Larger Customers, More Risk
Suppliers in many industries are selling to fewer customers than they were six months ago. The COVID-19 pandemic and ensuing economic downturn have left a smaller number of companies standing, let alone in a position to keep placing orders. Even suppliers whose total revenues are growing may be doing business with not as many customers as before.
Customers who are still buying tend to be larger companies with the market share, critical mass, and financial flexibility to weather the storm. Naturally suppliers want to keep selling to their key customers, but these circumstances are concentrating credit risks. Exposures are being heightened further by large customers insisting on longer payment terms: 90 days is the new net 30.
In the past, suppliers may not have been concerned about a large customer’s ability to pay. When they were selling to a lot of different companies, accounts receivable from any individual customer may not have commanded much attention. But now a single customer or a few key buyers may make up a big chunk of a supplier’s cash flow, and that represents an existential risk.
No matter how creditworthy a large customer may appear to be, if they were to default it would put the supplier out of business.
Trade Credit Insurance
Companies purchase insurance to protect themselves against catastrophic risks. While it is unlikely that a business will burn down in any given year, companies buy fire insurance every year because the cost of a loss would be devastating. Likewise for liability insurance, workers compensation insurance, auto insurance, and—these days—cyber insurance.
Accounts receivable need to be insured just like a company’s other assets, especially when there’s a concentration of sales to one buyer or a few key customers. This kind of coverage is called trade credit insurance. Credit insurance policies protect accounts receivable against virtually all nonpayment risks. If a covered customer defaults, and the debt can’t be collected, a claim can be filed for indemnification.
Credit insurance is a sales tool that helps companies win more orders and it’s a financing tool that makes accounts receivable—even risk concentrations—more attractive to banks and other lenders.
As with other kinds of commercial insurance, the principal reason for obtaining credit insurance is not to profit on the premium by incurring losses and getting claims paid. A credit insurance policy pays for itself by giving suppliers the confidence to extend competitive payment terms and the opportunity to keep doing business even in difficult economic circumstances.
Coverage in COVID-Time
Demand for credit insurance has been surging since the outbreak of the pandemic. The economic downturn is leading more companies than ever to apply for policies. Historically credit insurance has been used in other countries more extensively than in the United States but now we’re starting to catch up.
In recent years a lot more insurance companies have begun writing trade credit policies, expanding capacity and creating a buyer’s market for the coverage. Not anymore. Virtually overnight, underwriting capacity has tightened and credit insurance has become a seller’s market.
At this time insurance companies are still underwriting, offering quotes, and binding new coverage, but they’re growing increasingly cautious as recession looms. It’s unknown how long policies will continue being issued. Anyone thinking about getting credit insurance would do well to apply now.
How to Apply
The best way to obtain a credit insurance policy quotation is by applying for coverage on a reasonable spread of risk. Underwriters prefer to see a company’s whole sales turnover or at least all of a company’s largest customers, with no cherry-picking or adverse selection. Covering all receivables provides the most comprehensive protection anyway, since nobody knows in advance which customer(s) might default.
Is it still possible to obtain coverage on just one customer? Yes, but only for only for the very strongest of debtors. Applicants should not just throw the names of their customers at underwriters (even if that worked in the past) and hope they stick. That doesn’t get traction anymore. These days the chances for credit approval improve considerably when applications include the most recent financial statements, payment experience, information about how essential the supplier’s products are to the buyer, etc.
A cover memo should accompany every credit insurance application, describing the impacts of the pandemic on the applicant’s business. Gone are the days when companies could simply submit their receivables aging to underwriters and ask for a policy quotation. Explanations are required for any past-due accounts. Credit and collections procedures should be clearly described. In this economy, underwriters want to feel confident they’re onboarding new policyholders who have got their credit act together.
What to Expect
In policy quotations, expect to see larger deductibles and more requirements for policyholders to monitor their customers’ creditworthiness. Insurers are seeking to share the risk, not take all of it on themselves.
Premiums are increasing across the board but—still at a fraction of a percent of a supplier’s insurable sales—rates remain low compared with the benefits of being covered with trade credit insurance.
It helps to have reasonable expectations and be flexible about policy terms and conditions. Some negotiation with insurance companies is still possible but suppliers should be prepared to take what they can get. Any policy that helps suppliers share their nonpayment risks is better than no coverage at all.
Insurance companies paid a lot of trade credit claims in the wake of the 2008-2009 recession. Since then claim volumes have remained relatively level, but now losses are climbing and claim filings are projected to peak in the next six to nine months. Even if 2020 and 2021 won’t be their favorite years, the insurance companies are going to need to come through again for their policyholders in COVID-time.
For more information, contact Meridian Finance Group at 310.260.2130 or email@example.com. We’ve specialized for more than 25 years in brokering trade credit insurance. With offices in Los Angeles, New York, London, Brussels, and Singapore, we work with every insurance underwriter in the market and provide comprehensive support for each policy we sell . . . including in the event of claims.