Presentation on theme: "Credit Insurance Accounts Receivable Insurance presented by Aon Reed Stenhouse Inc. Calgary May 18, 2010."— Presentation transcript:
Credit Insurance Accounts Receivable Insurance presented by Aon Reed Stenhouse Inc. Calgary May 18, 2010
2 Credit Insurance 2 Headlines (In the beginning….) Sept 16 (Herald Tribune) How can this be happening? How can it even be possible that we wake up on a Monday morning to discover that Lehman Brothers, a firm founded in 1850, a firm that survived the Great Depression and every market trauma before and since, is suddenly bankrupt? Sept 18 (Reuters) - On Main Street, insurance protects people from the effects of catastrophes……credit default swaps are turning a bad situation into a catastrophe. Five years ago, billionaire investor Warren Buffett called them a "time bomb" and "financial weapons of mass destruction" and directed the insurance arm of his Berkshire Hathaway Inc to exit the business….AIG Shareholders would have been happy. Sept 26 (Reuters) - Banks worldwide hoarded cash and showed a growing reluctance to lend, driving rates that institutions charge to each other on loans to a record high in London. Sept 26. (Reuters) - Washington Mutual Inc was closed by the U.S. government in by far the largest failure of a U.S. bank ……its banking assets were sold to JPMorgan Chase & Co for $1.9 billion. Oct 20. (Time Magazine ) - “The Meltdown Goes Global”
3 Credit Insurance 3 Headlines (So what happened….) Lehman Brothers #1 (US $691 billion) Washington Mutual #2 (US $327 billion) General Motors #4 (US $91 billion) CIT Group #5 (US $71 billion) Chrysler #8 (US $39 billion) Masonite Circuit City/The Source Simmons Company Chicago Sun Times Canwest Global Communications Corp. McNally Robinson Reader’s Digest Wall Street to Main Street (Great Depression) and Main Street to Wall Street (standard)
4 Credit Insurance 4 Accounts Receivable What is “accounts receivable”? –The dollars owed to a company for goods sold or services rendered, i.e. a promise to pay –One of a company’s largest assets…and one of its most volatile. –If it makes sense to routinely insure other assets, does it make sense to insure this one?
5 Credit Insurance 5 Perils Covered Export TradeDomestic Trade Accounts Receivable Risks Insolvency Protracted Default Commercial Default Cancellation of Import/Export Permits Inconvertibility/Transfer Risk Refusal of goods by the foreign customer
6 Credit Insurance 6 “An insurance policy that covers the losses associated with unpaid receivables.”
7 Credit Insurance 7 Remember!!! What is credit insurance? –It is insurance of a company’s “Accounts Receivable” against non-payment due to: Insolvency/bankruptcy Protracted Default Political Risks –Credit Insurance is: an insurance tool, a sales tool, a financing tool; and it demonstrates sound Corporate Governance
8 Credit Insurance 8 Benefits of Credit Insurance Avoid excessive bad debt expense (Insurance Tool) –Bad debt (an unpredictable budgetary item becomes predictable) –Bad debt expense is capped (based on company’s appetite for risk) –Provision for doubtful debts may be reduced (improves profit) –Protects against “Oh my God, I’m fired” possibility. Obtain competitive advantage (Sales Tool) –Competitive advantage gained especially in high risk, thin margin industries (where a large bad debt can be simply devastating) and when seeking to grow business in new geographies or with new buyers. –Facilitates trade on open account.
9 Credit Insurance 9 Benefits of Credit Insurance Facilitate/enhance financing (Finance Tool) –Improved margining and reduced borrowing costs because the receivables are credit enhanced by a highly rated insurance company. Demonstrates sound Corporate Governance in a corporate world that has placed an emphasis on prudent internal controls and disclosure of risks. Answers the question: What is your company doing to manage their risk?
10 Credit Insurance 10 Market Comparison Total Canadian Premium = $200,000,000 Europe - credit insurance is a mature product North America - credit insurance is a growth product Canada - in excess of 15% growth year on year since 1990
11 Credit Insurance 11 Market Comparison Premium Total = $200,000,000 Canadian Credit Insurance Market 2010
12 Credit Insurance 12 Companies most inclined to purchase Credit Insurance Companies in very competitive industries –Offer better credit terms to increase sales Companies with thin profit margins –takes more sales to pay for a loss –commodity producers and distributors Companies expanding quickly and/or trading in high-risk geographies –Concentration of risk to one or two customers or geographies Companies in financial difficulty –Taking extra risk to push product out the door Companies needing/seeking financing –Receivables are used as security for a loan. Credit insurance enhances the value of the receivables. Companies that export –Reduces risk of the unknown –Help increase sales
13 Credit Insurance 13 The Export Trade Credit Insurance Industry Chart from Swiss Re; ¹ Industry statistics and company statements
14 Credit Insurance 14 Policy Terminology Policy Limit – Insurer’s maximum liability under the policy. Buyer – The Insured’s customer. Deductible – Typically the aggregate sum of qualifying losses that the Insured shall bear on its own account. Could also be in the form of a per buyer deductible. Discretionary Credit Limit – The amount up to which the Insured may extend credit without the underwriter’s endorsement.
15 Credit Insurance 15 Policy Terminology Non-Qualifying Losses – The amount up to which a loss is borne in its entirety by the Insured - not considered towards the deductible. Insured Percentage – The percentage of a claim that is borne by the Insurer (80%-90%). Premium – The cost of the policy. Commonly based on a percentage of the Insured’s annual sales. Typically quoted at $0.XX/$100.
16 Credit Insurance 16 Insurance Policy Parameters General Considerations: –Insurance policies are not financial guarantees. Claim payments are dependent upon policy terms and conditions. –First time buyers may not fully understand the policies terms and conditions. Brokers work with many Insurers on behalf of the Insured. Agents represent their company when addressing an Insured’s needs. –The application of funds is important, especially if the Insured received COD payments. –Insurers don’t take FX risk. Is the claim to be paid based on contract date or claim settlement date?
17 Credit Insurance 17 Insurance Policy Parameters General Considerations (continued): –Did you know that two deductibles can apply to a loss that spans two policy periods? –Unless the Insured carefully follows the discretionary credit limit requirements, a claim could be denied. Cancellation Considerations: –Buyers limits can be reduced or cancelled during the policy term (some exceptions). Has the broker negotiated Binding Contracts Coverage or Pre-Shipment coverage? When does the cancellation provision take place, 5 days, 15 days, 3 months? –Insured’s performance risk. Non-payment of premium can result in policy cancellation. Lack of utmost good faith could jeopardize a claim payment. How do you know?
18 Credit Insurance 18 Insurance Policy Parameters Reporting: –Claims reporting differs from Insurer to Insurer. Some claims can be denied because they were reported one day late. Is 180 days really six months? –Some policies state that the buyer insolvency must occur during the policy period, others give a six month grace period. –Overdue receivables need to be reported monthly, quarterly, or not at all. It depends on the policy. –Immediate notification of a distressed buyer is also policy dependent.
19 Credit Insurance 19 Insurance Policy Parameters Exclusions: –Did you know that at policy inception receivables more than 30 days past due could be excluded from cover? That could mean the buyer is also excluded from the policy. –Foreign countries are excluded, unless specifically included. –Trade disputes are never covered. –Non-performance of the Insured or causes avoidable by the Insured are excluded. –Does the policy have a cease-shipment clause? –Rescheduling a buyer’s debt without the Insurer’s approval will likely void a claim. –The Insured must attempt to minimize the loss or institute collection procedures.
20 Credit Insurance 20 Remember!!! What is credit insurance? –It is insurance of a company’s “Accounts Receivable” against non-payment due to: Insolvency/bankruptcy Protracted Default Political Risks –It is an insurance tool, sales tool, and financing tool. It demonstrates sound Corporate Governance.
21 Credit Insurance 21 Why use a Broker? The broker helps guide the Insured through the “small print”, claims, reporting, and buyer approvals. The broker works for the client, not the insurance company. Market clout Aon Credit Insurance Services in Canada –Years of experience –Credit Managers of multinationals –Underwriting experience
22 Credit Insurance 22 Why use a Broker? The broker helps guide the Insured through the “small print”, claims, reporting, and buyer approvals The broker works for the client, not the insurance company Market clout Aon Credit Insurance Services in Canada –Years of experience –Credit Managers of multinationals –Underwriting experience Brokers need to buy groceries too! Using a broker won’t cost you any money
23 Credit Insurance 23 Who is Aon Trade Credit? Organized in 1912 as the Credit Insurance Association (C.I.A) Global staff of 380 employees in 30 countries World’s largest specialist credit insurance broker In Canada our clients include the following industry sectors… –Forestry –Wholesalers –Specialty textiles –Financial Institutions –Manufacturers: steel, building products, electronic components, consumer electronics, health care products Sales cycle
24 Credit Insurance 24 Who is Aon Trade Credit? DAVID DIENESCH PH: KATHY JOVANOVIC PH STEPHEN COOKE PH: TANYA REDA PH: