“It is legal to be stupid, but it’s not mandatory.” An abrupt, brutal note of caution to those who would relax trade credit insurance vigilance, as the economic slowdown ends

By Rob DowneyAlfred E. Neuman (named by Harvey Kurtzman) of Mad Magazine

I urged readers in prior blog posts to conceive of both credit insurance (CI) and political risk insurance (PRI) as diverse tactical tools for a busy world AND as strategic “glocal” solutions to be structured globally and implemented locally.  

My previous advice was directed to an engaged and practical audience. But recently, I tried to calm a client’s fears by offering bland assurances that competitive pressure would keep underwriting practices in our industry flexible and reasonable for years to come. For that, I earned from Brandon Baker, a partner at ICBA in the U.S., the rebuke cited in this blog post’s title  His intent was to challenge my easy certainty that sobriety would prevail in our industry, simply as a consequence of the economic slowdown. “Thanks,” I might have replied to his humorous startling retort, “I needed that.”

Brandon believes a few CI and PRI markets are already trying to introduce unpredictability back into our industry. Five of his insights are below; each accompanied by a training maxim (bold print) currently used in ICBA’s stateside offices.

1. Keep things as simple as possible, but not more so. A minimum annual premium (MAP) is simple to calculate by multiplying estimated annual sales times a premium rate; it is simpler still to pay the entire MAP up front. But, be wary of such simplicity. If limits are cancelled, an insured “simply” loses coverage and some of their MAP! Insureds can help make this “simple” structure disappear by negotiating a MAP that is less than 75% of the estimated annual premium, or by paying premiums on a quarterly or monthly basis with an even smaller MAP, or by obtaining non-cancelable limits, if a high portion of the MAP is to be paid in advance. Most insurers offer non-cancelable coverage, subject to the insured’s agreement not to ship to long past-due customers or into “probable loss” situations.

2. There is no rule that requires us to fight while wearing red coats and white cross belts and marching in straight lines through the woods. It’s best to shoot from behind every rock and tree.  Two examples of changes to standard policy text you should “take a shot” at obtaining for your own coverage follow: A few insurers still charge per-buyer “limit” fees (up to $125/foreign; $50/domestic). Seek to remove these additional charges or else negotiate a smaller flat fee.  A similar surprise (and contingent cost) can arise in some insurers’ policies if a claim is filed on an obligor who received goods over two policy periods. If your policy says two deductibles apply in that situation, try to amend the provision. Most insurers will structure a one-deductible-only policy to cover shipments spanning multiple periods.

3. If you are merely choosing (from among options presented by others) you are surely losing.  A proactive attitude to negotiating a better policy for your company is also needed for situations in which underwriters offer less than 90% coverage for a standard portfolio of risk, or where a waiting period of longer than ninety days is offered to countries that carry average or better-than-average risk ratings.  Decide now to seek better terms, and don’t choose from lesser options.

4. Don’t just drown; better to die swimming. What do you want to happen if a buyer cannot pay or refuses to pay? Prepare for this type of survival “swimming” in advance; decide now to be in control of those aspects of the process you are best suited to control. The interplay of a claim-filing deadline, waiting period (the time needed to determine a loss) and collection procedure varies from policy to policy. Evaluate your own capabilities and the support featured in your policy. Together, the filing period, waiting period and recovery rules may conspire to force an insured to file claims earlier than is optimal, and allow insurers to work on “recoveries” (for a fee) over an extended time pre-settlement.

5. Credit insurance coverage is not subject to “opinion”; an insurance policy reveals a definite point of view.  If the insured is diligent, the application of the insurance contract to the sales contract should result in a settlement in line with expectations at time of claim. Consider “exclusions” as a sample topic of concern. Informed insureds will know when an insurer may exclude buyers from coverage, how an insured may elect to do so, how buyers may be excluded by poor payment performance, and how buyers may be excluded during the policy renewal process by being too far past due.

Coverage features in a CI or PRI policy are relatively easy to change during the placement phase, but will largely be immutable once a claim or past-due situation arises.

This is the essence of an informed point of view at ICBA.

(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)