Trade credit insurance, the process of getting started. Why, how and who should investigate the benefits and value of trade credit insurance prior to purchasing the product?
Broker, agents, internet…. Many of the answers would depend on the needs of the company.
Trade credit insurance is an insurance product and therefore can only be acquired through a licensed insurance professional in the United States. The USA insurance industry is regulated and controlled at the state level, and the producer must be licensed in the state which the acquiring business resides. Because of these strict regulations, the professional generally must pass a comprehensive test of technical skills and continue his/her education to acquire and maintain a license.
Statista reports that the number of broker and agent professionals in the USA to be about 1.2 million.
This would suggest that there are quite a few professionally trained producers specializing in trade credit insurance. This assumption would be incorrect. Assessing the numbers in this special insurance segment; Atradius, Coface and Euler Hermes maintain captive agency forces which number around 250 producers in total. Add another 200 brokers who range from highly specialized to adequately exposed in trade credit insurance and structured trade, and the entire universe of professional producers is less than one half of one percent of the entire insurance producing population.
As a result of this disconnect, the market is often exposed to misinformation as it relates to purpose, value and benefits of trade credit insurance. While there are more than a dozen providers of trade credit insurance in USA and more broadly the world; Atradius, Coface and Euler Hermes represents over 80% of the global production of accounts receivable insurance.
Over the years I have seen many definitions associated with broker versus agent comparison, and differentiation. The February 27, 2016 edition of MoneyTips provides a succinct and straightforward description.
Insurance Agents generally represent insurance sellers and act as a conduit to present information to insurance buyers. Buyers choose from available policies and contract with the insurer through the agent.
Insurance Brokers generally represent the insurance buyers. As representatives from the buyer’s side, insurance brokers are truly independent. They do not have contracts with specific insurers. Brokers prepare applications to insurers on behalf of their clients
This general definition speaks to the 1.2 million producers in the United States associated with all forms of insurance. While the definitions remain applicable for a niche insurance product line of trade credit insurance (bad debt insurance, A/R insurance, export trade insurance, etc.), the product and service orientations are much different than other insurance products.
The most challenging aspect associated with the placement of trade credit insurance is a conceptual understanding within the organization acquiring the services and products of the underwriter. As with any insurance cover, there must be an assumed exposure which is transferred for premium. Trade credit insurance the exposure to loss being indemnified; the risk of non-payment of a trade transaction. When a loss occurs, the insured restores the lost capital, cash flow and earnings associated with the default. This is an easy concept to understand and represents a central aspect of the value proposition of trade credit insurance. However, the financial benefits of trade credit insurance go far beyond this simple insurance principle which speaks to the services associated with risk and accounts receivable management.
The vast majority of the 1.2 million brokers and agents invest their time and efforts selling insurance products other than trade credit insurance.
A trade credit insurance professional will invest most of the time understanding their client’s business. Accounts receivables generally represent 40% of the assets of a business. Unlike most perils, with trade credit insurance expected losses are financially budgeted for future write-offs associated with bad debts. Significant financial and time investments are applied to credit management, information acquisition, monitoring, technology, debt collection, litigation, bankruptcy management, and sales facilitation. Operational costs associated with external working capital and capital financing, DSO management, terms of payment, payable controls, etc. have direct impact on earnings, cash flow and capital which speak to the “why” of trade credit insurance and the need for a professional review.
Many businesses believe they have this risk covered with other financial investments made to control and budget for expected losses associated with a customer’s non-payment.
The professional trade credit insurance broker and agent rarely seeks to sell a client a specific product. Rather they focus on understanding the client’s business strategy and customizing a comprehensive solution which will help that business grow more profitably. In North America, roughly 20,000 businesses are currently utilizing trade credit insurance, and there are no two programs exactly alike. Because the solution is integrated with the credit management processes of the insured, the services and cover are dynamic and fluid. The process of order fulfillment begins when the insured’s sales professional begins to pursue a new customer. The buyer’s credit quality will determine its insurability as well as the potential size of the sale, terms of payment and likelihood of payment. The trade credit specialist must effectively understand each stage of their client’s order to payment cycle to properly build the most effectively trade credit insurance solution for their benefit. The technical aspect of the insurance policy is the final responsibility of the trade credit insurance specialists.
As it relates to the 1.2 million brokers and agents with limited or no knowledge of the services and benefits of trade credit insurance, they tend to view the time investment for this process too excessive.
The trade credit insurance broker and agent understand that counseling a business in finding cost advantaged solutions to grow their business profitably transcends the sale of a trade credit insurance product. It is a unique and highly specialized skill with a focus on consultation over the execution of a product sell.
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