Credit Insurance: A Global or a Local Policy?
For most companies in Europe, credit insurance is a well-known method to secure outstanding debts, whether for local sales or cross-border. It is maybe more popular in Europe than anywhere else. One can question whether this is the best way to safeguard cash flow. There are almost as many pros as cons but one element is for certain – losses are spread over a long period of time, and so a certain percentage of the cash flow is guaranteed. I also understand when a company has several claims one year, the premium will increase for the next year. Bear in mind, however, it also costs money when you have to go to the bank to get a loan because not enough debtors are paying their invoices.
Last year several people asked me whether they should go for global cover by a single credit insurance provider or maintain their regional structure with cover by several providers in the respective countries. Although I thought this was a subject which was dealt with in the late 1990s, the number of people asking this question gave me reason to write this article – a more practical insight on how the process can take place. As this is my personal approach to the subject, I have also asked two large credit insurance companies to give me their view on whether to go global or stay local (see below).
I work with a multi-national, which in the 1980s had several credit insurance policies. These were policies with insured turnovers of between 75m euros and 900m euros. Some policies covered only a certain product line over more countries while others covered a multiple product line in a single country.
Each policy had specific elements which made it more difficult to compare with the others. The same counted for the personal relationship between the insured and the local insurer.Although not everybody in the company was in favor, we decided to take an overview of the policies concerned and compare the coverage given, the quality of credit limits rendered, price, claims handling and procedural elements.
The conclusion of this little study was while one insurer maybe had a better pricing structure, the other was offering a better coverage – in fact we found no real major differences. One element stood out however and that was the bigger the policy – turnover/premium-wise – the more influence the insured had on negotiating the conditions. This led to the idea of creating one policy covering all product lines, within all countries – a so-called global policy.
A single policy was welcomed with mixed feelings within the organization. People who had handled their credit insurance policy for many years would have to hand over to others operating more centrally but who were less familiar with the specific problems of the business or country. Next they felt they were going to lose an external relation, a contact with whom some of them had built up a personal relationship over many years.
This obviously led to many discussions. The pros and cons were discussed more than needed but this should be regarded as part of the process as emotions are involved. As all business units concerned wanted to improve the old situation, there was at least some common ground.
To take the decision to go ahead and see what the market had to offer was not difficult. However, this thought did not mean a principle agreement on the acceptance of the offer was made. In a process like this, a good broker is very helpful, but needs to have the expertise, especially when it concerns a major policy with many different interests and different units behind the insured’s name. I have been dealing with credit insurance since 1979. At that time credit limit requests were still typed and sent by mail.
Because of my practical experience I, in time, also slipped into the role of in-house broker and kept this role for many years. Therefore we did not use an external broker. Finally, we decided to talk to two of the major credit insurers – companies which showed eagerness and were said to be flexible. They had to prove this during the upcoming discussions and negotiations. It again took time to update them on all the details, to clarify what the deal breakers and makers were, and to discuss the ins and outs of the markets we were in as well as the customer profiles. Systems were tested, credit limits discussed, policy conditions debated and policy text altered.
Finally an abbreviated version of the policy was presented to the business units by the credit staff. This showed all the critical elements, all conditions, all pros and cons, in fact everything which mattered. This was done to focus internally on the important issues and not be distracted by the rather complex policy text in certain areas.
The offer on the table was much better than the set of individual policies before. Coverage was more than good, in some cases even better than before, the premium was much lower, the process newly streamlined – a perfect opportunity to also update organizational structure and optimize systems. It was a combination of central advantages and local input. In the end, the business units concerned were convinced by the facts – conditions and coverage – and by the guidance and guarantee of the credit staff that overall the optimal result was going to be achieved.
Each of the units had the option to end their participation after just one year. The credit staff had to make sure non-performance could never be the reason for ending a policy. In this case it was a credit insurance policy with a turnover of over 2 billion euros. We discovered size does matter – it creates more attention and opportunities. The business entities and countries involved were very happy with the product on the table. The final result was what counted and it was a mix of conditions and the interpretation of the rules which made it work.
The same issues also exist for companies of a much smaller size. Take, for example, a company having perhaps three policies in three different countries, each with a turnover of about 5 million euros. Combining these into one policy gives a turnover of 15 million euros and makes it much more attractive to an insurer and thus allows the company a better bargaining position.
One thing you have to bear in mind is an expert needs to guide the process before and after conclusion of the policy. Beforehand, he or she needs to make sure all internal worries are addressed and covered and, afterwards, ensure the communication between the insured entities and the insurer is just as quick and effective with the maximum result possible. Not paying enough attention to somebody guiding this process on a daily basis will diminish the results and ultimately cause this policy to fail. I am in favor of going global. In my view there are certainly many more positive than negative elements in this choice.
This doesn’t mean it is going to be easy to convince the parties concerned within the company. It is vital you spend some quiet time making a proper analysis of what you have, think clearly of what you need to have in the future and then discuss in detail what the insurer can offer you.
At this point, I would also like to draw your attention to another option rather than just going for one of the big names in Europe. Consider the possibilities of another credit insurance program, one based on the internal credit management system – called a credit management insurance by some – a product which can be found with several insurance companies in Europe as well as the US. In this case, the company itself establishes some 95 percent of the credit limits. A lot of the work is done in-house, so there is a higher cost at this end, but premiums are very different too.
In the end it depends on which kind of business you are in, the numbers being talked about, the risk concerned and how the organization is set up. For some among us this might give an even better answer than a global policy with a more standard credit insurance policy.
Christine Baudinet, spokeswoman for international credit insurer, Coface, says: “An international group may prefer a single company policy where the parent company requires a complete centralized control over all its foreign subsidiaries. Such an approach may be justified when the local subsidiary has only just been established and does not yet have its own credit management team. However, the approach could also be seen as too rigid since the centralized policy subscribed to by the mother company may not have the flexibility or offer the equivalent services of a local insurance contract.
“Drawbacks include multi-currency problems – conversion rates need to be fixed because of currency depreciation – as well as local difficulties in case of claims recovery. The alternative – allowing each region the freedom to negotiate its own policy – may ensure local buy-in, the delivery of a contract in local law, language and currency and, above all, full local service. Nevertheless, there are certain drawbacks with the local solution, including a higher insurance costs for the group, since there are no economy-of-scale advantages. In addition, any number of credit management discrepancies may result.
“The offer may involve one single product, or cross-selling solutions which are often required by international players. Whatever the choice, a master agreement is concluded with the parent company, specifying common provisions and advantages for the whole group. Upon conclusion of the first step of negotiation, each subsidiary may sign a contract locally, according to the initially agreed special arrangements.”
“Foreign entities will be delivered homogeneous credit insurance contracts adapted to local law, languages and in local currency. The contract should be modular, matching the type of cover and services required by each subsidiary. Furthermore, it provides for further reporting to the parent company, thus reconciling the adaptation of the contract with the evolution of the group at the end of each insurance period.”
Gary Hicks, spokesman for international credit insurer Atradius, says: “Businesses now operate in a global economy, in which the prosperity of individual countries and companies are closely linked. More open trade, rapidly developing emerging markets, free movement of capital, globalization, advances in information technology and instant communication, including ecommerce, are developments which, taken together, are causing the market to change at an almost frightening rate. In addition, financial services are being radically reshaped, with the wave of acquisitions and mergers continuing to roll out over Europe and stronger alliances and mergers developing rapidly.
“At the same time, businesses face new challenges in global trade – some unexpected, such as the sudden collapse of the world trade organization talks at Cancun – as the world risk map is continually redrawn in the current unpredictable and volatile economic situation. So much has happened, and is happening, which affects the economic and trading climate in which credit insurers operate, that they have responded since the late 1990s by developing much more flexible structures and tailor-made products.
” ‘Thinking globally, acting locally’, though now regarded as a cliché, I think still rather accurately sums up the new approach. Examining trade risks in much greater detail, assessing them faster and managing them more efficiently is essential in this era of globalization and ebusiness. Such trade risks are now increasingly volatile, and often appear unexpectedly and, given the inter-dependency of trade sectors and economies, impact quickly worldwide.”
“Crises such as BSE and the foot and mouth outbreak in the UK dramatically demonstrate that, in the modern world, no man is an island. This is why solutions for multi-national corporations operating across national frontiers require support on a global scale, integrated systems and guidelines to provide for consistent underwriting as well as language, currency, law and service flexibility.”
This article appeared in the March 2004 issue of Credit-to-Cash Advisor: