Trading Through Rough Waters

When an Australian financial services firm suffered a series of significant losses within a one month period in 2014, it caused serious turmoil for not only the company but also the multiple partners invested in the business. As a result of recurring non-payment of fees from a number of customers that had become insolvent, the business’s losses were approaching $800,000.

The risk of customer insolvency is perhaps one of the most unpredictable exposures to a business. Any business that provides products or services on credit terms is potentially exposed to this risk of non-payment. As companies extend their operations and reach nationally and internationally, many have found that using credit insurance to protect accounts receivables from unforeseen losses due to non-payment can be critical to the success of their business.

Brad de Plater, National Manager of Trade Credit at Marsh, explains that unexpected bad debts caused by insolvency, non-payment or political events, can severely cripple even the most prudent business operators.

“Businesses can be in for a shock if they simply rely on a customer’s payment history to be the predictor of its reliability. Within the complexities of the trade environment, we have seen insolvencies and defaults triggered by a range of issues, including a loss of bank financing, bankruptcy as a business strategy or changes in foreign government regulations.”

In the case of the financial services business mentioned above, Marsh was able to conduct a detailed review of the company’s operating processes to demonstrate to the insurer that the business’s internal credit management procedures were correctly observed.

Ultimately, the insurer agreed to honour the claim for a settlement amount of approximately $800,000. Without the cover in place and the negotiation of a successful outcome, the business would have been left to absorb the losses entirely.

According to Brad, there has been far greater awareness of the benefits of trade credit insurance since its heightened exposure during the credit woes of the Global Financial Crisis. Since the GFC, Australia has seen the high profile collapse of household names such as construction giant Hastie Group, fashion house Lisa Ho and, more recently, the Pie Face chain.

“During the GFC, many businesses found themselves caught up in the surge of insolvencies because they couldn’t be paid by customers. Some sellers were only able to recover a dividend of 5 cents in the dollar three years down the track. It’s a situation that cripples cash flow.

“With trade credit cover in place, the policy can provide sellers with up to 90% of their total outstanding amount within 30 days of the insolvency occurring”, said Brad.

As corporate insurance premiums across the board are continuing to decline, trade credit insurance has also become more affordable and accessible. Brad notes that the specialty line of insurance has experienced a 20% uptake over the past 12 months.

“It’s more affordable now than it was two years ago as a result of the competition among insurers. Businesses have seen the value and are taking advantage of the current pricing trend and we have seen this manifest in a spike in enquiries.”

Myths and Misconceptions

Brad responds to two of the biggest misconceptions around trade credit insurance:

Myth 1: “It is expensive”

Reality: Premium rates for trade credit insurance typically range from 0.15% to 0.40%, which is considerably lower compared to other lines of insurance such as property and liability. In many cases, the low cost of trade credit insurance can be incorporated into the cost of goods or services so that the customer is effectively subsidising the policyholder for most, if not all, of the cost of the premium.

Myth 2: “You need to insure your entire book”

Reality: Generally, the structure of a trade credit insurance solution can be tailored to your business’s specific needs – whether it be insuring your entire ledger, or a select group of customers under a “specific accounts policy”. In short, whatever structure the company desires to suit their needs can generally be accommodated in today’s trade credit insurance market. Taking advantage of the flexibility in the market and zeroing in on where a company’s credit risk hot spots are is the key to obtaining cover for the unforeseen catastrophic non-payment events.