Are increased credit insurance premiums the saviour of the industry?

By Mark Attley

In my last blog post, I made reference to the cost of risk being well below levels of five years ago despite the current credit environment. The strategy being engaged by most credit insurers to manage their risk is to reduce or eliminate it rather than charge appropriately priced premiums.

Since the beginning of this decade credit insurers embarked on a mission to gain market share utilising a mechanism known as cash flow underwriting whereby little consideration is given to the risk profile and much to getting the business at all costs and at any cost.

David Jetuah in his January 8^tharticle in Accountancy Age exhorts underwriters to increase premium rather than pulling cover on credit limits. It’s interesting to note that if premium rate levels today were at the same level as 2000 i.e. almost double, claims ratios today would be manageable. Admittedly we are in the midst of the perfect economic storm but everybody in this business knew that the prevailing pricing models were unsustainable even under the ‘normal’ circumstances of economic cycles.

As further anecdotal evidence that the era of rising premiums is well upon us, a nameless underwriter who would not increase a credit limit for one of our clients did take the increased risk on an excess basis upon learning there was a significantly increased premium rate.

But the question remains – are buyers of credit insurance ready to pay higher premiums? I would submit that the answer would be a resounding ‘yes’ if they were confident that insurers would consistently back the risk.

If recent examples of the deterioration of so called investment grade companies from AAA to junk bond status inside of a quarter combined with expected historically high bankruptcies is not enough to spur insurers to act, then who knows what is? Legitimate reduction or elimination of credit limits is justifiable. What is not is the wholesale indiscriminate approach being employed by major credit insurers around the globe.

My recommendation to buyers of credit insurance is to determine if paying higher premiums would result in more stability for their buyer credit limits. If the answer is yes, then by all means proceed to do business.

(Mark Attley is an ICBA Canada broker and President of Millennium CreditRisk Management –credit and political risk insurance specialists – www.mcm.ca. ICBA is the world’s largest team of independently-owned, specialist trade credit insurance brokerages. Partners combine local service with global coordination to provide credit and political risk insurance solutions for multinational companies.)