Credit Insurance after the Credit Crisis: The Future is Now

By Ron Doyle

Over two years ago, it was apparent that credit insurance companies were going to face problems as they abandoned their traditional underwriting guidelines in favour of more aggressive underwriting. Past credit insurance offers were priced so low that even a modest increase in claims would result in unacceptable loss ratios. This action alone deteriorated the pool of risk, and, like in the banking community, the credit insurance industry undervalued the cost of risk.

Then, once losses materialized, underwriters reacted urgently to protect their positions. Many cancelled large numbers of approved credit limits, increased prices, and applied policy conditions more rigorously when reviewing claims. Such actions created an adverse perception of the value of credit insurance by many companies affected.

Yet credit insurance remains a valuable tool in managing risk. Credit insurance allows companies to transfer certain risks to underwriters, and, by improving financing options and supporting increased sales, credit insurance solutions are evolving to follow more traditional insurance concepts. Examples:

1. Credit insurance coverage should only be used for unforeseen commercial and political risks that could cause abnormally high write-offs against accounts receivable. Routine write-offs are a cost of doing business and they are within the control of the company – not necessary to insure with credit insurance policies.

2. By necessity, companies seeking credit insurance may have to include new risk mitigation strategies into credit practices. It is now apparent that underwriters require more financial information (from policy holders and their buyers) prior to approving larger exposures, particularly in industries with a high aggregation of risk.

3. Many current policyholders and potential clients are changing their expectations of the pricing of credit insurance and the amount of risk they are expected to retain. In the last 5 years, average premium rates have dropped considerably, in the area of 50%, but this situation is not sustainable. Premium rates and deductibles are increasing to levels that allow credit insurance policies to be both effective and still provide good value.

4. Most insurers are modifying their products to meet policyholders’ expectations of reliable coverage at a reasonable cost. More policyholders are seeking non-cancelable credit limits or policies with definite criteria for allowing underwriters to cancel or reduce credits limits. If coverage on a loss is denied, policyholders want easily accessible recourse to arbitration, short of taking an underwriter to court.

5. Brokers and direct sales agents are providing superior customer service. A policyholder needs to understand each word in an agreement and how it will be interpreted in a claims situation. A credit insurance policy needs to be structured to provide optimum coverage at a minimum cost, which requires earlier and more detailed analysis by brokers.

Credit insurance for accounts receivable continues to be an excellent risk management tool, and over the next two years, it will continue to improve and change. Specialist credit insurance brokers are also trusted advisors, and the trend for companies to rely on and work in partnership with insurance brokers will continue.

(Ron Doyle is a founder 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.)