Extra Credit – Fall 2014 Newsletter

Soft Credit Insurance Market Equals Opportunities for Credit Pros

Things aren’t too bad now.  Right? 

Business bankruptcies are down 52.9% in the first half of 2014 compared to the same period in 2009, when corporate bankruptcies hit their peak at 60,837. Many US economic indicators suggest that the economic expansion will continue, albeit slowly. Four percent annualized growth in the 2^ndquarter. Unemployment at only 6.2%. And six years of continued economic expansion.
Given these good signs, why would a company that doesn’t currently insure its receivables think about doing so now?

Here are a couple of reasons savvy credit risk managers are acting now:

1. Dark clouds are on the horizon. Russian–sponsored Ukranian civil war; the increasing uncertainty and shifting geopolitics in the Middle East; economic weakness among the major players in Europe that might reignite another euro crisis; debt levels, labor issues, and margin squeezes that will continue to pressure businesses both in the US and worldwide. Any of these or other issues could trigger an increase in business bankruptcies.As we have all come to learn over time, the economic business pendulum eventually swings the other way – it’s just a matter of when.
2. Credit insurance rates are at all-time lows, and underwriting risk appetite is high. Excellent programs are currently being written for new and existing buyers of credit insurance. Current market conditions present an excellent opportunity to mitigate your trade credit and political risk now, even locking in multi-year programs at current low rates, before the current economic climate changes.

By protecting a company’s balance sheet against bad debt loss, credit insurance is an excellent financial tool in any economic environment.  It is especially valuable to have during an economic downturn – now is a great time to buy credit insurance while it is available and priced low so that you have it in place before the market turns.

If you are interested in exploring this further, please contact Trade Risk Group by phone at 1-877-442-7475 or email us at trgadmin@traderiskgroup.com.

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Temporary Reprieve for Ex-Im Bank

In mid-September, Congress approved a short-term extension of the US Export-Import Bank until 6/30/15 as an attachment to a stop-gap spending bill. The Ex-Im Bank was created in 1934, and provides direct loans, working capital guarantees and credit insurance to US exporters. The debate about whether or not the Ex-Im Bank should remain in existence has been long simmering, and accelerated in May when powerful House Financial Services Committee Chairman Jeb Hensarling came out aggressively against renewing the Bank’s charter, set to expire September 30. The debate primarily pits the “free market purists” within the GOP against the party’s “business wing” and against lobbying powerhouses US Chamber of Congress and the National Association of Manufacturers.

What does this temporary extension mean?

On one hand, it could be seen as a prudent way to take this politically charged issue out of the mid-term election picture, encouraging a more objective debate regarding the Bank’s mission and possible reforms.

On the other hand, it is being seen by the Bank’s supporters as an intentional strategy by the Bank’s opponents to lock in enough support to kill the Bank in June.

If you currently use the Ex-Im Bank for credit insurance, you may want to proactively investigate using the private sector for coverage instead. If the Bank does not survive in June, a significant number of companies will need to move to the private market, and capacity could be constrained. The can has been kicked down the road for the time being, but the debate continues on.

Growth of Credit Insurance Means Better Deals for Policy Holders

The stability of the global economy  depends on smooth trade transactions–including national and international payment systems. While prepayment may be the preferred transaction type for the seller, it also limits sales opportunities. This is especially true in the sales of raw materials, like metals, where buyers often require longer credit terms (sometimes up to 150 days) to allow for manufacturing times.

Because the extension of credit to unknown, overseas (or even domestic) customers for longer terms greatly increases a company’s risk exposure, more credit risk managers are turning to credit insurance to underwrite sales to clients at home and abroad.

Globalization Improves Credit Insurance Policies and Services

The globalization push of the 1990’s not only allowed for the rapid growth and consolidation of the three primary multi-national insurers (Euler Hermes, Atradius and Coface), it has also resulted in the collection of an enormous quantity of company data that is not otherwise available.

While rating agencies collect similar company data on large corporations, credit insurance carriers must examine the credit worthiness of  small to medium size entities (SMEs) worldwide in their day-to-day underwriting. As a result, they have the accurate, up-to-date information on just about every company worldwide. The information they gather is also available to their policyholders. That service alone is often worth the insurance premium.

Credit insurance carriers also offer added-value services like credit management, collections, and risk advice for countries, sectors and individual companies.

Market Stabilization and Improved Underwriting Reduces Premiums

As a result of the financial crisis 0f 2008, claims temporarily rose to 85% of the total premiums paid. The ratio has since returned to a more normal average of 40% to 49% of premiums paid. This is due, in part, to a more transparent and reliable underwriting system that can better predict market changes. These new predictive-models have allowed insurers to offer non-cancelable limits that guarantee credit limits for a set period of time. Credit insurers have also invested in automation that vastly improves timely payment of claims to better help customers avoid down-time.

With  more accurate company information, improved  policies and faster claim payments, the popularity of credit insurance has risen worldwide. Credit insurance’s total insured exposure is now at a record-setting $2 trillion. Customer retention rates are at a record high and policy premiums have dropped 4% below pre-crisis levels. As a result, more companies in the US and world-wide are relying on the relatively inexpensive credit insurance to help guarantee their financial stability.

To get a free quote on a new and improved credit insurance policy, please contact Trade Risk Group at 1-877-442-7475, or email us trgadmin@traderiskgroup.com.