An introduction to Credit Insurance

Mark Johnson at Bridge Insurance Brokers has provided us with some helpful advise to pass on to our clients in order to help them protect their business against risk.  If you think that this is something that would benefit your business please contact us and we can make and introduction to Mark and his team.

Section 1 – Credit Insurance

As anyone in business knows only too well, not all debts end up being paid. If your largest customer unexpectedly went to the wall, how would your business be able to cope? It’s something that’s happened time and again, and even seemingly rock-solid businesses aren’t immune. That’s why it’s reassuring to know you can put measures in place to lessen the impact of customers or clients failing to pay.

A Credit Insurance policy sourced by Bridge Credit will give you the peace of mind to know that if a customer doesn’t pay for goods or services, your insurer will contribute money back to you for Insured Losses. But that’s only the basics as a Credit Insurance Policy can also:

• Provide guidance on customers who might be experiencing financial difficulty to help you avoid bad debts in the first place
• Safeguard your cashflow – a sale isn’t a sale until it’s paid for!
• Support growth into new markets as you look to expand your sales reach and businesses are encouraged to Export more.
• Enhance your credit management process – the disciplines reinforced within a Credit Insurance policy support (and encourage) sound credit management and procedures.
• Facilitate access to Finance – Having credit insurance can increase your business stature with lenders encouraging them to offer more facilities, and even sometimes on better rates.

How does it work?

Having identified your requirements, Bridge Credit will search our extensive roster of suitable credit insurers to find the right product with the most suitable terms. We are completely independent meaning that you will get the very best policy assessed over three key areas – Cost, Cover and Structure. And whatever type of policy suits your business we can help:

• Whole Turnover – also known as “Ground Up” as this will look to cover all debts from low level to high. Cover can be offered on either a standard Cancellable and Non-Cancellable* basis
• Selective Risk – where you choose which debts you wish to insure and which you’re willing to take the risk yourself on.
• Single Risk – Multiple sales to one individual debtor only, covered for a short/medium term period.
• Single Contract – Multiple sales to the same debtor over a long-term contract benefitting from Non-Cancellable* limits throughout the contract period.

*Non-Cancellable limits are only available from certain Insurers and are subject to additional checks and due diligence requirements. Please ask your Bridge Insurance Brokers Ltd contact for more details.

Which Insurers do we deal with?

The key players within the market are typically:

• AIG – a leading and diverse global insurance organisation founded in 1919 and is listed on the New York and Tokyo stock exchanges. Their Credit Insurance division offers a wide range of policies/structures and they can offer Non-Cancellable Limits on certain polices* and flexible Discretionary Limits.
• Atradius – The Atradius group provides Credit Insurance, Surety Products and Collections services worldwide. The group has a truly global presence and is the second largest Credit Insurance provider in the world. Using its own internal data, plus the data of a Graydon (a wider group company), Atradius has access to the credit data of hundreds of millions of businesses in every corner of the globe.
• Nexus CIFS – part of Nexus Underwriting Management group and formed in 2000. Their Lloyds binding authority is underwritten by several Lloyds syndicates and Nexus CIFS pride themselves on providing nominated risk underwriters to support their clients
• Coface – believed to be the 3^rd largest Credit Insurer in the world serving over 50,000 companies. With over 70 years of experience Coface now have a presence in 66 countries and has a mission to support their client’s growth in both home markets, and with exports.
• Allianz (formerly known as Euler Hermes) – Incorporated in 1918, Euler Hermes is the oldest and largest Credit Insurer in the world. A member of Allianz, Euler has offices in over 50 countries and is a true global player. Euler have a reputation for innovative solutions, and they are regularly updating their suite of products.
• Tokio Marine HCC – a leading specialty insurance group with offices in the United States, the United Kingdom and continental Europe, transacting business in approximately 180 countries and underwriting more than 100 classes of specialty insurance.
• QBE – listed on the Australian Securities Exchange (ASX) and headquartered in Sydney. The company employs more than 12,000 people in over 31 countries offering commercial, personal and specialty products, and risk management (Credit Insurance) to their customers.
• Zurich – a leading multi-line insurance provider with a global network allowing them to provide coverage for both domestic and export markets.
• Cartan – The latest addition to the market, Cartan Trade have been established in France for many years now and they have recently begun trading in to the UK. Cartan bring a very fresh approach to the market, plus a significant amount of new (well needed) capacity.

And many more specialist providers including Credendo, Chubb and Markel to name a few. We also have a direct channel into the Lloyds of London Market for more complicated/structured requirements so whatever your requirements we’re here to help.

Can you cover Export Debts?

Absolutely! A Credit Insurance policy can cover both domestic and export debts regardless of whether you have minimal export trade, or it’s 100% of your turnover. The Insurers above have presences all across the globe allowing for local knowledge of export debtors to be passed directly to you.

If you do export, make sure you tell us a rough percentage for each country you deal with and we’ll take care of the rest.

Ongoing Support:

Once your credit insurance facility is set up, our close involvement with you will continue to ensure your expectations are met. This involves regular meetings with you and insurers, as necessary.

We pride ourselves on being available to deal with queries or problems as quickly and efficiently as possible.

Every year, we’ll undertake a review that won’t just reappraise your requirements, but also measure your satisfaction levels. We’ll then search the market as necessary to find you the right product for your updated business requirements.

The Very Best Service:

Our specialist Credit Team are here to understand your business and your cover requirements. Our Account Executives and Support staff boast over 100 years of combined experience within the
trade credit insurance industry – knowledge and experience that is at your disposal.

As a client of Bridge Credit, a dedicated Account Executive will be appointed to manage your policy and be your main point of contact providing you with the very best service possible.

Our client base ranges from small, owner-managed businesses to large international companies. Whatever your size, we can design an innovative trade credit insurance solution that’s right for you.

Section 2 – Surety and Bonds

Whatever type of Bond you’re looking for you’ll need the support and advice of a specialist surety Bond Broker. Through our partners we are once again able to provide you with the best options on the market and ensure that you have the best possible support to ensure you comply with your contractual obligations during the period of the Bond.

What do you mean by Surety/Bonds?

Typically, an “Applicant” – or the person who is requesting the Bond – will request a Bond to be put in place as part of a “contract” between them, and your business. You are stated on the Bond as “The Risk” and essentially you are offering them a promise of some form, depending on the type of Bond being requested. The applicant has the additional comfort of the Bond and the contract can then begin.

What types of Bonds can you offer?

• Duty Deferment Bonds – Duty on goods imported from outside the UK/EU are payable upon arrival. A DDB allows for this amount to be paid up to 6 weeks later providing better cashflow for your business.
• Performance Bonds – A performance bond covers the damages suffered by the Applicant in the event of non-performance by the Risk.
• Retention Bonds – Retention Bonds can be offered to the Applicant ensuring that the Risk is able to benefit from the early release of retention monies.
• Road & Sewer Bonds – Required as per the Highways, Water and Planning Acts.
• Advance Payment Bonds – These can be used when the Applicant pays the Risk in advance so that raw materials can be purchased in order to complete a job.
• Deferred Consideration Bonds – These are often set up where the Applicant is a landowner where the land is being developed by the Risk and payment for the land is deferred until post completion.
• Reparation Bonds – Where land utilised for a project for a number of years has to be put back the way it was once the project is de-commissioned. This is prevalent in the Environmental Sector at the moment specifically around wind and solar farms.

Plus, Environmental Agency Bonds (landfills etc), Pension Bonds, Payment Guarantee Bonds (similar to Letters of Credit) and many more.

Why should I use Bridge Credit?

Historically, business owners may have approached their Bank for their Bond requirements however while the Banks are able to offer this, typically they will require Security as they are effectively providing a “Guarantee” to the Applicant. This could be a Commercial/Residential property, a full Debenture, Personal Guarantees or even Cash Coverage at a £ for £ rate.

What Bridge Credit offer through the Surety Market is a switch from a “Guarantee”, and the security that goes with it, to a “promise to Pay” by an Insurer based on a risk assessment and an annual premium. There are two key benefits to the “switch”:

1) The most obvious benefit is that by issuing bonds through the insurance market, you can free up badly needed working capital that could have been otherwise retained/deducted from your overall credit facilities with your bank. A bank tying up £200,000 of your cash just to cover a £300,00 Performance Bond, for example, simply doesn’t make sense in today’s turbulent economy.

2) A typical feature of the Bank facility is that the Bond is stated as “On Demand”. A call upon the facility is made and the Guarantor (Bank) makes the payment without question. The Insurance market however prefers to provide bonds which are “Conditional” whereby if the Applicant calls on the “Conditional” Bond it is up to the Applicant to demonstrate that they are justified in doing so, thereby reducing the risk of an unfair, or unjustified, call on the Bond.

What’s the cost and what do I do next?

The growth of the UK Surety Market is having a positive effect on prices and we are seeing Bond rates becoming increasingly more competitive over the prices quoted by Banks. As your Broker we would recommend that those businesses with bonding requirements who currently use their bank to get in touch with us at your earliest convenience to discuss available options.

Section 3 – Credit Consultancy – “Supply Side”

Following on from the benefits of Credit Insurance, one thing is for sure – just as our clients could be selling to debtors and want protection while doing so, they could also very well be buying off other providers. This could be stock, raw materials, services etc. but whatever it is they are “debtors” to their suppliers and the supply terms they get are equally as important as the credit terms they give out.

In a perfect world we’d see purchases on 30 days EOM and sales on 30 days DOI allowing for a full neutral position on cash out and cash in – but we don’t live in a perfect world!

For example, what if your suppliers also use Credit Insurance and they, like you, will only offer Credit terms to debtors their Insurer accepts? What if the Insurer has an impression of your business that means they don’t want to issue any cover?

This is where the Bridge Credit Consultancy service can help:

How does this affect me?

The one thing we’ve learned in years of working with the Credit Insurance world is that Insurers hate one thing more than anything else – uncertainty. If they don’t have a clear picture of what’s happening within a business, then it’s far easier for them to say “No” rather than “Yes”.

Certain elements concern Insurers more than others but crucially some of the key situations we see which affect your position with the Insurers could include:

• “Old” Accounts in the public domain – Once the last set of accounts available for inspection are over 12 months old then Insurers will instantly question what has been happening since the last set were released? More up to date Management Information, or even Draft Accounts, can provide Insurers with a more “Live” picture and so encourage them to provide cover.
• “Bad” Accounts – Just because a set of accounts shows a reversal on the performance compared to the year before it doesn’t necessarily mean that the business is struggling, and there could be a multitude of reasons why the change has happened. But without full information, and the “story” around the change, what else can Insurers think?
• Abbreviated Accounts – While perfectly within the rules of the UK, abbreviated accounts don’t tell anywhere near a full picture of a business. For example, if the net worth of a company reduced year on year then the only assumption the Insurers can make is that the company has made a financial loss. But so many more other, less negative, things could be in play and its essential Insurers get the full picture.
• Changes of Directors/Owners – Often the first an Insurer knows about a business sale is when the change of Directors has been noted at Companies House and by that time it’s too late. Without information such as “who the new owners are”, “what’s their intentions with the business” Insurers will always err on the cautious side and remove cover first, then ask questions later.
• Closing of Subsidiary Companies – Once a group company closes a subsidiary the Insurers first thought is that “if it could happen to one group company it could happen to another”. Rightly or wrongly they make this assumption but if another group company is one that they are currently writing cover on then we all know what will happen next – a reduction or even a full cover removal.

There are many other factors that can affect the view of an Insurer, but one thing is for sure – if the Insurer has any concerns over your business then they will act by reducing their exposure. This in terms affects your suppliers who credit insure your debt to them and the next phone call you’ll receive will be suppliers demanding cash upfront for supply.

How can we help?

The first thing to say is that the earlier Bridge Credit are brought in the better – prevention is certainly better than cure! Initially we will speak to the Insurers on your behalf and ascertain:

1) What cover they currently have in place on your business?

2) Has that position changed recently (positive or negative)?

3) What concerns do they have about your business?

4) What do they need to address those concerns?

Once we have these initial points, we will then work with you and utilise the relationships in place with the Senior Risk Underwriters within each of the major Insurers. Through the supply of information, conference calls, direct Insurer meetings etc. we will look to leverage the relationships with the Underwriters to:

• Improve (or at least Strengthen) the view Insurers have about your business.
• Open up direct channels of communication between you and the Senior Risk Underwriters to ensure information/co-operation continues to flow.
• Conduct regular reviews on the Insurer position.
• Directly intervene if suppliers highlight a particular issue with offering your business credit terms.

And one final point specifically on Business Sales/Transfers – it is essential to engage us at the earliest possible time whenever there is going to be a change of ownership within your business. We can form part of the Due Diligence pre-transaction and then ensure that the expectations on Supplier credit come to fruition post transaction.

When lending propositions rely on cashflow forecasts, and cashflow forecasts rely on debtor and supplier terms, the fall-off of supplier terms on Day 1 post transaction means that literally all bets are off!

How successful are you and what does it cost?

There are of course “no guarantees” and just because we demand a change in Insurer position it doesn’t mean that they will suddenly change their mind. But if the “story” is right and the information provided paints a different picture then we can certainly be your voice to get the right results.

Historic success rates are high, and we can adapt the cost to either a Fixed Fee for the work involved, or on a Success Rate Commission based on the difference between the start and end position.