit
limits without having to put themselves at additional risk.
It is also helpful in covering open credit sales to new accounts
where you might have limited information and sales history.
It is worth pointing out that using your credit insurance
policy to support additional sales you would not have made
otherwise will not only allow you to recapture the premium,
it will help you drop additional profit to your bottom line.
Credit
decision support: As mentioned earlier, in just about
every case, the underwriters on your credit insurance policy
are going to actively research, approve and monitor the accounts
you wish to insure. Having an industry specific financial
analyst doing this work for you as part of your credit risk
insurance program adds a lot of expertise to your credit practice,
or provides you, to a certain degree, with an outsourced credit
department. This allows you to focus your internal resources
more on cash flow management and collections work. If you
consider the cost of amassing the information resources, many
by costly subscription only, and hiring the additional expert
financial analysts, this decision support alone is worth the
typical annual premium. Most companies operate on the general
rule that as long as the customer is paying timely credit
management efforts can be focused elsewhere. Unfortunately,
payment history is not a valid predictor of default. Many
companies are current on their bills at the time they file
for bankruptcy protection or are forced into default. Having
the carrier watching your covered accounts and helping you
evaluate credit limits on new risks is a great advantage to
the program.
Borrowing
enhancement: If the company borrows against its receivables,
credit risk insurance can provide additional protection to
the lender so they may be able to enhance the borrowing arrangements.
They do this by increasing the percentage they will advance
against insured accounts, and/or roping more accounts into
the borrowing base- large concentrations, slow payers, export
customers, etc. This allows you to maximize the amount of
working capital available from the same pool of receivables.
If you're in a high growth mode and find yourself in need
of more working capital, credit insurance is a great way to
resolve the problem. Exporting on open credit: With more companies
sourcing customers outside their own borders, the risk of
granting credit terms has to be balanced against maintaining
competitive terms against other sellers. Export credit risk
insurance is one tool you can use to offer competitive open
credit terms without the additional risk.
Before
you talk to a specialist in this field, you should take a
look at your business- the customer base, credit practices,
risk appetites, etc. and think about how you want the policy
to go to work for you and where it can bring value. With this
accomplished, you'll be better prepared to have a productive
dialog with a specialist who can help you find the ideal solution.
Continue
for tips on:
Locating
the Right Credit Risk Specialist to Assist You
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