How to protect, inform & grow your business with trade credit insurance

Transcription

1 Aon Risk Solutions How to protect, inform & grow your business with trade credit insurance Risk. Reinsurance. Human Resources.

2 2 How to protect, inform & grow your business with trade credit insurance

3 Contents Introduction...5 What is trade credit insurance?....6 Do you really need trade credit insurance?...7 Who buys trade credit insurance?...9 Six reasons for purchasing trade credit insurance...10 Why now for trade credit insurance? What are the main types of trade credit insurance?...13 What else does trade credit insurance cover? How to engage colleagues? How can an insurance broker help? Why Aon? Conclusion & next steps PARIMA is grateful to Aon for producing this guide. The intention of this guide is to provide PARIMA members with an overview of the topic and provide information on the practical considerations when managing this important risk management/insurance issue. Aon Risk Solutions 3

4 4 How to protect, inform & grow your business with trade credit insurance

5 Introduction 36.2% of the total value of B2B receivables remained unpaid when due. Source: Atradius Payment Practices Barometer for Asia Pacific The topic of trade credit is becoming increasingly important. Having the right payment terms with your customers is critical to your competitiveness and being able to grow your organisation with confidence. Ensuring that those terms of business are adhered to is not always in your control. Without protection that your invoices will be paid, your business decisions are based on faith and past experience alone, which may not be the best grounds for ensuring business profitability. According to the latest Atradius survey results for B2B payment practices for Asia Pacific, respondents stated that 36.2 percent of invoices issued remained unpaid when due. More worryingly perhaps for Asia Pacific businesses is that 50 percent of the value of their receivables are lost if they aren t paid within 90 days of the due date. This is where trade credit insurance and robust credit management policies can help. Trade credit insurance is as much about protection against bad debt as a facilitator for growth and maximising your profitability. This short guide aims to help you understand how trade credit insurance can support your business, assess whether you really need it and give insight into why it is of growing importance. Aon Risk Solutions 5

6 What is trade credit insurance? Basically it s insurance to protect you against bad debt. If your customers fail to pay, the insurance kicks in ensuring you re not left with a cash flow problem. However, it s not just about risk transfer. Trade credit insurance also facilitates growth. As part of your risk analysis process, it helps by giving you more detailed profiles of your customers, allowing you to develop an understanding of markets where growth is an option, underpinned by the confidence that your invoices will be paid. The risks of customer insolvency, or protracted payment defaults, are covered, which may also enable you to negotiate more favourable terms with banks and financial institutions. D EBT R E L I E F Foreign invoices are more likely to go unpaid due to the complexity of payment procedures. Source: Atradius Payment Practices Barometer for Asia Pacific 6 How to protect, inform & grow your business with trade credit insurance

7 Do you really need trade credit insurance? Unsure if you need trade credit insurance? Simply answer the following questions to find out. Yes No 1. Do you sell goods or services on a business-to-business basis? 2. Do you provide credit terms to your customers or have you considered doing so? 3. Would you like to improve your days sales outstanding (DSO)? 4. Are your sales concentrated on a small number of key customers? 5. Would non-payment by a customer have a detrimental impact on your financial performance? 6. Do you plan to expand into new markets, sectors or countries? If you answered yes to any of the above questions, trade credit insurance could improve your cash flow, profitability and growth capacity. Aon Risk Solutions 7

8 The main reasons for payment delays in Asia Pacific The primary reason given for payment delays in Asia Pacific is insufficient funds, according to 47.3 percent of businesses. Source: Atradius Payment Practices Barometer for Asia Pacific Other reasons included the following: 01 Disputes over the quality of goods delivered or service provided Goods delivered or service provided didn t correspond with what was agreed in the contract Complexity of the payment procedure Inefficiencies of banking systems Incorrect information on invoices 06 Buyer using outstanding debts/invoices as a form of financing Formal insolvency of the buyer Invoice was sent to the wrong person According to the International Credit Insurance & Surety Association (ICISA), whose members account for more than 95% of the world s private credit insurance business, nearly 3,000 million was made in claims globally in During the global economic crisis claims peaked at around 4,500 million in How to protect, inform & grow your business with trade credit insurance

9 Who buys trade credit insurance? Trade credit insurance is relevant to all businesses and all markets. In short, any company exposed to business-to-business credit risk, through the sale of goods and services on open account credit terms, can benefit from trade credit insurance. The product is suitable for companies of all sizes from the largest multinationals and corporates to start up SMEs. Organisations that export and / or avail themselves of trade finance facilities offered by banks are particularly likely to benefit. Business-to-business credit risk Aon In Action Flexibility of open account terms without undue risk taking A major commodities exporter in Singapore, trading with a Chinese customer on secured letter of credit terms, was coming under increasing pressure to extend 90-day credit terms. The customer wanted more flexibility to manage their cash as well as reduce letter of credit costs. Aon created a single customer trade credit insurance policy to protect the exporter against non-payment and introduce a leading local bank to finance the receivables. This enabled the exporter to extend attractive and more competitive terms to their customer, while mitigating payment risk. They were also able to improve their cash flow via an insurance-backed receivables finance solution, and the payment method was more costeffective and flexible. Aon Risk Solutions 9

10 Six reasons for purchasing trade credit insurance Put simply a sale is not a sale until it s paid. With trade credit insurance you re protected against losses that affect your business results, even if your customer can t pay. Essentially, your business can benefit from: 01 Risk protection & business continuity Any business providing goods or services on credit terms is exposed to credit risk and the possibility of non-payment.bad debts can have a detrimental impact on the financial performance of a business, affecting profitability, margins and cash flow. Trade credit insurance transfers the risk of non-payment from your balance sheet to the insurer, ensuring that in the event of bad debt the balance sheet is not adversely impacted. 02 Credit management & information A trade credit insurance policy supports and enhances the credit management function of an organisation by providing access to rich and vast customer information and expert risk intelligence held by insurers. This information can be used to make informed credit management decisions, and be integrated as another supplementary check within existing practices. Credit management and collection can be outsourced to the insurer. 03 Finance Trade credit insurance is widely recognised by banks and financial institutions as a credit risk management tool, enabling you to secure access to facilities (and in some cases preferential rates) by providing the insurance policy as security to the bank. Banks can be added as loss payees to a trade credit policy, enabling claims to be paid to a relevant institution. 10 How to protect, inform & grow your business with trade credit insurance

11 04 Open account trade A competitive edge can be created through trade credit insurance, by enabling your business to move from selling on secured terms (for example, a letter of credit) to unsecured open account trade. This also helps to develop relationships and enable more favourable pricing. 05 Sales growth Trade credit insurance supports sales growth, particularly when entering new markets or looking to extend credit limits in excess of internal comfort levels. The policy can be used to identify customers suitable for open account trade and help to develop your sales strategy in the most competitive and efficient way. 06 Corporate Governance Although due diligence can help you identify some customers with bad debt, it s not a guarantee. Trade credit insurance gives stakeholders and investors peace of mind, protecting them against the risk of unforseen losses. Aon In Action Global reach, local service A longstanding Aon US trade credit client decided to open sales offices in Singapore, Indonesia and Malaysia. Aon Asia created a regional programme for the client with local policies in each market and dedicated in-country contact points to provide policy support and advice. Aon, in conjunction with the insurer, worked with the client at headquarter, regional headquarter and country level to ensure: There was direct access to risk underwriters to guide prospect sales Thorough policy training was provided to all new users of the policy The new entities benefitted from a very competitive premium rate by using the existing insurer relationship and experience in the US Aon Risk Solutions 11

12 Why now for trade credit insurance? The global macroeconomic environment continues to chart an unpredictable path, which presents three key factors why businesses are investing in trade credit insurance: Global economy Businesses are feeling the impact of continued uncertainty in the Eurozone, the impact of falling oil prices globally, political considerations such as the Ukraine crisis; and affects of instability in Syria and Iraq. Such ongoing macroeconomic uncertainties continue to impact the trading environment and confidence of all companies, big or small. Regional uncertainty Regionally, businesses are also unsure how to react to economic uncertainties, such as a perceived slowdown in China which has impacted bank lending and buying capacity in the domestic import market, alongside the challenge that exporters face in offering credit terms. Increased competition As trade becomes increasingly globalised, markets become more and more competitive and companies must react accordingly to stay ahead of the pack. Against this somewhat uncertain backdrop is opportunity. With trade credit insurance support, your organisation is underpinned and can build and grow, helping you to manage the risks associated with both new and existing markets and open account trading. Aon In Action Supporting competition A new entrant to the regional banking market approached Aon seeking insurance support for a receivables purchase product they were looking to launch. Aon created a competitively priced portfolio cover, with reduced tiered premium rates, supported by the growth of the policy. This enabled the company to offer competitive solutions to its customer base, fully backed by insurance against non-payment, along with extended credit limits in excess of conservative internal guidelines. Export transactions were also supported into markets where the limited company workforce had no experience or presence. 12 How to protect, inform & grow your business with trade credit insurance

13 What are the main types of trade credit insurance? Trade credit insurance policies are very flexible and can cover an entire portfolio or selected accounts against corporate insolvency and bad debts. If your buyer does not pay, the trade credit insurance policy will pay out a percentage of the outstanding debt. Typically, this percentage is 90 percent of the invoiced amount. But what are the three most common types of insurance cover? 01 Portfolio cover This is the most common type of trade credit insurance and would cover all of your buyers, above a pre-agreed first loss level. In addition, the underwritten buyer portfolio is constantly monitored and any changes in the status of a buyer are highlighted to you. Portfolio cover is often interchangeably referred to as whole turnover cover. 02 Single transaction only This type of cover is particularly useful for organisations that deal with only one buyer or have significant concentration of exposure to one buyer. 03 Selected risks If you do not wish to insure all of your buyers, but need cover against certain selected risks, then a selected risks policy would suit your needs. Two of the most common reasons for choosing this type of cover are the wish to cover key concentration exposures, or receivables that will be assigned to a bank. How does Aon help? As well as being able to navigate you though the insurance terminology, Aon will work with you to understand your business and trade credit risks. We will then be able to tailor a programme and policy structure with the correct limits and terms to protect your organisation. Aon Risk Solutions 13

14 What else does trade credit insurance cover? Trade credit insurance policies that insure against export risks will often also offer political risk cover. This helps protect against non-payment and non-delivery of goods due to circumstances outside of your control, for example war, terrorism, riots, changes in export or import regulations. As well as risk transfer, robust credit management techniques will help you to assess and manage credit exposures, get paid on time and manage delayed payment. Aon s team of trade credit specialists can work with your risk management and credit departments to develop appropriate credit management policies that will offer assurances to insurers and help facilitate financing. A trade credit insurance policy will typically add further value by providing the credit manager with access to: Up-to-date buyer information Country reports Sector updates Studies and surveys on payment trends and evolving credit management practices Debt-collection services Uninsured risks Unless the credit risk has a direct link with an underlying trade transaction, for example the delivery of goods or services, it is not insurable under a trade credit insurance policy. 14 How to protect, inform & grow your business with trade credit insurance

15 How to engage colleagues? Engaging with colleagues and developing internal commitment is sometimes tricky, especially when you re dealing with a subject that s not on most people s radar. We ve highlighted some key talking points that will help create buy-in: Role/Departments: Treasury/finance Key talking points: Cash flow & cash management Protection of financial results Access to finance / working capital solutions Good corporate governance Role/Departments: Sales Key talking points: Support when expanding into new markets Credit vetting of potential clients Open account terms vs. secured terms Supports / guides sales strategy Role/Departments: Credit Key talking points: Minimise bad debt Support internal decision making & buyer monitoring Meet sales team objectives / manage expectations Added value: credit information & intelligence Role/Departments: Risk management/insurance Key talking points: Protection of the organisation against considerable risk /exposure Secures financial results Dilutes concentration risk Quantifies risk, aids planning & ensures business continuity Aon Risk Solutions 15

16 How can an insurance broker help? Once you have internal support, what happens next? Before engaging the insurance market we assess your total cost of risk (TCOR) by analysing data and developing a financial model. The diagram below outlines the key steps we follow to ensure that our proposed solutions are fully aligned to your risk profile and credit management strategy. 01 Needs analysis In depth assessment of your business objectives & requirements, both in the short & longer term. TCOR profiling & financial modelling Credit risk analysis of your receivable portfolio, focusing on the optimum level of risk transfer, risk retention & resource/capabilities Solutions Full cost-benefit analysis of appropriate programme structures & solutions ranging from self-insurance to excess of loss structures. Solution benchmarking & selection Full global insurer market review & identification & selection of appropriate solution(s) Implementation Full implementation of your chosen solution(s) with credit insurance policy management training & support. Servicing Performance against KPIs & service level agreement if in place How to protect, inform & grow your business with trade credit insurance

17 Why Aon? We work with a range of insurers, organisations and partners who can help develop the solution you need to support your business. Our services include: Short term trade credit insurance Structured trade credit and political risk insurance Surety solutions Top up, co-insurance and capital market solutions Captive solutions and deductible funding Policy audits Credit management advice Full claims management service Training and seminars Aon s Trade Credit team is the global market leader by premium volume placed in the insurance market with more than 60 specialists serving 12 Asian markets. Aon In Action Protection from a crippling single exposure A thriving family-run business approached Aon with concerns that their exposure to one particular customer had grown to such an extent that it now presented a serious concentration risk that would pose catastrophic consequences in the event of default payment. While there was an excellent longstanding relationship between buyer and seller, the client decided that it would like to cap its exposure at USD2m; a loss level that would have some impact on financial results without crippling the business. Aon created a USD10m credit limit, in excess of the USD2m hold level, to provide the business owners with the protection and peace of mind they needed. Aon Risk Solutions 17

18 Why Aon? 18 How to protect, inform & grow your business with trade credit insurance

19 Conclusion & next steps Essentially we believe there is a simple equation: Trade credit insurance = profitability + growth + peace of mind Trade credit is one of the most important instruments of external financing. However, in the face of increased competition and economic uncertainty it is not without risk. Late payments and non-payment can leave businesses with a serious cash flow issue and/or a significant impact on your profit and loss account. Trade credit insurance can help protect your organisation from these dangers and provide you with confidence to take risks, expand your business and ultimately get paid. We hope this short guide has been useful and has given you some insights into how trade credit insurance can support your organisation, giving you the confidence you need to reach your business goals. To speak with a trade credit specialist, please tradecreditasia@aon.com Aon Risk Solutions 19

20 About Aon Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world s best broker, best insurance intermediary, best reinsurance intermediary, best captives manager, and best employee benefits consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/ manchesterunited to learn about Aon s global partnership with Manchester United. Aon plc All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Risk. Reinsurance. Human Resources.