The many Bright Sides of Accounts Receivable Insurance

By Ron Doyle

My last series of blog posts focused on the mitigation of credit and political risk in a highly volatile and threatening world economy. While there haven’t been many improvements to provide hope that the risks facing companies around the world have reduced, today is a lovely April day, and so this post focusses on how credit insurance and better management of the accounts receivable can provide very positive benefits, even if a claim for a bad debt never occurs.

Please note: The non-claim benefits accruing from credit insurance vary depending if the client is a large company, a small company, a company exporting goods or a company providing services.

Benefit #1: It takes time and money to approve a new buyer, but obtaining a credit approval under a credit insurance policy can be faster and less expensive than you may think. With the online systems that underwriters have in place, most credit limit requests are approved within 24 hours, if they have information on the buyer. Compare this turnaround time to the time it takes a company to source the information to do a proper credit analysis and verify references on his or her own. Credit insurers normally charge for credit approvals to cover the costs of issuing them, yet these costs are likely lower than you would have to pay for the credit information if you sourced it yourself.

Benefit #2: If you are an exporter, the benefits in the above item are magnified. The private sector credit insurers licensed in Canada (for example) have related companies operating in all areas of the globe. Export Development Canada, with over 65 years of experience in covering export sales, has extensive buyer data bases and can obtain credit information on foreign buyers on a timely basis and at a reasonable cost.

Benefit #3: Obtaining credit information is one thing, having the expertise to evaluate it (and the political risk) is another. Normally, credit insurers delegate a Discretionary Credit Limit to an insured under which the insured can make the necessary credit decisions covering a large number of its smaller buyers, provided they follow certain criteria.

For larger exposures, it is necessary to have a written credit approval under the policy. These larger exposures usually relate to the top 20% of the buyers, and a bad debt write-off of one of these accounts would be material to the company’s results. If you approve large exposures internally, it will be necessary to have staff with the appropriate expertise. Personnel qualified to deal with the challenges of foreign buyers are expensive and hard to find. Meanwhile, because of their experience in most foreign markets, underwriters can assess the risks against the norms and also assess the impact of the political risk. You could be losing good business opportunities because you don’t understand how to evaluate risks.

Benefit #4: Sourcing and initial evaluation of credit information is important, but more important is monitoring an account to detect any deterioration in the buyer’s financial condition before it results in a loss. Once underwriters approve an account and have exposure, they continually monitor the account. They do this function by regularly up-dating the credit information as well as by having their policyholders report serious overdues or events likely to cause a loss. Extensive monitoring of buyer activity is often impractical for individual companies, but not for underwriters.

Benefit #5: In any one year, credit insurers will pay billions of Euros in claims. In a recession, these claims escalate quickly. On the bright side, this has allowed them to develop a knowledge base on how to effect collections or recoveries in most of the countries of the world, including North America. Once a claim is filed, underwriters will attempt to collect the debt, and if they are successful prior to a claim payment, they will normally charge a collection fee, although some insurers will actually cover or share in approved collection costs. When a claim is paid, the debt is subrogated to the insurer who will then be responsible for all of the necessary collection or legal activity to recover the amount owing. The good news is you will always share the amount collected, after your share of the outside costs is removed. Think of the time and effort it would take to collect a debt in Turkey or even Mississippi, U.S.A.

Describing five benefits of accounts receivable credit insurance is enough for one blog post. Part II with more benefits will follow soon. 

(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.)