Time for a fresh risk assessment

A look back at the credit insurance crunch and its effect on businesses

Pacey: Assess risk afresh in changing times

Much has been written and discussed on the topic of credit insurance and the effect it has had on channel credit and, as ever, there is a gap between the real and what is perceived.

Most resellers find the ‘burden’ of credit insurance superfluous, in part because many of their clients may be public, large or essentially household-name institutions. Yet events since the autumn of 2007 have shown this assumption to be less than certain.

Distributors tend to use credit insurance, rightly so given low margin and a trade-only approach where the risk at the client base is high. They have some sophisticated credit management tools to manage the cost of credit insurance manageable for maximum coverage.

There is always recognition that a credit insurance policy will not cover all debt and there is scope to control premium cost through excesses or tailored policies.

Commonly, a whole turnover policy means what it says but where the insured is willing to consider non-qualifying losses (a level of debt below which loss is not claimed) and added to this, an aggregate first loss (a chunk of money the insured is willing to take as a first loss on all claims that fall above the non-qualifying loss).

This is more commonly known as catastrophe cover, because it is designed to cope with a year of high claims or a series of disastrous events.

Given the nature of policies written, it is unlikely that any distributor has more than 75 per cent of their book debts covered.

Cover reduction and removal increased in Q3 and Q4 of 2008 and Q1 of 2009. Insurers took heavy losses. Claims paid to premium income earned should not exceed about 65 per cent if the insurer is to profit. Last year, they exceeded 90 per cent and in Q1 topped 110 per cent, with further rises expected.

Reductions have caused pain, to the point where credit insurance is being questioned. Yet the only real pain is where substantial cover is reduced or removed on principal clients ­ where an insured line may be held in several million and the business transacted in similar values.

Faced with no cover on a multi-million risk makes it difficult to continue open credit trade ­ more so when cover is reduced or removed when a business is going through hard times. Yet, insured or not, internal credit risk management will review exposure.

Laying the blame on insurers is all too easy.

One positive to have come out of this period is a growing recognition by large and publicly quoted businesses to readily provide interim financial data directly to suppliers, something they were historically reluctant to do, either because they considered themselves household names or big enough not to have their status questioned.

Loss of cover on clients is painful but not too great a problem if one has the intensity of client relationships, mutual understanding, transparency and honesty in dealings and information exchanges.

We have all been through these periods before and may have to manage this one for a while yet. It may be a time of channel and business ‘cleansing’ but what survives will be stronger and better prepared for similar times in the future. Credit insurance will still support business activity and increase funding for many.

Eddie Pacey is director of credit services at Bell Micro Europe