Out of sight, out of mind. CFOs rarely give much thought to credit insurance, delegating responsibility for it deep within the finance function. But as insurers withdraw cover in the face of surging claims (see “Bold Claims” at the end of this article), trade credit is now high on the agenda of many finance chiefs. Without it, firms have seen supply chains collapse and working capital requirements explode. Some companies have even gone to the wall as a result.
Late last year, analysts at Morgan Stanley published a primer on credit insurance for clients, highlighting the dire consequences that a loss of cover has had for a host of retailers. (See “Withdrawal Symptoms” at the end of this article.) French and British government officials suggested recently that steps may be taken to underpin credit insurance markets in those countries. In Germany, meanwhile, the national insurance association said that though coverage expanded by more than 15% in the first nine months of 2008, “it is fair to say that this trend will not continue.”
Shaun Purrington, regional director for the UK and Ireland at Atradius, one of the three credit insurers that dominate the European market (along with Euler Hermes and Coface), notes that despite headlines suggesting wholesale withdrawals of cover, his company has cut less than 5% of its portfolio. For companies nervous about losing cover, he recommends that, where possible, CFOs provide the credit insurer with trading data or management accounts, rather than leaving them to rely solely on public information. According to Purrington, “Things are changing so rapidly and data decays so quickly” that anything CFOs can do to “unlock” more timely financial information — about their own companies as well as key trading partners — will improve their chances of maintaining cover.
This is a topic Malcolm McKenzie has discussed with CFOs a lot lately. The managing director at Alvarez & Marsal, a turnaround consultancy, recently met with the finance chief of a consumer products company, who admitted that he “wasn’t aware of any effort to build a relationship with the credit insurer,” McKenzie recalls. But having seen the havoc caused by a loss of cover elsewhere in the sector, “the CFO was going to get much closer to the credit insurer to ensure that the right information was flowing to it and that the insurer really understood the business.”
Of course, sometimes even the best relationship with an insurer may not be enough to secure cover for certain risks. In these cases, McKenzie says, the typical response is to explore forms of invoice discounting or cash-on-delivery, actions that may not be viable if a buyer is in distress. Other measures include convincing a buyer’s bank to write a letter of credit to the supplier’s bank or for the supplier to provide stock on consignment.
Most companies, including the insurers, hope it never comes to this. “Withdrawing cover is the last resort,” asserts Purrington of Atradius. “When we withdraw cover, we can’t charge premiums. If we walked away from every risk, we would be out of business.”