A Trade Secret Comes to Light, Again

Globalization and customer consolidation are spurring renewed interest in trade-credit insurance.

Like well-trained scouts on the edge of a wild frontier, insurers are intensely sensitive to the first signs of trouble. Their massive and sophisticated databases are churning continually with up-to-the-minute financial information on tens of thousands of public and private companies. Armed with data, insurers often are the first to detect even the faintest whiff of financial trouble in the market. Consider the recent experience of some policyholders of Euler Hermes, a multinational insurer based in Paris.

Six months before Enron declared bankruptcy in late 2001, Euler Hermes began advising its policyholders to reduce sales immediately to the energy giant and seek payment on receivables. At the time, Euler Hermes’s clients had $120 million in receivables owed by Enron. Policyholders heeded the warning and aggressively began pressing the energy giant to pay up. By the time Enron filed bankruptcy, Euler Hermes had paid out less than $1 million in claims, says Joseph Ketzner, executive vice president at Euler Hermes ACI, a U.S. unit. “We’re the guys who tap you on the shoulder while you’re driving to tell you the car behind you is out of control,” he says.

Trade-credit insurance is fairly broad in its coverage, but it does have some limitations. Policies typically cover instances in which customers simply can’t pay their bills, such as insolvency or natural disasters. Some receivables that are 90 days past due may be covered as well, depending on circumstances. Policies also cover receivables that go unpaid because of war or currency-exchange problems. However, trade-credit insurance won’t typically cover receivables that go unpaid because of business disputes over defective products or late deliveries.

Insurers are eager to sell more policies in the United States, which could mean a bargain for some finance chiefs. Several U.S. companies, such as Chubb, have jumped into the market recently. Meanwhile, two years of minimal losses have encouraged providers to offer more insurance, in some instances at lower rates, and deductibles are falling. Still, companies doing business with telecoms, airlines, or steelmakers may find it difficult to secure trade-credit insurance because carriers may deem the risks of default on receivables too high. And carriers may set limits that fall short of what clients request.

In the end, CFOs will find trade-credit insurance a complicated business decision rather than a pure insurance play. But some policyholders say that they’re hooked. “Trade-credit insurance is a habit,” says Magellan’s Weiss, “and not a bad one.”

Marie Leone is senior editor of cfo.com.

Watching the Receivables
Companies buy trade-credit insurance for many reasons, and tailor it to their needs.
Risk
38% Insure major accounts*
33% Insure high-credit-risk sector
20% Insure for political or geographic risk
Receivables
45% Insure both international and domestic receivables
32% Insure only domestic receivables
23% Insure only foreign receivables
*Defined as representing 20% of a company’s sales
Source: Trade Credit Foundation

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