Getting the credit insurance you want and need: Reliable tactics for multi-buyer receivable policies

By Rob Downey

In previous blogs posts on the topic of Trade Credit Insurance (TCI) policy administration, we heard from a West Virginia hitchhiker on the necessity of changing tactics, and from the Roman gods Apollo and Daphne on the benefits of changing thinking to suit the demands of the day.  Today add Mick Jagger and the Rolling Stones to the list of those who took up other careers, but might have been great Treasurers, Chief Financial Officers or Credit Managers by virtue of their abilities to retain the essential flexibility of mind and openness to tactical change necessary to use trade credit insurance products wisely.

You can't always get what you want… but if you try sometimes, you just might find, you get what you need."

With the dawning of 2011, I address all insureds holding Multi-Buyer (MB) receivables policies: If you are concerned about gaps in your MB coverage or restrictions that keep certain credits outside your insured portfolio, think about your situation anew. My partner at ICBA USA, Trish McCarthy, assists fifty of our largest clients every month with their operational (limit requests and amendments), administrative (renewals, past dues, shipping reports, and other filings) and claims-related concerns. She recommends a variety of architectural changes to clients with uncovered accounts receivable:

  • Some MB policyholders with private-sector coverage use a separate Ex-Im Bank (government-backed) Single-Buyer (SB) policy to cover their large risks in markets where private-sector underwriters are off cover for reasons to do with political volatility. This solution works well so long as your product qualifies under government content restrictions, and the additional cost and month-long approval process is acceptable to you under the circumstances.
  • For large exposures in markets where financial information is either insufficient or unreliable, it may be possible for your bank to arrange viable coverage via a buyer credit mechanism, i.e., either a bank-to-buyer funding or a bank-to-bank-to-buyer funding. This is orchestrated via your bank either way, and involves an insurance-backed loan from your bank to your buyer’s in-country bank or directly to your desired customer in order to support the purchase of your product. There is significant loss of transaction control by you as the seller, but this is a good solution in particular cases.
  • If the main uncovered risks are for large buyers paying for capital goods over credit periods of a year or longer, then separate Medium-Term coverage can be obtained on a one-off basis outside the existing MB (portfolio) coverage.
  • For multi-nationals with a wide array of products, terms, buyer types, and credit competencies around the world, it may be advisable to have multiple MBs in place – each with different styles of underwriters and different levels of deductibles – each tailored to the risk appetite and credit oversight intensity of a particular global Division or product line.
  • Put Options are often available on distressed customers (high credit risk) and therefore tend to be far more expensive than credit insurance. Approach the put option market only if credit insurance is not available on a particular buyer or two.
  • Consider dropping your MB policy in favor of a series of Single-Buyers. This alternative works well when you have a few large concentrations of risk, especially where you do not need a large pool of insured accounts  receivable for the borrowing base.

For a happier New Year (with best wishes from myself and Mick!) think about gaps in your coverage as creatively and as flexibly as possible in 2011. View your world as do hitchhikers, rock stars and gods in love! Actually, isn’t that how we all think of ourselves outside work… or do I reveal too much?!?

(Rob Downey is one of the founding partners of International Risk Consultants, Inc. (IRC) www.irc-group.com – a globally-integrated trade-finance and credit insurance specialty brokerage, which serves as the operating member of ICBA for Asia, Brazil, India and the USA)