It would be an understatement to say credit insurance has received some bad press recently with small and medium-sized companies feeling the brunt of insurers withdrawing credit limits.
But there is a fact that appears to be conveniently omitted from this coverage - credit insurers continue to underwrite incredible levels of insurance and covered £282bn of UK turnover in 2008 according to the Association of British Insurers (ABI). To put that into context, there are approximately 13,500 credit insurance policyholders in the UK - so insurers are covering nearly £21m of turnover per policyholder.
It's a very simplistic way of looking at the situation but it is the flip side to the press coverage that suggests all insurers have ‘shut up shop' and stopped insuring.
Areas that small businesses should focus on in the current economic climate:
- Improve credit management discipline (record keeping, adhering to payment terms, identifying late payers/delinquent accounts etc.)
- Know your customers - obtain up to date and accurate customer information
- Look at outsourcing collection of overdues to professional companies
- Train staff to ensure they understand the terms of business and the systems that are in place.
It's a commonly held misconception that credit insurance is solely an insurance product but all the above come as part of the policy. These additional benefits create a risk management platform that can transform the credit management function of a business. It's particularly pertinent to SMEs without the resources to dedicate to credit management. A credit insurance policy can offer this risk management support in one simple package.
One of the most frequent comments we hear about credit insurance is that "it's too expensive" or "we only deal with blue chip companies" or "we don't have bad debts". We frequently come across cases where firms don't know the company they are trading with as well as they thought - and in some instances it's not even the same company!
As far as the question of expense is concerned, it all comes down to what value is placed on protecting your company's sales revenue. At approximately 40% of the value of a company's balance sheet, revenue is one of the most important assets a business.
The reality of the current economic environment is that it is becoming increasingly difficult to identify where the next insolvency is coming from. The credit insurers have professional teams of underwriters and analysts whose job it is to try to do just this. They are not infallible so there are occasions where insurance cover is cut or removed and the company continues to trade and these are the situations that are continually highlighted in the press. But what about all the companies identified as being high risk that have since become insolvent? This early warning system has helped numerous policyholders manage out of these accounts and onto more profitable business before incurring a loss.
There has been an unprecedented increase in the number of credit insurance enquiries received in the last 12 months as the recession has kicked in. We've seen the number of SME businesses buying credit insurance increase by 20% since 2007 and this is continuing to rise. The reason for this is simple - it is a protection product that will help ensure the survival of their business should one of their customers become insolvent whilst owing them money.
For more information visit www.aon.co.uk
