According to Aon’s latest C-Suite Series report on credit insurance – Driving growth amid the chaos – as few as two in 10 CFOs are making full use of credit insurance solutions. It’s a surprising statistic given the current volatility in the economy which means every organisation needs to be looking at ways in which they can both better manage their credit risk, while also delivering sustainable growth and profitability.
According to the International Monetary Fund, the global economy grew by just 3% during 2019, representing the slowest rate of growth since the recession of 2009. Added to that risk of contraction for businesses, says Aon’s credit report, are factors like changing consumer purchasing behaviour and digital transformation which are all adding to the overall “uncertainty and corporate vulnerability”. For some businesses in 2019, the consequences have been terminal with major insolvencies – companies with a turnover exceeding €50m – growing for the second year in succession.
Given this gloomy backdrop then it is surprising that all big companies don’t credit insure particularly as many of them would have suffered some significant losses related to the failure of companies like Carillion. In the past, businesses have been able to absorb the odd loss but these losses are now occurring more regularly which means credit insurance is growing in relevance as an alternative way of protecting their balance sheet and even their ongoing viability.
More than just covering bad debt
Credit insurance is at its most straightforward (but no less valuable) when used to pay claims related to unpaid client bills but it’s a product that offers far more to businesses in areas like replacing expensive bank guarantees and letters of credit with insurance products; meaning businesses can take these liabilities off their balance sheet to help free up working capital, boost their share price as well as facilitate access to cheaper financing.
Banks are also more willing to lend to businesses who have insured their “yet to be settled invoices and payment obligations” which has been a factor in driving the credit insurance market to the point where the value of exposure covered by credit insurance in 2018 went above €3trn for the first time. Credit insurance now complements a firm’s credit management function to the point where we’re seen as a business partner rather than simply delivering an insurance product.
Other advantages of what credit insurance can do include if a business is looking to expand into a new region or geography where perhaps they have no experience, they can use the on the ground knowledge and experience of their credit insurer to gain access to information that they might not necessarily be able to get hold of to help them avoid risk and maximise the opportunity.
The quality of the systems that credit insurers use and offer to their clients to apply for limits and look at claims has also improved immeasurably over the last five years. The entrance of AI and machine learning is having a role to play here. Atradius for example is using web-crawling technology to look at the creditworthiness of companies looking for key words like ‘breach of governance’ which helps the insurer create a link between the frequency of these words and their creditworthiness.
The focus on automation and different types of technology like blockchain by insurers looking to get ahead of the pace all helps to improve the client experience but also make the service more seamless behind the scenes by taking away lots of the manual burden related to underwriting. As these technologies develop, we will see them move into the insurance market and there’ll be more focus on smaller fintechs and insurtechs coming through, with the bigger insurers looking to purchase these companies as a way of breaking in to new technologies.
Can businesses ignore credit insurance?
How exactly some of these changes will play out is not yet clear but we do know that unlike the last major slowdown in 2008/9 where credit insurance was largely withdrawn, insurers learnt lessons and are continuing to offer the cover and still at relatively competitive prices. Given that availability, can businesses afford not to take advantage of a product that can offer companies real competitive advantage whether it’s paying claims, enabling growth, maximising balance sheet efficiency or supporting new business wins?
Download a copy of Aon’s latest C-Suite Series report ‘Driving growth in uncertain times’