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Credit Insurance - financing multiplier or just another bogus product?

I read a recent industry produced info-article on credit insurance. It can be used as a risk mitigation technique It can be used as a way to improve liquidity and finally it can be used to support growth. What do you think?

Answers

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Interesting concept. But, Insurance is tricky. I have seen companies over-insure, as they believe that the added safety cures all. Insurance comes with costs. Can you add the price of the insurance into your overall client pricing, or is the cost coming out of your margins?

A few things to consider – As usual, you need to check the fine print to see what is covered and what is not. In what situation can you collect vs. not collect? Additionally, insurance costs are based on risk, i.e. risk based pricing. Prior to submitting for underwriting, you will need to make sure your own house is in order and your risk managed, i.e.credit applications complete, AR monitoring established, a collections process exists, and the collections process is followed.

I question if all of the benefits offered are relevant to every company. If the insurance allows me to access capital at more favorable rates, and I need the capital, it may be worthwhile, if priced correctly. In the end, it will come down to a cost benefit analysis.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Regis and somewhat agree here; however since I've "used" credit insurance I have some first-hand experience.

The question with all insurance products, and credit insurance is no different is multi-fold.

What is in the fine print. (All Credit Insurance policies use the "dispute" issue as an out, where the insurance company does not have to pay). Of course this term is not tightly defined.

What is the cost. Most credit insurance has a base rate, plus at the discretion of the insurer, a supplemental charge can be accessed based on the customer the goods are being sold to, and you'd be surprised who may be on that list and why.

What is the cost-benefit. Does your company/industry have a history of bad A/R in excess to the cost of the insurance? If not, where is the benefit.

As for improving liquidity, I find this tenuous. In some industries, it may decrease DSO a bit, but again, what is the cost-benefit. The paradigm is that they will pay a well known entity who handles many accounts and can impact a companies credit rating vs a vendor that goes it alone, but I don't believe there is a scientific study to back this assumption.

There is no evidence that a company will receive capital at better rates than companies that don't use credit insurance. They may, if they use ABL, receive a higher percentage of their receivables, which may be beneficial, but not better rates.

How does having credit insurance support sales growth? This claim is either absurd on its face or an extreme extension of the other two arguments, that the concept is just a marketing ploy.

At the end of the day, do you save more money than you spend for credit insurance, and will the credit insurer pay. If the answer to both questions are yes, then its worth-while.

Bradford Marcus
Title: BDO/Account Executive
Company: Atwell Companies, The
(BDO/Account Executive, Atwell Companies, The) |

I agree with Wayne & Regis. I can just add that companies should look at their sales and see if the large percentage of their business come from financially
well-off or stable companies. How much risk Is the insurance company really underwriting? Is insurance necessary?

Anonymous
(Credit Manager) |

It's been a while since i am wondering the same... A part from the mentioned facts, i also believe that Credit insurance can be even a sales stopper, by creating insecurity when sales oportunity goes above the insurance's classification. Credit Insurance is a product based on uncertainty, widely promoted by all the interested / benefited from it. it may even harm the 'corporative fair play' between companies. Risk is inherited in trade- relationships, with or without insurance, like spaghetti go with tomato sauce. I agree with almost all the comments posted. Cheers.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

My general view goes a step back......If you really need insurance, then you are selling to the wrong clients.

I understand that there can be business models (and market niches) that take (and have) risks but in the end, do you really want that model?

For one off transactions, I think I can see the point of credit insurance (with appropriate pricing). But as a business model, it reminds me of our sub prime mortgage loans disaster.

Anonymous
(Accounting Manager) |

I have found useful the credit insurance.
We are in the automotive industry that is highly dependent on the economic conditions and generally are good payers, but things can change rapidly....
We never experienced a customer default before 2008 and after 2009 too.
But back in 2008/2009 we do received a good amount of money from companies that went bankrupt and also were advised with enough time of other companies with high risk of default.
That helps us of not going on default too, keep our supply and bank credits in good shape and eventually after the crisis makes us growth faster than our pears.

In good times the credit insurance might look like a high cost with no return.

If you try to get a good deal in hard times... that is going to be difficult, but if you hire it when the times are good, the insurance company will support you when things get nasty.

In our case it has paid well enough, but if I analyze only the last 4 years it has been a pure expense with no return.

So make your decision based on a long term study of Cost-Benefit.

Gary Honig
Title: President
Company: Creative Capital Associates Factoring Co..
LinkedIn Profile
(President, Creative Capital Associates Factoring Company) |

In my experience;
Some capital lenders use it (we never have.)
It doesn't necessarily improve your access to capital (it might complicate it, as the policy has to be amended to make payments to the lender)
Reading the fine print is the best advice - the process of collecting on a very narrow interpretation of a default is lengthy. First they investigate, then they litigate, and finally you might receive a payout which is a percentage of the loss.

This is not to say that credit insurance is bad or unnecessary. It needs to be utilized in situations and industries that warrant it.

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