january 19 th, 2010 a presentation to the professional credit and financial association of calgary...

January 19th, 2010

A Presentation to The Professional Credit and Financial

Association of Calgary

Ian Lydiatt InRisk Solutions Inc.

http://www.inrisksolutions.com

“Trade Credit Insurance – What is it and How Can it Help Me?”

Trade Credit Insurance . . . Defined

In simple words:

It is a stand-by security in the form of an insurance policy with individual company coverage endorsements from an insurance company, that generally pays 90% of any individual company accounts receivable/shipments exposures, if there is a non-payment or default by one of a company’s client endorsees who have a accounts receivable owing.

Trade Credit Insurance . . . Defined

It is conditional to:An executed trade credit insurance policy boiler

plate + additional amendments specific to unique negotiated terms

Each company client being presented to insurer and pre-approved in advance of any shipment

Each company client having a specific endorsement to a specified amount (ceiling amount) with a general 10% deductable on each claimAny specific conditions for each endorsement coverage (i.e.

– a guarantee held or a Letter of Credit for 50% of any value)

The policy will have an annual cap or limit on total claims

Trade Credit Insurance

Specific company endorsements can be withdrawn for post-shipments upon notification

Cannot be withdrawn on shipments prior to date of cancellation notice provided


There are normally two types of trade credit coverages:

1. Protracted Default – in a case where endorsed company simply fails to pay within terms

1. Payment is usually delayed by a built-in 90-180 days – accounts for a cooling off period in case of subsequent resolve and payment

2. Bankruptcy or Receivership - business closure or failure

1. Payment is usually within a standard 30-60 days (subject to negotiation)


In addition to the standard Protracted and Bankruptcy coverages . . .

You can negotiate additional Forward Price CoverAllows for a fixed price term contractIf endorsed company goes off-cover at some point

during term:All shipments are covered up to cancellation notification

receiptAllows recoupment of any pricing differential between

contract price and market price (if lower – over the balance of contract)

Trade Credit Insurance . . . Strategies

Always always always . . . . . . negotiate through a well known

Broker

Going direct . . . clout is non-existent as you are one company, even if yours is large >> vs. broker who does this daily

Going direct saves zero monies – insurers always protect broker

A large broker has his fees built in – free to you without cost!


Get at least three quotes as coverages not always the same

Ask for references on claims payment values equal to yours

A few insurers by reputation force you to sue – know them!


Be sure to check out insurers for claims payment history

When speaking with other insurer clients, ask on . . . Competitors > to broaden your scope of insurersClaims payment record > to be sure there is a good

consistent claims paid recordTo find out how long they have had a policy = happinessTo understand frustrations if anyTo hear if any others they know have had

problems with current insurer

Trade Credit Insurance . . .

Question: Why don’t more North American companies use trade credit insurance?

Answer: The unspoken truth:Job protection. Credit insurance annual costs thought as large and credit people think why does a company need my services if they have credit insurance?!

In reality, if there isn’t a good credit

person and/or credit policy, credit insurance may not be approved by insurer; sometimes even a condition


Mechanics . . .

Premiums paid and based on total presented portfolioCosts can be spread out over each yearPolicy and costs provide an even base line vs. bad

debts @ 0.5%You can cover a selected broad cross-sectional group

Premium rate based on broadness of portfolio You do not have to cover premium clientsPremiums vary from less than 0.5% to over 1%

Based on your type of business and risk profile per each endorsee


Advantages:Your competitors won’t know you have itYour customers won’t know you have it on themCosts are usually justified when trying to sell a

large contractPremiums usually less than or equal to an

allowance for doubtful accountsNo surprises for YE resultsBesides credit, you now have another set of

external eyes on each approval prior to shipmentPremiums usually less than or equal to an

allowance for doubtful accounts


One last - AND MOST IMPORTANT - Advantage:

Having a Trade Credit Insurance Policy in many cases gets you a higher bank line based on the higher quality of your A/R

. . . This means the bank could increase leverage from 60% to 80% of your A/R because having insurance increases quality


Disadvantages:

1. It can take 24-48 hours per endorsement if insurer doesn’t know endorsee – be sure to build in required response time

2. Increases for existing endorsees can take same time3. Each large endorsement request takes time to present4. Increases reporting and tracking time5. Additional reporting requirements

Except for #3, all of above can become advantage if a threshold amount on required approvals is automatically given on your policy prior to having to request coverage


Questions?

january 19 th, 2010 a presentation to the professional credit and financial association of calgary...

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