By Rob Downey Vercingetorix surrenders to Caesar by Alphonse Marie de Neuville (31 May 1835 – 18 May 1885)

This is the second time in 2009 I have risked the use of a military tale to support my view about the best use of credit insurance (CI). The Discretionary Credit Limit (DCL) is the topic for this post, so it is perhaps appropriate for me to take a few “discretionary” risks in framing my recommendation, but first the historic context:

For six months in 53-52 B.C., Julius Caesar and twelve legions, numbering 60,000 Roman regulars, pursued Vercingetorix, principal leader of the Gauls, and his 80,000 warriors through what today is Northern France.  By summer, the Romans were able to trap and besiege the Gauls on a plateau near modern-day Alise-Sainte-Reine, fifteen miles NW of Dijon.  To secure his elusive foe, Caesar had his legionnaires circumvallate the entire Alesian plateau with an 11-mile wall comprised of a twelve-foot-high earthen palisade, behind a double row of deep ditches. The encircling work took a month.  The trapped Gallic leader sent riders out for reinforcement. Caesar let the couriers “escape”, and allied tribes marched to the relief of Alesia, 250,000 strong.

While waiting, Caesar had his army dig a second “outer” wall, or contravallation, 13 miles long.  When it was finished, Caesar was intentionally and irremediably “trapped” in a dug-earth doughnut, expecting to be assaulted all around by the largest army ever to attack Roman troops. Incredibly, history records that the legions won the four-day battle which ensued. Casualties were thirty to one in Rome’s favor; Vercingetorix was captured; 100,000 other captives were dispersed.

The practical application for better credit risk management: Outnumbered five-to-one on his opponent’s home field, Caesar trusted in the professionalism and competence of his team and put his Legions in a position calculated to give them maximum opportunity to assert their advantages, i.e., superior ability at close-in fighting, in ranks enhanced by elevated and protected defensive positions.  He moved toward his problems, dug into the risk he faced, and thereby avoided being either destroyed piecemeal over months of guerrilla warfare, or surrounded and overrun on the plains of Gaul.

Caesar applied the same theory as that which underlies the use of DCLs in your credit insurance policy.  A DCL allows you to take more risk because you are confident in what you are doing and are willing to increase the number of decisions you make – as opposed to ceding those decisions to others. With a DCL, you earn the ability to frame the risks you take and garner the rewards that accrue to competent performance.

Discretionary authority in most CI policies is designed to allow an insured to approve, depending on policy type, between 25% to 95% of all obligors. The DCL is limited in its application by the policy Aggregate and country restrictions and will not apply to buyers specifically approved or declined for coverage elsewhere in the policy.  Because DCLs often occur in “Excess-of-Loss” policies that carry significant deductibles, there may be downward rate pressures attendant to the use of a DCL. Check with your broker about different types of DCL authority – whether qualified for use by ledger experience, reported information (new buyers) or “good-faith” – and how each may apply to your situation.

Seek credit insurance coverage that includes the DCL feature and you will dig yourself into an attractive position, i.e., in the middle of the risk assessment equation between your insurer and your buyers.  By use of a DCL, you will be rewarded with increased control, decreased cost, and increased flexibility relative to coverage decisions.  I never metaphor I didn’t like: Caesar and his discretionary digging in is my final and my favorite parable for 2009!

(Rob Downey is one of the founding partners of International Risk Consultants, Inc. (IRC) www.irc-group.com – a globally-integrated trade-finance and credit insurance specialty brokerage, which serves as the operating member of ICBA for Asia, Brazil, India and the USA)