Credit Today online

I'm interested in hearing members opinions/experience of Credit Insurance in the current market.

If you use Credit Insurance are you finding the underwriters more open to writing marginal risks (obviously where information is available) than last year? or what issues if any do you find yourselves facing in terms of your policy/requirements and service levels.

For those who do not insure, what is your perception of the product, have you considered insurance or what alternative risk mitigation do you rely on?

Thank you in advance for any feedback.

Kind regards,
James Earley

Despite the best efforts of their PR machine which would have you believe there was no change to service levels find they are still not prepared to have anything to do with many business sectors no matter what information you supply them with. While they will not admit it seems they are totally dependant on scoring systems with little or no ability / knowledge within their business with which to make a commercial decision - computer says no.

There's not one single aspect of your response which is correct Andrew

Whilst algorithms are used for smaller limits, all of the credit insurers employ teams of risk underwriters/analysts who speak directly to buyers and often have information which is right up to date - this is a key benefit of credit insurance.

Communication could be better delivered in some cases, but cover is usually declined/withdrawn where there is a lack of information or co-operation on the part of the buyer. So, whilst the 'computer says no' you need to consider and understand the reasons why.

Undoubtedly acceptance levels are lower running at an average of 60% approx. compared with 80%+ pre financial crisis.

Good reply James and great to see you back in action....

Am always left wondering exactly what the information which is right up to date actually is.

Before considering a customer for a credit limit where the insurance has been removed we look at 2 different credit reference bureau data which includes payment information. If this passes our benchmark would then seek credit insurance to look at again supported by latest financial info we have obtained from customer - mgt a/cs, mgt a/cs to match year end, budget projections, bank facility letter, confirmation of contracts held. Send this in to have declined due to confidential information held by insurer !!
We are then unable to continue to offer trade terms due to the requirements of the insurance. Customer then goes bust insurance company says told you so not that they caused it by removing credit to an otherwise sound business.

Have a good friend who works in the underwriting department of one of the biggest credit insurers. Stories he tells of management by crisis / fear and inability of an underwriter to make a sound reason based decision which over rides the computer are scary.

Forgot to say that now we are delaing with a limited number of credit limits being removed rather than the deluge seen early last year. From this point of view position is better. Would be of more assistance if the credit insurers contacted the customers for any information they required to continue cover before cancelling the cover though.

I still have severe reservations about the credit insurance business. Yes there are some businesses out there that may benefit. However there are many things to consider. The cost of administration. The fact that credit insurers are now insisting (or are about to) on using specific credit reports that cost upwards of double that of many other equally good reports. Then of course there is the old chestnut. WHich is..... If cover is pulled the client cannot do business with that company until the entire debt is paid in full. Totally against how most credit managers would react. What better way of driving a business into closure than by not allowing them to continue to buy stock even if they were paying for it up front. Ridiculous to say the least.

Reforms to policies and agreements are needed to lend credit insurance to the 21st century.

Ron

Eddie, thank you and hope all is well with you.

Andrew, communication is key and you are doing the correct things in trying to obtain up to date figures from the relevant buyers. The risk underwriter should be able to at least give you a heads up on whether they require just up to date financials or if there are other issues (without breaching any confidentiality) which are influencing their decision. At least the figures will give you a better basis on which to make your own commercial opinion of the risk – the policy shouldn’t prevent you from making a decision to trade uninsured, although I know that some companies operate that as a rule, but I would question the value they place on their credit managers judgement!

The nature of confidential information is of course down to the individual cases but it could – for example – be based on discussions with shareholders/banks/suppliers, and isn’t always based on pure financials.

A point to bear in mind is that fundamentally, underwriters do want to write risks where possible, that’s how they earn their premiums after all.

Ron, the insurers usually specify in their policy wordings that financial reports (for setting of discretionary credit limits) have to be from an acceptable source. Those sources vary by underwriter but that’s nothing new.

To clarify your second point, if cover is pulled then you can continue to trade but uninsured of course. If on the other hand the limit remains in place but the buyer has simply gone too far overdue, cover usually comes back on once the account is up to date (within the acceptable overdue period which is typically 30/60 days). I’m happy to answer any specific query if you have an issue if you PM me.

Some useful points coming out of this thread, thank you for taking part.

Sorry James.

That is simply put not the case on being able to continue to trade. Of all of the rules and contracts I have seen the contract specifies that ANY money received must be allocated to the oldest debt first. Even if it is not due yet. This means that the insurers liability reduces leaving all of the risk with the supplier, even though a premium had been paid.

Ron

Ron,

Sorry, that's another issue altogether.

You are correct in that monies received are allocated to the oldest outstanding debt.

It's only an issue if your buyer defaults, and wants futher supplies/services of course and you then have to consider if it's prudent to continue to trade on any terms.

I have been able to negotiate exceptions in individual cases as part of an overall repayment strategy, however.

Quote: RONBIDWELL
Sorry James.

That is simply put not the case on being able to continue to trade. Of all of the rules and contracts I have seen the contract specifies that ANY money received must be allocated to the oldest debt first. Even if it is not due yet. This means that the insurers liability reduces leaving all of the risk with the supplier, even though a premium had been paid.

Ron

Ron is correct.
In the old days it used to be referred to as 'right of offset'....nowadays all policies state that 'incoming monies are allocated chronologically, oldest debt first'.

In the circumstance discussed here it's harsh but then it would be equally unfair (ie. against the interests of the insurer) if the supplier was in a position to simply 'sideline' an old debt, continue trading, with payments against new supplies keeping the uninsured debt down.

What in reality tends to happen is that a 'salvage disclaimer' is sought, on the basis of an agreement which suits both parties...supplier can continue to deliver, on an uninsured basis, with part of the payments received allocated against old debt and part against new.

I agree it would be unfair to prefer one to another. However in such cases as where payment terms are say 60 days and payment for an account is not due for another 30 days. I have known that in order to obtain goods the customer has been foreced to pay for all of the oustanding debt even though it is not yet due. AND up front for the goods they currently want as the supplier is saying no credit as there is now no limit. This severely impacts on customers cash flow and in a lot of cases will mean folding as they simpy cannot afford it.

Ron

Ron,

In terms of how a credit insurance policy works the scenario you have outlined is not quite correct.

Assuming that they had defaulted on one or more invoices/due dates, the buyer would still be entitled to have their credit terms on outstanding invoices which were within terms, but cover would not be reinstated until such time as the account was back up to date i.e. within the allowed period beyond due. A supplier can of course impose stricter requirements on their buyers in such circumstances .

Obviously if the buyer has defaulted but yet still wants further supplies the circumstances need to be considered and an agreement negotiated. The insurer wants to avoid bad debts as much as the supplier so if a sensible proposal is tabled they are often agreeable, but you have highlighted a very important point which is that without the insurers agreement, any payments received will be allocated against the oldest debt, so if as sometimes happens, a supplier takes up front payments in order to continue supplies in the event of a claim the insurer will offset those payments against the oldest debt.

If the insurer has pulled the limit completely then no further sales are covered until such time as cover can be formally reinstated (which will of course depend on the specific reasons why cover was removed).

This thread's getting very technical!

James

Hi James. I have experienced first hand situations where payment was not due for goods purchsed in Jan. Payment terms where 90 days. Customer had ordered £100,000 of goods spread over four months. Supplier ordered total quantity to take advantage of a much bigger discount. Credit cover was pulled and supplier was advised no further cover. Customer offered to pay for the second months supply of goods up front. However they were told they would have to pay the £25,000 they owed (even though not due) AND the £25,000 for the second months supply. This was not possible. What eventually happened? The customer went broke because they could not purches goods to enable continued supply. Unfortunately the supplier also went because they could not pay for the £100k of goods that they had only sold £25k worth. All this happeneed because the credit insurer stuck to their guns and insisted that ANY money received had to be allocated to the oldest debt irrespective of what it was actually paying for and if the supplier did not do that, then their original £25k of sales would not be insured even though they had paid a premium.

Now that is not good.

Ron

Hi James

I agree that this thread is getting rather technical as we are into the finer details of operational aspects of credit insurance.

These threads demonstrate just how complex credit insurance can be when at the front end of managing and complying with one’s policy.

I share the same view as Ron especially in respect of the scenario he outlined. It is a scenario that I have experienced more than once with bitter consequences.

That is: Cover gets pulled and:

1 In effect the supplier cannot supply further without doing it on uninsured open credit terms.

2 The customer has little chance of securing vital supplies from that supplier. Even if the customer is able to propose payment on delivery, it is not possible as all payments have to be allocated to the insured debt first. So in effect the customer not only has its credit facility terminated, to secure further supplies it faces having to settle debts that are not even due as well as having to pay up front for the new supplies.

Combine 1 and 2 and as Ron mentioned previously, the customer is very likely to find itself unable to continue to trade. And the sequence of catastrophic events in such a scenario tends to happen very quickly.

It has been mentioned that there is scope for negotiation with the insurer in such a scenario.

Regrettably in my experience with credit insurers, the scope for negotiations proved completely futile.

Regards

Craig

Such a case is tricky and difficult but ultimately I guess it depends on you and what type of policy you have. It can either be one that insures you as a supplier or your customers.
It is extremely difficult to gain the support of insurers where a client in default seeks time to pay but at the same time requires further supply. Having said that, I had success with two others suppliers some years ago where otherwise the insurer would have faced a signficant liability. On that occasion (and it took a lot of negotiation) we managed to hang onto endorsed cover on the buyer while we collectively worked a rescue plan and timetable (this last almost a year with regular monthly meetings). We still had to apply payment toward the oldest debt but at least we had cover on continued supply. we in turn agreed to take our own extra risk for a period. I'm glad to say we saved the company from failure and it has been sold on twice since then and remains a major player.

"Demand surges for credit insurance - 26/04/2010

Demand for trade credit insurance has significantly increased due to the financial crisis, according to the association that represents the industry.

The International Credit Insurance and Surety Association (ICISA), claims that policy renewal rates for credit insurance are currently at ‘around 80 to 90 per cent’, with demand expected to increase due to emerging markets and a prediction that these markets will increase worldwide GDP."

Classic case of a spin doctor in the marketing department of the credit insurance industry attempting to put out another headline which does not quite align with what even the story itself says. Perhaps it is a result of spending too many years as a credit manager having to read what is actually going on through the picture which is provided however even some of my more creative customers would have thought twice before telling me that a 20% drop in sales was a surge in demand!

He's talking about 'renewal rates' not 'sales'
To arrive at 'sales' you have to add new business to your renewals
If renewal rates are 80-90%, you add new business or 'sales' to those figures and you're going to be very much seeing big rises in demand...

One of the major insurers just had a record first quarter on new business. If their renewal rate for the same quarter was anything like 80-90% (which it was) then...well....you do the maths

If I saw sales from existing customers fall to 80% of what it was for the same period in the previous year I would have to wonder what was going wrong. Surely if customers were pleased with the service and cover they received in the previous period they would renew?