Managing business assets with global credit insurance

Trade receivables management, protection and financing are becoming ever more complex in the age of mass customisation, intense competition and globalisation.

The world of credit risk has many facets and events unfolding around the globe, with the US subprime market and fear of recession spreading, certainly have an impact on the Australian domestic market and the view of its exporters. Coupled with Australian interest rates being at a ten-year high, and recent executive surveys revealing growing negative sentiment on the back of statistical evidence of an increase in payment defaults, the credit and liquidity markets remain fragile. 

In this environment, management of a significant company asset like the accounts receivable is being addressed by a number of global credit insurance underwriters. They provide products that deal with the key issues of payment default, management, and financing of the accounts receivable. They offer insurance and finance-based solutions that effectively remove most of this risk from the balance sheet of the insured or their interested financial partners. This is achieved on the basis of well-managed and executed credit risk control, and offloading of non-payment risk to a well-rated risk carrier.

Bespoke solutions

Credit insurance in its most vanilla form covers the risk of non-payment—usually on insolvency but often with specified political risks cover for cross-border transactions—on payment terms up to 90 days, with 90 percent indemnity and usually a small non-qualifying level to eliminate subeconomic losses from the claims process.

However, over the last few years the market has evolved substantially, offering all companies the opportunity to work with the insurers to develop a bespoke solution often not only addressing the payment default risk but management of the entire accounts receivable flow from ‘birth to grave’. The most advanced insurers can offer:

* Company information;

* Support the ‘birth’ of a new credit account with background information and a credit rating incorporating a recommended limit amount on debtor;

* Commercial credit reports on offshore companies;

* Company, sector, and country ratings;

* Receivables management;

* A seamless integrated approach to receivables management;

* Global collection coverage: in the event of adverse information, notified default or insolvency (‘the grave’), mobilise recovery and collection teams to minimise the potential loss and maximise the salvage/dividend and do this anywhere on the planet at nominal cost to the insured client;

* Regular updates on account progress;

* Performance-related fee structures;

* Online/web based services and electronic communications;

* Receivables protection using insurance solutions;

* Trade credit insurance;

* Political risk insurance;

* Single counterparty risk insurance; and

* Self-underwriting.

Receivables Financing

The latest enhancement, and possibly the most significant, is the ability to offer funding through invoice discounting or factoring, integrated with the credit insurance cover of all or part of the account receivable. This offers limited recourse funding against these secured debts and the underwritten buyers on such a portfolio attract 100 percent indemnity for all qualifying claims amounts.