Multinationals seek credit insurance amid uncertain times
With concerns over a slow recovery and a potential rise in interest rates on the horizon, trade credit insurer Marsh is seeing an upturn in enquiries about its products.
The UK-based insurance broker has experienced a rise in enquiries over trade credit insurance, with queries coming in from small corporates through to the multinationals.
Tim Fisher, leader of Marsh’s UK trade credit practice, says although there seems to be improvements in the health of the economy, concerns remain about the impact the demise of one company can have on the entire supply network, and some are accordingly looking to take steps against it.
Trade credit insurance protects companies against insolvency, bankruptcy and default. According to Marsh, a key concern is centred around the possible rise in interest rates resulting in an increase in the number of insolvencies.
While corporates might not be posing a risk in the short-term, there is a move to set up the safety net before the worst can happen.
Fisher says Marsh has seen an increase in interest from the multinationals during the past year to take out insurance.
“This increased interest in trade credit insurance has a number of causes – one of which is the responsibility and accountability of the directors and the boards to their shareholders to consider all angles in terms of risk mitigation, bad debts and insolvency,” he says. “And this can prove embarrassing if they can’t demonstrate they are attempting to mitigate the risk. This is about balance-sheet protection.
|Corporates might not be posing a risk in the short-term, but there is a move to set up the safety net before the worst can happen
“Large multinationals continue to grow and expand, and the world becomes smaller, but this is alongside economic uncertainty, and now a lot of socio-political uncertainty.”
Fisher adds: “The speed of the escalations, such as in Ukraine, is unsettling for multinational companies, but equally some of these companies can’t afford not to be in certain territories. They recognize there are risks in expanding their footprint and developing new markets, and are looking increasingly towards credit insurance as a way of mitigating some of those risks.”
He highlights the demise of a number of high-street giants in recent years as one of the reasons for this shift in attitude, as awareness grows that today’s blue-chip triple-A rated companies could turn out to be the weakest link in the supply chain.
Fisher points to the decline of UK automobile manufacturer MG Rover in 2005, with the insolvency having a ripple effect down the supply chain for several years afterwards.
Although, overall, there has been a decline in the number of insolvencies recorded in the UK, the concern remains about what the decline of one partner could have for a company. Trade credit insurance can be on a wholesale ledger basis to offer protection against a single entity in a network if there is a disproportionate dependency on them, even if they are perceived to be financially sound.
Fisher explains how some companies would only look to take out insurance once the risk is known, but by then it is too late. “There’s heightened interest once everyone knows there’s a problem, but if there’s a known peril it’s more difficult to get cover,” he says.
As well as providing coverage against potential disaster, trade credit insurance has the secondary benefit of providing additional insight into the clients that a company is operating with.
“It is not only about protecting from the impact of bad debts and insolvencies – credit insurance can be a growth-enabler as well, as the information and intelligence around the credit worthiness of your customer enables companies to feel more confident in their trading relationships, ” says Fisher.
“Credit insurance is involved with propriety data and looks at credit risk as distinct. Talking about the financial solvency of a company, their ability to service debt effectively, that determines risk appetite. It helps with the identification of the stronger and weaker customers and develops growth strategies, domestically and overseas.”
He adds: “The risk really is the degree of impairment that being hit by either a frequency of bad debt or a single event with a major customer. This is basically the bottom line and affects every margin. Every bad debt costs 10 times the written-off amount to replace the level of lost business.”
However, overall, the number that choose to take insurance against the collapse of a buyer or supplier is still relatively low, something Fisher questions when compared with the numbers that will insure their fleets and buildings, despite the comparative unlikelihood that anything would affect them.
“There is little argument from banks and lenders that a business that is credit insured represents a better risk than one that isn’t,” says Fisher. “On balance sheets, trade debtors are often the largest, single asset companies will have. Insurance is seen as something that offers a solution rather than something that has a benefit.”