The business culture of a country and its companies represents a set of customs and practices regarding how to conduct and manage business.
When a practice becomes economically beneficial to certain parties, it is often presented as essential and indispensable.
This is sometimes the case with credit insurance, whose indispensability is quickly undermined by the figures. It is estimated that between 200,000 and 300,000 companies worldwide use credit insurance, a figure that should be put into perspective with the estimated number of companies with more than 10 employees worldwide, which is 110 to 120 million.
The use of credit insurance is therefore a management decision that has advantages and disadvantages and that has consequences for the organisation of the insured company.What are the advantages and disadvantages? Should you subscribe to this type of product?
Benefits of credit insurance
- For some companies, customer credit management is not considered a key competence of their organisation. They are cautious about this area, which affects commercial relations, and prefer not to interact directly with their customers regarding their creditworthiness, securing receivables and recovering unpaid debts.
Credit insurance allows these inconvenient issues to be outsourced so that they do not have to be dealt with internally. The services it provides also have the advantage of being discreet (except for unpaid debts). In fact, the buyer is not informed that their supplier has requested a guarantee to cover their credit risk.
- Some insurers are excellent at gathering financial and behavioural information on companies and performing high-quality credit analyses. To do so, they have internal (regional offices) and external (access to confidential information) resources that companies can only obtain by purchasing financial reports from specialised providers at a high price.
The guarantee granted to a buyer is determined based on their assessment and provides both coverage against the risk of non-payment and valuable information about the buyer's creditworthiness.
This principle generally holds true in France and certain OECD countries. However, it is much less applicable in other countries where financial information on companies is less readily available or even non-existent. The approach taken by export insurers is more macroeconomic (country risk, sector of activity) than microeconomic (buyer analysis) and thus loses some of its relevance.It is the combination of the assessment of the risks intrinsic to the company, its sector of activity, and the economic situation of the country, or even the global economy, that allows for a fair assessment.
- In order to retain their right to compensation in the event of non-payment, the insured must apply the principles of the insurance policy in their sales process, which provides structure for the company and requires it to manage its receivables with due diligence.
Credit insurance is therefore attractive to companies whose management is not optimal, as it forces them to adhere to the fundamentals of good management. For example, it is impossible to continue delivering to a customer who has outstanding payments.
- The cost of credit insurance is relatively modest and avoids the need to hire one or more employees specialising in credit management, which is not the core business of the company.
- Credit insurance includes several useful services: from customer risk prevention to effective collection of unpaid debts, including securing customer accounts up to the amount of guaranteed customers and the guaranteed portion (the portion of the unpaid debt compensated by the insurer, around 90%).
- Digitalisation and interconnection between systems enable much more efficient use of credit insurance, with automatically updated guarantees, alerts and management tools, etc.
Credit insurance limits
- In most cases, taking out a credit insurance policy means delegating customer risk management to the insurer. Payment terms and credit limits are only granted to customers if the insurer provides a guarantee.
This poses a real problem because this decision is strategic for the seller, as the stakes are whether or not the sale goes through. It must therefore remain internal.
Like any business, insurers have their own constraints, which may conflict with the interests of their policyholders. Outsourcing customer credit decisions to insurers is therefore unsatisfactory and can cause internal tensions within the company and with potential customers.
- There is no such thing as zero credit risk. Everyone must define their level of credit risk tolerance based on their financial constraints and commercial challenges.
Insurers face significant constraints. They provide coverage for cumulative amounts totalling hundreds of billions of euros. As a result, they cannot afford to take on significant risk in relation to the coverage they provide. Given their heavy quantitative exposure, they cannot afford to be exposed qualitatively as well.
They are therefore restrictive by nature, except for low-risk buyers. This caution often seems excessive to their customers, who need their support to grow their turnover.
- The insurer is often required to provide multiple guarantees for a company in cases where several of its clients are suppliers to the same company. The risk for the insurer corresponds to the sum of the guarantees provided.
It may therefore be restrictive on a new guarantee application because its total commitments have already reached the acceptable limit with this buyer. In this case, the insured does not obtain the desired guarantee not because its customer is not sufficiently creditworthy, but because of the insurer's internal constraints.
- Credit insurance is a silent method of covering credit risk (the buyer is not involved in the process).
It is no coincidence that it has become relatively widespread in France, where there is a certain cultural reluctance to address issues of creditworthiness and payment terms during commercial negotiations.
The disadvantage of this approach is that obtaining sufficient guarantees from customers does not encourage the negotiation of more advantageous payment terms (deposits, invoicing stages before delivery, etc.) or payment guarantees. The insured party is content with standard terms because they know they are covered by the insurer, to the detriment of their cash flow.
This reality contrasts with Anglo-Saxon culture, where the exchange of financial information and the negotiation of payment terms are central to commercial negotiations. This results in shorter payment terms overall and a total lack of interest in credit insurance (excluding excess of loss).Conclusion
Credit insurance offers numerous advantages in terms of prevention and securing customer accounts. It also provides debt collection services and is a reliable source of financial information about companies. However, it is not a miracle solution. Insured companies often expect too much from their insurer, particularly those that only grant credit (or a credit limit) if they obtain a guarantee, which is a mistake.
In doing so, they are inevitably disappointed because the insurer has its own constraints, which can sometimes be contrary to the interests of their clients.
In some cases, they may hinder their commercial development when this is not justified.
The decision to grant credit to a customer rests solely with the seller, who must maintain in-house expertise enabling them to make judgements and argue their case with the insurer in order to defend their requests for guarantees.
The insurer should be seen as an important and often valuable partner, but only a partner, not the decision-maker when it comes to the payment terms granted to its customers.
The use of this type of service is therefore a choice made by each company, which must in all cases ensure that its organisation is consistent in order to deal with credit management issues: risk management, amicable debt collection and litigation.