An expanded use of credit insurance could be the key to the longer-term health of many fuel businesses as countries start to exit the pandemic lockdown.
The impact of COVID-19 on the energy sector has been stark. Take the use of petrol and diesel which have seen sharp drops in demand around the world – the US for example reported a 28% fall over April, while the UK saw fuel sales down 40-45% over the first few weeks of May. But the depression in energy sales is in no way restricted to service station forecourts. Gas and electricity usage have been similarly depressed. Towards the end of May, the UK’s National Grid warned that it would have to switch off renewable supplies as electricity usage fell by more than 2GW over the Easter weekend compared to the expected forecast.
Add in the recent volatility surrounding the price of oil and it all points to a sector particularly vulnerable to the demand depression created by COVID-19. As lockdowns ease however and energy usage rises – although whether it will return to pre-pandemic levels is up for debate, at least in the short to medium term – energy businesses will be looking for ways of both protecting their balance sheet and for achieving competitive advantages in the teeth of tight margins and tough competition. It’s a sector where clever use of credit insurance solutions could prove to be the vital difference.
Heavy users
Much more than other sectors, the energy industry is a heavy user of credit insurance given it is a high volume, low margin business which means if just one business goes to the wall without settling their accounts, it can deal a heavy blow to its suppliers. Consequently, credit insurance – which can be offered for just one debtor or for the whole of the sales ledger and is available either with cancellable or non-cancellable credit limits during the policy – plays a crucial part in protecting the balance sheet of a range of different energy businesses, particularly in the current economic environment.
In response to the COVID-19 global health emergency, credit insurance underwriters have looked to reduce their exposures although some have considered fuel as an essential service during the pandemic so have not cancelled or reduced credit limits on existing policies. Neither have we yet seen the level of credit insurance claims increased significantly in the energy business. This is likely to reflect the calm before the storm however, as the incidence in the volume of overdue notifications is beginning to rise although insurers are showing some flexibility on the time taken for businesses to report any late payment issues.
In the downstream fuel sector, there was initially a huge increase in the number of cancelled direct debits with fuel distributors as their customers went into lockdown mode to protect cashflow, and there is also evidence of requests for payment plans. As the lockdown eases, it’s possible that we will start to see more legal action as collection agencies and legal firms return to work and move to collect debts. The overall result is likely to be an increase in credit insurance claims over the back end of 2020 and into 2021.
An intelligent choice
While claims are the physical evidence of the role that credit insurance can play, they don’t always reflect the additional value that a credit insurer can deliver beyond simply covering bad debts. Helping businesses understand the credit worthiness of existing and potential clients is another important part, a factor underlined in Aon’s C-Suite Series report on credit solutions – Driving growth through uncertain times: “Due to the extensive volumes of trade covered by credit insurance, insurers represent a powerful source of data and insights. These can support business decision-making and help businesses to see around ‘corners’ – identifying where their exposures are concentrated or where new opportunities lie.”
As business operations start to pick up again, credit insurance underwriters will be looking for up to date management information from a lot of debtors; assessing the cash position of businesses and understanding whether they can survive and for how long given the reduced activity. They will be ahead of the curve in terms of knowledge of individual businesses and be able to pick out the winners and the losers, hopefully preventing companies from picking up a bad debt.
This activity also underlines the importance of providing insurers with the necessary management information for businesses who are looking to secure credit lines within the energy sector, as well as making use of other intelligence available such as the fuel sector’s Petroleum Distributors Intelligence Unit in the UK which helps to identify delinquent debtors via a dynamic on-line platform and meets regularly to share best practices.
It’s also critical that organisations understand their customer’s customer all along the supply chain to build that rounded picture of their credit worthiness and ability to pay in the event of a problem. Acumen, for example, might be arranging cover along that chain and is able to help each business with its credit limits such as helping fuel distributors maximise their credit lines with the oil companies.
Innovate to stay ahead
Looking ahead, credit insurers can also help businesses well beyond dealing with bad debt whether it’s helping to free up and optimise working capital, or by using insurance to offer suppliers enhanced credit terms without increasing their own debt lines. In difficult economic times, it is innovations like these together with credit insurers’ more traditional products and services that can help businesses throughout the energy sector not only survive, but make the most of the opportunities likely to surface as the country returns to work.
To find out more as to how credit insurance solutions can help your business, download a copy of Aon’s latest C-Suite Series report ‘Driving growth through uncertain times’
Feel free to contact me if you have any feedback or wish to discuss any aspect of the article.
Paul Martin - [email protected]