Dispelling The Myths Around Credit Insurance
While there is never a bad time to purchase credit insurance, many organisations feel, often unjustifiably, that it is not suitable for them. In our latest bulletin we want to address some of the common misconceptions associated with credit insurance.
As with many insurance products, credit insurance continues to evolve in response to customer demand for more sophisticated risk management controls and mitigations. The last few years have seen new entrants to the market bringing increased capacity and risk appetite. We have also seen the development of new products and innovations such as Top Up Cover, Non-Cancellable buyer credit limits and the delayed effect of credit limits adjustments.
Premium rates are currently at very competitive levels with most Insurers reporting that they are running overall risk exposures at levels approximately 25% higher than they were a decade ago. Arguably there has never been a better time to purchase credit insurance in terms of value for money and as our last bulletin ‘The year of uncertainty’ highlighted, there are strong reasons to suggest that businesses should be prepared for a period of socio, economic and political turmoil.
All my customers are financially strong and I know them well
- Can you ever really be sure of this? Annual reports and accounts are usually 12 months out of date by the time they are published, status agencies do not measure solvency and past reputation and performance is no guarantee for the future.
- What about your customers’ customers? You are, to a degree, reliant upon the complete supply chain including trade sector factors that you cannot influence. In fact, company failures often arise due to the demise or loss of one of their major customers.
- Most insolvencies are unexpected and leave at least some creditors unpaid – can you guarantee you won’t be affected?
- No matter how good your credit management procedures are there are no guarantees that goods or services will be paid for.
- Debtors usually represent the largest single element of company assets and are vulnerable without any protection.
I have never incurred a bad debt
- Suffering an unexpected major bad debt is a frequent cause of business failure and can seriously dent a company’s profitability. Past experience is no guarantee that it won’t happen in future - particularly in the prevailing ever changing economic and political environment where we now live.
- In addition to covering bad debts, credit insurance is also a valuable tool in enabling you to monitor your customers in “real time”. Insurers have extensive proprietary databases supported by teams of risk analysts who pro-actively visit and talk to companies about their performance. This complements existing credit management procedures.
Insurers cancel cover or reduce limits when the going gets tough
- Since the last major economic downturn in 2008/09, Insurers have responded positively to this criticism. It is also important to note that when Insurers withdraw cover that it is only for future deliveries/services from that date forward, it is not retrospective and they will honour any contractual obligation to continue to trade provided the appropriate cover has been purchased.
- Policies with Non-Cancellable limits have also been introduced and are widely available, therefore removing the risk of the Insurer cancelling cover.
- In addition notice of cancellation/reduction is now commonplace with 30-60 day periods applying. The main purpose of this is to give the client and insurer time to fully explore and understand the reasons behind the decision and also to grant the client time to prepare for the removal or reduction in cover.
You have to insure everything
- There are many different options and structures of policies available so it may be possible for you to insure part of your ledger or even single buyer risks. It is also possible to insure a selected number of key risks.
Credit insurance is too expensive
- Premiums remain comparatively low due to the competition among Insurers and the risk appetite and capacity that they and other reinsurers have.
- A £100,000 bad debt for a company operating on a 5% margin would require them to generate an additional £2 million of sales to make up for lost profits. Are you confident that your business could do this?
- As with most things the costs need to be measured versus the benefits. Credit insurance offers more than just peace of mind, it provides customer information and market intelligence as well as cash flow protection.
Credit Insurers only insure the good risks
- Capacity in the market has never been greater. Insurers are covering more risk than ever before - in fact, they have increased their exposure by more than 25% in the last decade.
- Insurers continue to regularly pay claims - The latest ABI figures show credit insurers paid over £4m claims a week last year.
- Credit insurance is designed to offer protection against a potentially creditworthy risk which suddenly becomes a distressed one. There is increasing evidence of a trend of large unexpected business failures occurring with little or no warning.
Credit Insurance is too complex and a burden administratively
- Most policy wordings have been simplified in recent years to ensure ease of compliance and to embrace a “plain English” approach.
- There are now policies where only a credit agency report is needed for insurance justification.
Insurers aren’t able to cover all of my customers
- Capacity in the market is extremely high and acceptance rates of over 90% are now common.
- Insurers are now much more willing to cooperate with each other and products exist where an insurer can ‘top-up’ another.
Download the Dispelling Credit Insurance Myths.pdf