UNDERSTANDING CREDIT INSURANCE
Global Banking and Finance Review interview Andreas Tesch Chief Market Officer of Atradius Credit Insurance N.V. to find out more about credit insurance.
Hi Andreas, thank you for taking the time to speak with us. Please introduce yourself and Atradius Trade Credit Insurance
Atradius is the world’s second largest international credit insurer. Our products and services can be accessed through more than 160 offices in 50 countries across 6 continents. As Chief Market Officer of Atradius I am responsible for the commercial success of the credit insurance business of Atradius worldwide.
How does credit insurance work?
The simplest way to explain that would be to say we help identify non- creditworthy companies. When a customer of an insured seller does not pay its invoice credit insurance pays the seller and helps recover the debt.
But for most companies using credit insurance, this is only the bottom line. Like with all other types of insurance, we underwrite risks. The risks that we underwrite revolve around a buyer’s ability to pay for the products and services they buy on credit terms (payment terms other than cash on order). This can include cash on delivery of specialized products or services that the seller would have difficulty in selling to another buyer because of customer specific details in the product. Atradius analyses a wide range of factors related to the buyer than assesses the likelihood that the buyer will be able to pay the invoice. This information is then used in determining the amount of credit that is considered to be manageable by the buyer and ultimately the amount of insurance that can be offered to the seller.
What are the common misconceptions about credit insurance?
Two of the most common are that credit insurance is only for large companies and that it is expensive. Through credit insurance larger companies have the clear benefit of being able to maximise their credit management focus on key accounts without worrying that other accounts are being neglected. As the volume of customers and receivables grow, there is a clear benefit for companies of all sizes as the amount of risk climbs exponentially. With credit insurance you can keep a particularly close eye on your biggest risks while your credit insurance keeps you safe on the smaller debts. But smaller businesses also benefit from the access to credit information on their buyers that would be difficult for them to access and burdensome to assess. It provides them with the security of insurance that can save them money and makes it easier for them to manage their balance sheet.
This leads us to cost; this will vary based on a number of variables. Many companies, especially smaller ones, look at the cost strictly as an expense and underestimate the value that they will receive. The actual outlay on a whole turnover policy is usually much less than 1% of your annual sales but you normally have a positive return on credit insurance well before your claims reach the amount you pay in premiums. In addition it can improve your internal financing, your customer financing, increase your access to external financing, and improve your debt collection.
Why is Trade Credit Insurance better than Letters of Credit?
Letters of credit and credit insurance are similar in that they both shift the risk of payment default to a third party. However a letter of credit is specific to one transaction and ties up a portion of the buyer’s credit making it expensive, burdensome and unappealing for them.
Credit insurance is more flexible covering anything from a single transaction to the entire portfolio of receivables. The burden on the buyer is providing up-to-date information about its ability to pay. The seller (insured business) has a tool for protecting all of its receivables that is affordable, easier to use than letters of credit and that puts them in a better competitive position with the buyer. It also enables the seller to spend more time finding new customers as the credit insurer does most of the work in assessing the creditworthiness of its buyers.
What are the current trends you see?
Globalisation is a big and continuing trend. International trade continues to grow in importance. The recessions over the last six years, especially across Europe, have demonstrated the value of a good export element in your sales strategy. Strong exporting countries like Germany fared better than countries with a heavier reliance on domestic trade like the UK and Italy. We are expecting insolvencies to remain high across most key European markets in 2014. A diversified customer base can help to limit payment default risks.
But exporting is not the only way businesses are broadening their geographic footprint. Like Atradius many businesses are opening offices or factories in their target markets. In many cases, this offers a stronger platform from which you can build business in the country. Whether our customers are exporting or have a physical presence in multiple markets our goal is to support them where they need us. We will be expanding our presence in a number of countries like Turkey, Russia, Thailand, Malaysia and Indonesia this year to continue to meet the growing needs of the market. While Asia is the biggest focus of expansion in 2014, we are also in discussions to expand our activities in North and South America.
Atradius has a strong global presence in 50 countries. What are the challenges and benefits of operating globally? How do you maintain strong client relations locally?
Atradius believes you can support your customers best by being on the ground in the markets that they need you in. Therefore, it has always been our goal to be where our customers need us and our expansion plans have been focused on achieving that goal. The challenges here are that our customers may need service and expertise in multiple languages, around the clock. They also require consistency across their markets but customisation for each market. Essentially we need to deliver the best of multiple worlds.
Our clients have dedicated account representation at the point of contract, but also have Atradius support on the ground in 50 countries; which normally covers all or almost all of their business and customer locations. In cases, where our client requires account representation, not just service, in multiple countries, we are almost always able to provide them with this support. No matter who they reach at Atradius, the contact will have up-to-date client information because of our international information platform. In addition, all customer contract and portfolio information can be generated in just about any language the customer needs.
Do you have any new products or services coming in 2014?
Atradius is constantly looking for ways to improve what we offer and the way we work together with our customers to ensure they are receiving the best products and services we can offer. A number of the improvements we are introducing are focused on SMEs.
In the Netherlands we have introduced two new products for SMEs, InfoZeker and MKBZeker. Many SMEs have difficulty finding ‘easy to use’ information about the creditworthiness of their buyers and therefore place a higher value on information than on insurance. InfoZeker provides these businesses with easy to use information at an attractive price. Smaller businesses often have smaller invoices. MKBZeker offers SMEs flexible cover terms on up to € 15,000 of the annual invoices of each of their buyers. These two products better fit the credit management needs of SMEs, providing ‘easy to use’ solutions with flexible cover and collections options to match their business needs.
In Spain we have introduced CyCred a new online credit management enhancement that helps businesses find new sales opportunities. It can help our customers grow their business more effectively.
Last year we also introduced early cost assessment which, shortly after a claim submission, generates a letter to the creditor informing them about what their claim reimbursement will be (if everything remains the same as submitted in claim) and approximately when they will receive it.
Thus far this year we have introduced a program called new cover opportunity. The program informs customers when previously high risk buyers have improved their creditworthiness and cover is again available on them.
We are also introducing customer reports that provide a whole new level of account information to help businesses better manage their receivables portfolios. Improving our customers’ experience is important to us and we will continue to introduce product and service enhancements that do so.