Credit Insurance and the Crisis

The definition of the word ‘crisis’ itself alone explains almost all the events that we have seen recently. Deriving from the Latin, it has a similar meaning to the word ‘wind’, thus carrying the notion of switching.

Once the change has happened, there is no hope of returning to earlier ways. The whole crisis thus leads to an accentuated vulnerability.nTo use a more simplistic definition, we can define ‘crisis’ simply as an 'abnormal period' between two 'normalperiods'. The problem is that at this time we do not know exactly what classifies as a ‘normal period’.

To take a positive stance, which is what managers should do, crises should be viewed as a new opportunity to ‘start afresh’, but with more intelligence…

Creating value always involves taking on risk. Every day, managers with a ‘risk appetite’ culture have large ‘wear and tear’ in their financial analyses, which necessarily are subject to concerns about economic risk and financial risk. In addition to all this there is the potential increase in credit between companies, caused by globalisation and the need to enter markets abroad. This job is being delegated increasingly to external ‘experts’, who analyse and approve inherent risk. It is at this time, faced with the need to master ‘risk awareness’, that it becomes key to find a risk partner, giving rise to the need for Credit Insurance.

Credit Insurance, once again in a very simplistic form, guarantees the (credit) transactions between companies, once the latter are deemed to have the ‘right’ to credit in the opinion of the risk analysts of the insurers themselves. Credit Insurance covers cases of the buyer’s Insolvency (de facto or by law), in other words, scenarios in which companies do not have the capability to ‘honour’ their payment commitment on time, or in the case of ‘bankruptcies’.

The world crisis rang alarm bells for many companies, and the demand for Credit Insurance flared worldwide.

Insurers, however, are more selective as they know very well that the kind of managers seeking it only now have a different view from the real function of Credit Insurance. They see Credit Insurance as a final salvation from the uncertainty or even a catastrophic scenario. From the insurers’ point of view, they see Credit Insurance as a long-term risk partnership, which has to be consolidated through a relationship of trust that matures over time, which once initiated, leads to the insurers ‘accompanying’ their client more closely at certain points, something which can not happen when that experience is not there.

So what solution does Credit Insurance offer in times of crisis?

Although all the insurers have a bank as their main shareholder, it is they that help the managers in their day-to-day needs regarding ‘credit management’.

Credit insurers are not limited to indemnification.

When well ‘worked’ by the managers, they supply important information and support regarding:

• Target market to penetrate and its nature (clients’ prospects);

• Objective credit analysis of the client company (allocatable Rating or Credit Limit);

• Monitoring of the client portfolio covered by the policy, alerting the client of the financial impairment and the possibility of a given debtor’s non-fulfilment;

• Charging management processes (due to the greater pressure caused to companies, due to their 'weight' in the market), leading to sound value recovery indices before indemnification;

• ‘Filtering’ and resolution of situations of attempted use of dispute credit, which led the third party to not make payment;

• Management of indemnification processes;

• Indemnification, after the default period has ended;

• Option of post-indemnification, and through agreement between the parties, of the insurer continuing with diligence on the value recovery behind the claim.

Although Credit Insurance has existed since after the War, when it was used to re-establish exports interrupted by certain countries, it is in the last 20 years that it has seen renewed interest on ‘managers’ agendas’, thereby allowing it to grow, especially over the last 10 years.

Currently, at the world level, the policies guarantee credit over USD 2.15 billion, especially in Asia and Europe.

To give an idea, in the first quarter of 2008 alone in Brazil, demand for this ‘instrument’ grew 83% yearon- year. In Portugal, the increase (in credit insurers’ turnover) for 2008 was of 28.88% year-on-year. European average growth was 23.53%. At the world level, the credit insurers’ rankings are

as follows in order of total turnover (insurance and services):

1 EULER-HERMES (who own 50% of COSEC), turnover of EUR 2,166 million

2 COFACE (directly present in 40 countries), turnover of EUR 1,682 million

3 ATRADIUS (owned by CyC), turnover of EUR 1,522 million

4 QBE Insurance (directly present in 45 countries) In Portugal, it is thought that out of 331,250 companies (of which around 300,000 are SMEs and privately owned companies), only 3,700 have subscribed to Credit Insurance as at December 2008. Growth compared to 2007 (in terms of the number of companies) was 5.7%, which is clearly insufficient given the typology and vulnerability of the Portuguese market.

In Portugal, there are currently five Credit Insurance players in operation (in alphabetical order): CESCE, COFACE, COSEC, Credito Y Caución and MAPFRE.

The year 2008 in Portugal was marked as the first year (of the modern economy) in which the absolute value of indemnifications (costs from indemnifications) surpassed the absolute value of premiums charged by policies issued (by around 2% to 4%). In other words, while in 2004 the claim rate was at around 56%, in 2008 that same rate reached about 102% to 104%.

Euler-Hermes, which holds approximately 37% of the world Credit Insurance market, publishes a periodical analysis of the trends of certain sectors in several world economies, at the micro- and macroeconomic level. Its most recent analysis is quite interesting.


By Marcos Polónia - 

Credit andFinancial Risks Managing Director

MDS