The age of the internet has enabled virtually anyone to investigate the concept of trade credit insurance. Anyone who has responsibility over credit management will likely have invested some time and energy to the subject. Ironically, the basic concept of trade credit insurance has remained unchanged since its genesis in the mid-1800s.
A simple concept: if your customer fails to make payment on goods ordered, shipped and delivered, the trade credit insurance carrier pays the supplier.
Today there are more than a dozen providers of trade credit insurance in the USA, each one having created an impressive web site touting their ware and presenting the common benefits associated with the product:
*Catastrophic loss protection from bad debt losses
*Safe sales expansion
*Enhanced bank borrowing capabilities
*Operational cost efficiencies
*Risk and financial buyer analysis and monitoring
*Lower reserves for bad debts
For over 150 years these providers of trade credit and risk management solutions have helped tens of thousands of businesses grow and prosper. For each company, the decision to invest was driven by specific events and timed with their own needs.
Over the years I have been asked: when is the best time to invest in credit insurance? Logic would suggest the best time would be as the storm clouds of an economic downturn are forming. Many would suggest that as we enter 2020, that period is NOW. If the same logic is to be applied alternatively; the worst time to make the investment would be at the end of an economic downturn or recession.
My observation is that timing should not be dictated by prevailing economic events as the financial and operational benefits are realized throughout these peaks and valleys. Obviously, the expected increase of defaults occur as the economy slows and the loss payment aspect of the trade credit insurance dominates the value proposition. The company is also supported by the collection, recovery and bankruptcy administration facilities of the carrier during this period. The central focus is the insurance component.
Trade credit insurance, however, has equal importance in the recovery period in which the sales engine must be fueled. New markets, new customers, higher credit exposures, etc. become the focus of a company during an economic recovery. Utilizing the capabilities of the insurance carrier’s deep database of information, their analytics, and their monitoring services, the insured will better capitalize the rapid sales expansion opportunity in a controlled manner.
Trade credit insurance underwriters act and react much the same as the companies they underwrite. As an economic decline approaches rates harden, risk share is expanded, and credit extension is tightened. It might be suggested that there is less value to the insured during this period as less cover is provided while costing more. The reality is that the underwriter is less concerned about its own financial performance and is focused in its main objective of guiding the insured effectively through the troubled waters. One of the most important benefits of a trade credit insurance program is a restrictive decision.
As the economic recovery begins, the underwriters’ rates and risk share soften, and credit limit acceptance increases as the number of defaults decline and the probability of future defaults fall. The value proposition has changed as the emphasis is now aligned with sales growth.
Understanding these simple realities supports the assumption that the ROI remains constant throughout economic cycles. The primary change is associated with the perspective of “loss protection” versus “sales expansion”.
The other associated benefits or key drivers with investing is a trade credit insurance program remain throughout all cycles.
Is there an optimal time to acquire health insurance? Maybe just before you get sick or have a heart attack? What about life insurance, when is it best to invest? Property and casualty insurance? The same answer can be attributed for all perils; the closer you get to actual insurable event occurring, the higher the likelihood of declination or adjusted rate and risk share. The single biggest difference with all these other insurance lines compared with trade credit insurance is how the carrier becomes a strategic partner in the avoidance or elimination of the peril they are being asked to insure.
Trade credit insurance should never be viewed as something to step in and out of based on economic cycles or specific circumstances. View it as a normal business tool designed to support capital utilization and protection at the same time driving optimal top and bottom line growth.
When is the best time to invest in trade credit insurance? NOW!
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