Sep 23, 2011
Company stresses importance of credit risk insuranceBack
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Companies insure their assets; how- ever, many overlook or choose not to insure one of their biggest assets, the debtor’s book.
Aon divisional executive director Richard du Toit states credit risk should not be overlooked, given the heightened threat of financial failure and issues such as political risk.
Credit insurance is the underwriting of debtor books, as apposed to asset insurance, which is insuring the physical infrastructure and equipment.
“About 15% of the total business credit market is credit insured,” says Du Toit. Out of all insured businesses, roughly 85% are insured for assets only.
He says the value of the debtors book can easily be in excess of any other asset in the company; this is especially true for trading companies.
Credit risk arises the moment goods or services are supplied to a third party, and the risk is exposed until payment is received.
Du Toit states the essential covers are domestic credit cover, which protects against liquidation and nonpayment by debtors within South Africa, and export credit insurance, which, in addi- tion to commercial debtor cover, has short-term political cover that protects the exporter against default by a foreign government.
“A major benefit of this kind of pro- tection is that companies can explore new markets and consider transactions with debtors whose credit standing is unknown and untested,” he says.
He adds there are only three companies that provide this type of cover in South Africa, namely Credit Guarantee, Coface South Africa and Lombard’s Insurance Company. Many varied credit transactions, on both the domestic and the export market, can be underwritten.
“There are no minimum requirements for companies to acquire credit insurance. Companies of all sizes can insure their debtor books and there are many types of products for companies to choose from. The process of arranging cover involves evaluation of the credit risk exposure, resulting in effective ‘right- sizing’ and correct structuring of cover,” says Du Toit.
Negotiating with underwriters to arrange competitive and affordable rates, the ability to handle the credit and political risk needs of clients with a great variety of business transactions and selecting the most appropriate cover are all considerations for companies when choosing insurance.
“Corporate cash flows are under strain; there are a number of sectors where there are reports of extended credit terms being requested. Higher costs of doing business, owing to factors such as elec- tricity and transport cost increases, are impacting on companies’ profitability,” states Du Toit.
He says insurance rates have remained steady, but that can change in the medium term as companies are seeking to write covers as soon as possible under the most favourable terms.
“Credit exposures are assessed in their entirety, depending on the nature of a given business, and cover should be scoped against a risk management premise. Credit concerns should not be allowed to inhibit business and credit insurance provides solutions,” he concludes.
Edited by: Chanel de Bruyn© Reuse this Comment Guidelines (150 word limit)
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