The role of risk

Bill Grimsey, chief executive of Focus DIY, recently blasted credit insurers for cover removal. This creates trading issues with suppliers who may then ask for pre-payment or payment on tighter terms, which can shrink cash and capital.

His argument was that credit insurers had been readily provided with the information they needed, including forecasts and details of plans to cut costs and achieve goals set for 2009.

Others have suggested insurers massively underpriced cover and were too quick to remove or significantly reduce it.

Yet one must first understand what credit insurance offers: a way of limiting loss against receivables; and non-payment by clients as a consequence of insolvency, bankruptcy and, occasionally, political risk. It may offer total outsourcing of credit risk management or complement a client’s own structure.

Credit where it is due

During the course of the policy, insurers constantly monitor and review performance and risk, adjusting credit lines as required, something almost all firms should do if they employ people in credit, irrespective of cover.

Say you have no credit insurance and supply a client on open credit terms, providing a credit line of £1m. You note that their performance has declined recently, they have asked for extended terms and continued discounts, they do not pay properly and you have some concerns about the risk you are taking. Do you cut the line, update information and discuss terms and payment issues? Doing nothing is not an option ­ imagine if that buyer fails.

Dealing in the future

Look at this again. You have credit insurance covering your line of £1m. You may be unaware of any change in your client’s circumstances or choose to not act and hope insurers have not picked up the declining client performance. The client becomes insolvent and you claim against the loss, gaining a return of perhaps 85 to 90 per cent. You still lose between 10 and 15 per cent.

Next year, your premiums rise considerably and policy constitution may be less advantageous.

Insurers assess the company’s systems, processes and people engaged in receivables management. The client determines the typeof policy, the excess and the premium. The insured must comply with policy requirements.

The bigger picture

Many businesses need their receivables insured to obtain bank funding. If there is to be criticism of insurers, it is in failing to write new policies and perhaps in taking a macro economic view of industry, sector and buyer risk.

They have to show a return to shareholders and recent claims to premium income and number of business failures has torn through their own performance and profitability.

Insurers need more flexibility when writing new policies. They also need to apply themselves more diligently when considering cuts to credit lines and be less quick to just slash them.

But given the economic climate of the past 15 months or so, to reduce a buyer line to the levels witnessed simply on profitability and performance decline may be a step too far.

Eddie Pacey is director of credit at Bell Micro Europe