business – credit insurance
Credit insurance
is worth its
premium
Credit insurance helps companies to protect cashflow and profit against the risk of insolvency. This is the
result of a study carried out for the international credit insurer Euler Hermes by the Credit Management
Research Centre at the University of Leeds, UK
More than 80% of daily B-to-B transactions are
on credit terms; it is the most important form
of short-term financing within the corporate
sector. The results of an independent study on
credit management habits of 2,000 businesses
in 10 European countries prove that late
customer payment does affect cashflow: 98%
of the companies questioned have experienced late payments,
three-quarters have seen their cashflow affected. Credit-insured
companies, however, save on the operating costs of receivables.
On average, 1.38 percent of a company’s annual turnover could
be saved by having a credit insurance policy.
As the 2007 economic outlook seems increasingly uncertain,
with corporate insolvencies likely to be on the rise, company
directors must make crucial decisions to achieve a well-balanced
risk profile of their trade receivables in order to secure cashflow
and net profits. One of the key findings of the study is that credit
insurance enhances companies’ business relationships, which
contribute to the overall effectiveness of the credit management
department. For example, insured companies manage to receive
a bank loan more easily (49% vs 34%), with a better rate of
0.5%. Credit insurance has also shown to improve customer
relationships: 73% buy regularly at credit-insured companies,
while only 67% of the customers come back to non-insured
companies.
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Within the European economies, the Eastern European
countries show similar results to Western Europe: credit-insured
companies in Poland and Hungary, for example, have better
access to extended finance and receive longer credit periods. On
the other hand, the overdue period from customers is shorter for
insured companies than for uninsured companies.
Altogether, credit-insured firms have less cash tied up in
customer debts as a result of disciplined capital management: this
not only represents a financial saving but means that companies
are also less vulnerable to insolvencies.
But what about the common belief that credit insurance is
a costly solution? Clemens von Weichs, CEO of Euler Hermes
explains: “For smaller companies, the costs of late payments or
non-payment are even higher because they depend on a smaller
number of customers. You could almost call it a vicious circle:
as a reaction to late payments, many companies delay their own
payments to their suppliers. Credit insurance is certainly worth
its premium. Not only is the receivable paid if the customer fails,
further credit information and market intelligence help reduce
companies’ losses.”
The process of insuring a company’s accounts receivable
involves understanding the company’s trade sector, risk philosophy,
business strategy, financial health, funding requirements, and
internal credit management expertise. Credit insurance does not
substitute for prudent, thoughtful credit management. Sound
credit management practices must be in place before a policy is
bound.
With other types of business insurance, the policy is often
purchased and filed in the desk drawer until the following
year’s renewal. Credit insurance is different. Building a strong
relationship between the policyholder’s credit management department and the credit insurer is the surest way to make
certain that the policyholder derives maximum benefit from their
investment. A strong rapport between the two parties allows the
credit insurance policy to be a living, breathing document that is
as dynamic and unique as the business it is protecting.
A credit insurance policy does not replace a company’s credit
management department, but rather supplements and enhances
the job of a credit professional. The best credit insurers will invest
heavily in the development of proprietary credit and financial
information, and also will employ risk analysts, as well as industry
and country-based underwriters, in many geographic locations in
order to have a close physical presence to its customers’ buyers.
No matter how well protected from unexpected bad debt losses
a company may believe itself to be, credit insurance provides
one of the key ingredients for a business to maintain a healthy
financial status. “This multipurpose business tool provides a
valuable extension to a company’s credit management practices
– a second pair of objective eyes when approving buyers, as well as
an early warning system to a deteriorating situation so exposure
can be managed,” says Euler Hermes ACI CEO Paul Overeem.
“Ultimately, should an unexpected loss occur, the trade credit
insurance policy provides indemnification, thus protecting the
policyholder’s revenue and bottom line.”
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To maintain and maximize the collaborative effort between the
credit insurer and the insured’s credit management department,
it is important for policyholders to have a good understanding
of what happens “behind the scenes”. The best credit insurers
will invest heavily in developing proprietary credit and financial
information. Euler Hermes employs risk analysts, as well as
industry and country-based underwriters, in many geographic
locations to have a physical presence close to its policyholders’
clients. This close surveillance leads to higher acceptance rates
on credit limits, generating more sales with decreased risk to the
policyholder. In addition, Euler Hermes has a global network that
monitors the economic and political climates of countries around
the globe, capturing and analyzing payment information about a
policyholder’s clients to identify early signs of financial trouble.
Risk mitigation is an important part of doing business today. If
a major customer cannot pay its invoices – or if several customers
are unable to do so – it harms cashflow, earnings and capital. This
can put the seller in serious financial trouble or, in an extreme
case, out of business. That is where credit insurance comes in –
it is more than just a means to indemnify losses incurred from
a trade debt default. The ultimate goal is to help the insured
avert catastrophic losses and grow their business profitably. The
key is having the right information and proper analysis to make
informed credit decisions at the outset, and then monitor the risk
effectively after shipment.
About Euler Hermes
Euler Hermes protects companies of all sizes and industry
sectors from the risk of customer default. The leading
credit insurance group with a global market share of 36%
and presence in over 48 countries, Euler Hermes offers a
range of integrated credit management services covering
each phase of the transaction between the policyholder
and its customer: protection from customer non-payment,
debt collection and loss indemnification. Euler Hermes
monitors the business and financial solvency of 40 million
companies worldwide and has developed one of the world’s
most efficient risk information systems, thus enabling it to
offer its clients unparalleled risk experience and services of
equal quality in all countries.
A subsidiary of AGF and a member of the Allianz
Group, Euler Hermes has the necessary financial strength
to provide long-term support to its clients. Euler Hermes
is rated AA- by Standards & Poor’s.
For more information, please visit our website: www.eulerhermes.com
Credit insurance
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