Property, casualty, and business-interruption insurers are taking a beating following the destruction of the World Trade Center. How are credit insurers doing?
By Joanne Y. Cleaver
Reprinted from CollectionsWorld.com – December 2001
The rubble is still being cleared from Ground Zero in lower Manhattan and from the ledgers of businesses whose customers were affected by the Sept. 11 terrorist attack. Even in late fall, it was still too soon to tell which businesses were permanently felled by the attack – and would default on payments to suppliers – and which were pulling their operations together and would eventually make good.
One truth is cutting through the haze: Financial executives have been shocked into awareness of an often-overlooked, previously little-understood financial tool: credit insurance. Widely used by European countries to guarantee payment, U.S. companies have been reluctant to spend money on premiums when it seemed routine credit analysis and bank-issued letters of credit could do the job.
Those days are abruptly gone, say executives at credit insurance companies and industry analysts. “The attention to risk has increased and companies are now focused on it like a laser beam,” says Peter L. Aitken, vice president of trade credit for the Chubb Group of Insurance Companies based in Warren, NJ
Companies that have used credit insurance are now filing claims and counting their lucky stars for their foresight. Those that haven’t “are waking up,” says Gerald L. Mize, a partner at Alston & Bird LLP, an Atlanta-based law firm that is handling claims stemming from the attacks for insurers. “Everybody is now at increased credit risk because of the deep impact of the events,” he says. “Even if it’s just some small incremental factor, we’re all a little less certain of our ability to pay.”
Perversely, the attacks come at an excellent time for credit insurers. Several are rolling out new products and services designed to reposition them as rich sources of advice and data for assessing credit risk, not just plain-vanilla underwriters. A situation that is proving disastrous for most American companies has a silver lining for credit insurers. Reality has relieved them of the burden of conjuring up fictional worst-case scenarios for balky customers. The truth is sufficient to scare customers into the fold.
“We are defining a new norm, and that will take time,” says Joseph A. Ketzner, executive vice president of Euler ACI, based in Baltimore and the U.S. arm of leading international credit insurer Euler. So far, this 30-year industry veteran is mainly seeing an exaggerated version of the classic recession playing out – traditional industries such as apparel, textiles, and steel have been in a recession for a year now, and the ripples are finally spreading to the service and technology sectors, with concurrent interest in credit insurance.
Spike in Applications
By mid-October, Euler had seen a 26% jump in submissions, or applications, for credit insurance compared to last year’s levels. That’s spurred by suppliers worried about being blindsided with defaults by seemingly solid companies – companies that seem stable according to traditional credit scoring yardsticks. “For the second year in a row, we are seeing an unprecedented number of investment grade entities that have failed,” he says. “Obviously, that gives us good press in the underlying risk [factors].”
However, Ketzner echoes the opinions of other insurance executives when he points out that this recession is likely to permanently change corporations’ habits because it was so dramatically exacerbated by the terrorist attacks. Companies of all sizes that trade internationally are accustomed to factoring in political unrest into their credit analysis. But until now, nobody has contemplated the credit risk of terrorist attacks in the U.S. Not only are U.S. firms getting a crash course in supply chain credit exposure, but they are also gaining a whole new perspective on how to size up the risks of doing business internationally where terrorist attacks, political unrest, and regional wars are much more common.
The booming economy of the late 1990s had undermined the urgency of insuring transactions, even for relatively risky international accounts, says Daniel N. Boccara, chief executive of Coface North America, the Manhattan-based U.S. division of the Paris-based firm. Companies that were growing quickly were more willing to take on credit risks because they were more concerned with increasing the top line than they were with minimizing exposure. In other words, they could grow their way out of defaults. Credit policies were gradually becoming looser at many U.S. companies, migrating from, say, automatic credit approval of transactions below $5 million to automatic approval of transactions below $20 million.
Though recessionary pressures had largely reversed the easy credit trends, U.S. companies also found that they didn’t necessarily have the internal expertise to assess complicated international credit situations. Bank-issued letters of credit not only carry administrative costs twice as high as corresponding credit insurance coverage, but also are inflexible and burdensome to implement. And, letters of credit include only factors deemed critical by the bank’s credit risk department, which might not reflect risk factors that the company considers crucial.
Complicating the international scenario further is the fact that traditional credit analysis for countries is only updated quarterly and doesn’t provide extremely specific detail and projections about particular industries and companies, Boccara says. “Post-Sept. 11, we definitely see customers wanting credit information to refresh their files,” he says, explaining that if they have to choose between current information and detailed information, customers value current data more. With terrorist threats escalating into war, immediate assessments of the business climates in various countries is critical.
Now that credit insurers have the unwavering attention of American financial executives, they are making sure they explain all the bells and whistles they’ve been adding. European companies have used credit insurance for decades to smooth transactions across their many borders. But until recently, U.S. companies could grow for decades within this country’s borders. Still, recent trade agreements have made it easier for even small firms to trade easily with Mexico and Canada.
Internet-based trade and the perception that it’s smart to get an early foothold in other countries fueled an unprecedented growth of international trade among American companies of all sizes in the past decade. Credit insurance firms have been trying to grab their share of growth, but it has taken a while for American firms to get the message. The gradually deepening recession has delivered the fast growth that the industry has been seeking. NCM Group, for instance, based in Amsterdam and operating in the U.S. since 1992, has hit a 25% annual growth rate in the past two years. (NCM and Cologne-based Gerling Credit, another leading international credit insurer, have announced their intention to merge, with the combined entities accounting for 25% of the global market for direct trade credit insurance.)
The recession accounts for some of the growth, but not all of it. Credit insurers also realized that they had to offer much more value than simple risk mitigation. So in the past 18 months, they have been gradually rolling out a variety of new credit analysis, information, and consulting services designed both to squeeze more revenue from their rich internal databases and to position themselves as consultants to the whole credit analysis process. “We are moving away from only risk mitigation to credit enhancement, to support banking institutions, which are supporting companies’ bigger deals,” explains Arjan G. van de Wall, vice president, marketing & sales U.S. with NCM. Its online product, eCredible, is run as a separate division. “People know that it can’t be business as usual, but it has to be business of some sort,” he says.
The hunger for information is so great that Coface Group is supplementing its ongoing underwriting partnership with Chicago-based CNA Credit with a new suite of online credit management products known as @rating. The service lets companies tap into an always-fresh stream of information fed by Coface’s offices in 93 countries and ongoing business relationships with 70,000 clients.
Credit insurance professionals predict that corporations will start to weave the service into an increasing number of transactions. “In a year, usage will be higher, there will be more U.S. companies that are aware of credit insurance and sensitized to the utility of it, and there will be a greater demand,” says Nick Pearson, a partner in the Manhattan office of law firm Edwards & Angell LLP and head of the insurance and reinsurance practice.
At the same time, he and others are confident that premiums for credit insurance will rise significantly. After all, some significant risk has now been introduced into the American scene. As well, greater usage of credit insurance sops up more of the capital in the industry available for backing the policies. That escalating cycle alone will force premiums up.
Mize says that the federal government’s attempts to relieve pressure on insurance companies could backfire on customers. If customers believe that insurers will be protected from future risk by the government, they’re more likely to file all possible claims now, while they can still get a good return for the cost of coverage. “If future insurance losses tied to terrorist events are capped, then commercial insureds may become more aggressive [in making claims now],” he says. As of late October, the Bush administration’s proposal called for the federal government to cover up to 80% of terrorist-related losses up to $20 billion in payments in the first year. Insurers are still on the hook for losses incurred in the September attacks.
Even before Sept. 11, the credit insurance outlook seemed healthy. Coverage for exports has been rising for the past five years, says Euler’s Ketzner. “In the broadest terms, credit insurance premiums have doubled in the past five years driven by market awareness and export demand,” he says. Euler has added a variety of related services, such as “swapping,” a more sophisticated version of factoring that doesn’t actually require the sale of accounts receivable.
Soon customers can expect to be pitched credit insurance directly through their banks. That marketing channel is such an obvious fit that banks and insurers are racing to get their partnerships organized and to market, says Ketzner. About 20 of the country’s largest banks have established insurance brokerage arms to sell credit insurance. “It’s an untapped gold mine that they have in their own backyards,” he says. “The product sells itself. People scratch their heads and once they understand what it is, they don’t understand why they don’t have it.”
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