According to the International Monetary Fund, Chinese companies had to wait more than 75 days in 2015 to get their invoices paid, compared with around 55 days in 2009 – if they get paid at all. Corporate debt at risk is also climbing sharply and could potentially make banks lose the equivalent of 7% of GDP.
One solution for corporates: Take out credit insurance. The insurer will indemnify the company when a buyer covered by the policy fails to pay an invoice. One problem: Credit insurance companies have become stricter about which companies they are willing to work with.
“We’ve cancelled a number of policies where we had to recognize that the risk management of our customers was not at the level where we would expect them to be,” says Andreas Tesch, Chief Market Officer at Amsterdam-based Atradius Credit Insurance, which has more than 160 offices in 50 countries.
“A lot of people have referred to credit insurance as the umbrella that closes when it starts to rain. I would rather claim we are the weather forecaster and we tell you to bring your umbrella or not”
Tesch spoke to CFO Innovation’s Cesar Bacani about what CFOs can do to get credit insurance coverage, the value-added risk-management consulting that come free with credit insurance and other issues. Edited excerpts:
How are things looking on the ground? So far in 2016, are you indemnifying more clients in Asia because their customers are failing to pay them?
On a group basis, yes, claims are on the rise both in frequency as well as severity. We see this to a lesser extent in Asia, but that’s mainly because we’re coming from a relatively high level of claims. It’s still significant, but it’s not as bad as it has been the previous years.
We have de-risked our portfolio mainly in China. Outside of China we never faced serious issues, but in China, we had some severe challenges on the claim side in the construction sector, with trading customers, with local customers.
We’ve had to work through that and that’s been dealt with. But we continue to support our remaining domestic customers as well as large multinationals operating in China as well in the rest of Asia.
What do you mean by de-risking?
We’ve cancelled a number of policies where we had to recognize that the risk management of our customers was not at the level where we would expect them to be.
It’s not only us assessing the risks and leaving it to the customer [to manage]; we have to rely on the customer chasing overdues, realizing irregularities in the payment behavior and responding to that, selecting customers [that are good credit risks].
What we experienced in China was that some of our customers did not apply credit management procedures as we would expect them to. So we basically managed out these customers and that helped us in improving our claims ratios.
So the companies that need credit insurance the most because their risk management system is so weak cannot get coverage precisely because their risk management is weak?
We’re not insuring a house that’s already burning . . . We’re not a charity, we need to make money.
A lot of people have referred to credit insurance as the umbrella that closes when it starts to rain. I would rather claim we are the weather forecaster and we tell you to bring your umbrella or not.
We will give you the umbrella when there’s a high likelihood that the sun is going to shine [and not when it’s already raining]. But if it then starts raining, we’ve already given you the umbrella.
Are you finding new customers that practice the expected level of risk management?
We do find those customers, both domestically but also subsidiaries of large multinationals which have group standards, group procedures to be followed in probably a more rigid way in the Asia markets.
It’s more multinational subsidiaries in those markets that we are insuring as of now. But as far as new business is concerned, the majority is coming from domestic business. We do still find some new customers [that are subsidiaries of large multinationals] but the growth is coming from local companies.
Our customers don’t offload 100% of their exposure. There’s always an element of what we call self-retention. They are accelerating in their credit management procedures, and credit insurance is one element there.
“The origin of credit insurance is export credit insurance. That’s where the roots of all the big credit insurers lie. But we’re also insuring domestic transactions”
Those customers with proper credit management procedures, they do have their own systems, they do their own information gathering. They operate either their own collections or they’re using third party services – Atradius also offers a standalone collection facility.
In case all these other aspects fail to perform, you get the indemnification of insurance.
Do you cover only trade-related transactions or can companies also take out credit insurance to cover receivables with domestic buyers?
The origin of credit insurance is export credit insurance. That’s where the roots of all the big credit insurers lie. But we’re also insuring domestic transactions.
When it comes to export, that market has been highly regulated until very recently. Sinosure was the only company that, until probably one and a half years ago, was the only licensed insurer to provide export credit insurance [in China]. Licenses have now been given to some other insurers as well.
Every country is operating its own export credit activities for what is considered under OECD terms as non-marketable risks. So you have Sinosure for China, NEXI [Nippon Export and Investment Insurance] in Japan, K-sure in Korea.
I’ve just been to Korea and they are in the process of opening up the market for other insurers. It’s still at a very early stage for many Asian countries to allow other insurers [that offer export credit insurance].
Atradius has been granted a license in China?
None of the established credit insurance providers has obtained their own license in China. We’re working with partners there. For us, it’s China Continent Property & Casualty Insurance Company or CCIC for both export and domestic credit insurance. [Atradius partners with three other Chinese insurers for pure domestic credit insurance.]
We’re using partners in Indonesia and Malaysia as well. In the Philippines, we’re also using a partner. Korea we’re using a partner. We’re operating under our own license in Hong Kong, Japan and Singapore.
So when a company takes out credit insurance with Atradius in China, it deals with your partner CICC? There is actually no Atradius branding?
Formally, the CFO would be dealing with CCIC. Because of the license requirement, there will be individuals of CCIC involved in the discussions with the local CFO.
But we’re providing technical support. We’re also providing underwriting support. When it comes to exports, we’ve got our [global] database, we’ve got our knowledge. Locally we are giving them support as far as IT knowledge and so on is concerned.
Formally, there’s no Atradius branding in China as far as insurance is concerned . . . But in many of the countries we don’t operate directly, our legal name is Atradius Credit Information Consulting. So that indicates that we really are there.
It’s not just credit insurance coverage, then. It’s also help with risk management practices as a free service.
Correct. Credit insurance is two-fold. On the one hand, it’s prevention by educating our customers about the right and the wrong buyers, and helping them to collect outstanding invoices. The second aspect is, when push comes to shove, to indemnify them for a defaulted invoice.
We put every emphasis on the first part. We actually want to help our customers to avoid having losses. And that’s a large part of our work.
“This tool gives [our customers] information about the status of the quality of their buyers and the development over time. Is it deteriorating, is it improving, is it developing in certain value bands, in a certain direction?”
I’ve been told that credit insurers maintain a global database of companies and their credit ratings, which could be made available to customers as a free service.
We draw from some of the information providers and our own research. We get our own people to go and visit certain buyers trying to obtain their balance sheets upon the request or enquiry of a prospect or customer.
A lot of buyers are not actually prepared to share their financials with their supplier, but they might be prepared to share their finances with us, as the insurer, in order to obtain the credit.
So even prospects, not just customers, can access the database?
We wouldn’t do this on a named basis [for prospects]. But we would show them the rating quality of their portfolio. So we’ll say: 80% of your portfolio sits in the rating band from A to B. This much in the next rating band and so on and so forth.
We have a very high penetration in some industries. When we get early signals that one of these suppliers is not being paid, we can give the heads up to the others [that are our customers]. We might say: We are concerned about this buyer because of our five or ten customers, one is already seeing late payments.
That’s particularly important for some of the larger players because you might still be the last one to be paid. And the smallest suppliers will be the ones hanging out there high and dry.
Is it a searchable database?
Yes, and it’s a very extensive database; all the information we collect globally goes in. If you are a client of ours, then you have access to all of that information and can slice and dice per sector. If you want information on the industry in a new market you’re entering, say textiles in Vietnam, you can get information on an [aggregate] industry level out of that database.
We have developed a tool called Insights that is in effect an interface between our customers and our own database. The CFO might not be dealing with the daily operation and individual buyer assessment. This tool gives them information about the status of the quality of their buyers and the development over time. Is it deteriorating, is it improving, is it developing in certain value bands, in a certain direction?
Is Insights a standalone service I can subscribe to, or do I need to be a credit insurance customer?
You need to be a customer, because otherwise you would not get the access to the buyer information, which is the basis for all this analysis. You get access only to the buyers in your supply chain.
Can you give a rough indication of how much it would cost me as a CFO to take out credit insurance?
It ranges from 10 basis points to 50 basis points of the turnover that you generate [from the transactions with the covered buyers]. In most instances, we charge based on turnover rather than charging based on exposure.
That’s a rough indicator. There will be cases where it will be more expensive, and there will be cases that would be something less.
What we are looking at when pricing a policy is first and foremost the claims experience. Is there a history of defaults? Has the company been able to provide evidence that they have taken out good management procedures?
If I can demonstrate to you that my risk management processes and the way I assess my buyers are actually superior, can I get a lower premium from you?
Those companies operating in a more professional way will get a better rate, ultimately, compared to the ones that don’t pay as much attention. It might be the rate, it might be the risk appetite, it might be whether we are prepared to take out a policy at all. There are some customers that we refuse to take on because we don’t feel they are fit and proper.
What we are looking at when pricing a policy is first and foremost the claims experience. Is there a history of defaults? Has the company been able to provide evidence that they have taken out good management procedures? We obviously look at their credit manual and we look at the quality of their buyer base. There are a number of components that factor into our pricing mechanism.