This article is a direct reprint from Covisint, from the HCI group LTD. Resources Page Covisint.com
Companies doing business in Asia will likely be using a financial tool common to European markets for a long time: business credit insurance.
Also called accounts receivable insurance, bad debt insurance and credit risk insurance, credit insurance is starting to replace letters of credit as a preferred means of guaranteeing payment.
“There is a lot of credit insurance written in Asia,” said Victor Sandy, executive vice president of Global Commercial Credit, based in Bingham Farms, Mich., and one of the country’s largest brokers of credit insurance.
“We’re seeing a lot of growth in China and a lot of specialized coverage for companies that are either putting assets overseas, such as equipment and facilities, and for companies just buying and selling,” Sandy said.
Credit insurance is common in Europe, where transactions cross many borders but less familiar in the United States even though it has been a niche product since the 1890s.
Growing in use during the last 10 years because it is more flexible than letters of credit, credit insurance has gained new prominence since the Sept. 11 attacks, when executives realized how devastating unexpected risks could be.
“Traditionally, U.S. companies limited their view of credit risk management to expected risk; they would take Dun and Bradstreet reports, financial statements and trade references,” Sandy said. “No matter how much research you do or analysis or information you gather, you can’t predict the events that can happen to a company that will cause it to be unable to pay.”
The uncertain economic climate of the last 18 months has helped fuel the industry’s growth, he said. Before that, credit insurance premiums have roughly doubled in the last five years because of awareness and export demand, according to a special report in the December 2001 issue of CollectionsWorld.com.
Looking for new markets beyond their shores, Europe’s primary credit insurance carriers have partnered with or acquired U.S. carriers to gain a foothold in the U.S. market.
Written to fit a company’s unique situation, credit insurance can be written to cover losses on goods and services with a specific customer or the client’s entire portfolio of customers. It can be written for foreign and domestic receivables, used to extend credit to customers, protect a concentrated exposure, improve borrowing arrangements with the bank and protect against political risk.
In Asia, the tension between China and Taiwan creates some political volatility, Sandy said, as do the shifting relations between North and South Korea as well as the United States and Japan.
“We have a region where potential terrorist activity is very real and things occur on a daily basis,” he said. The potential for currency crises in the region coupled with the increasing volume of business in Asia adds additional risk.
Credit insurance requires is welcomed by most customers, Sandy said, because it is less burdensome to comply with than expensive letters of credit. Frequently the cost, which typically runs about 0.5 percent to 2 percent of the requested coverage, can be passed along to customers.
The booming economy of the 1990s created a false sense of safety because many companies believed they could absorb credit losses without sacrificing revenues. That attitude has been changed dramatically in the past year as the parameters of risk are redefined.
Because of the potential risk introduced into the American scene and greater demand, the cost of premiums is expected to rise significantly, said the CollectionsWorld.com report.
“Most of the countries in Asia are open for coverage,” Sandy said. “This is one of those situations where people wait to get this kind of coverage until they perceive the need and typically, by then, the situation is so bad you can’t get it.”
Nearly seven years old, Global Commercial Credit is one of few middle-market, full-service brokers in the United States and helps insure about $8 billion in annual sales.
