Credit Insurance Important Than Ever
The effects of the global credit crisis has highlighted the important role that credit insurance can play in stabilizing trade flows. Some have even blamed for the disappearance of well-known brands of credit insurers. But this shows a misunderstanding of the role of credit insurance.
In her song Big Yellow Taxi 1970, singer songwriter, Joni Mitchell sang “Do not know what you have until it’s gone.” And in the world of credit and finance, the current economic crisis is the Big Yellow Taxi remove much of the financial support that many companies had come to assume would always be there. The effect is twofold. Companies have found their customers can not pay, and are often unable to obtain financing of trade credit from their banks to compensate for lack of cash flow.
Insurance – other insurance – it must have limits
Credit insurance is just that – insurance. Like any form of insurance, credit insurance is there to protect insured clients. And again, as with any other insurance, there are limits to what can be insured.
It would not be surprising that a car insurance company refused to insure an unlicensed driver or that the blink of an eye if coverage is dropped from a licensed driver who has lost sight. The auto insurance company would simply making prudent decisions, based on common sense to cover the risk profile of potential drivers. These decisions help the client to avoid unacceptable risks. Even an increase in premiums will not change the fact that the high risk of an accident that these drivers at the wheel of a car that makes these drivers can not be secured.
This is essentially what credit insurers do on a regular basis. Analyze the risk that a buyer will not pay for purchases made on credit and guidance to customers outside buyers are likely to fall into this category of risk. In the current economic climate however, is considered necessary to help clients avoid unnecessary risk by reducing coverage potential buyers more often.
There is an analogy with the credit insurance. The economic landscape is constantly changing, and during a recession like the present, changes are quick and hasty. Credit Insurers therefore need to revise its risk portfolio, and remove the cover of buyers who have gone beyond the tipping point from uninsurable to insurable risks.
But let’s put it in perspective
As for the total portfolio, the number of withdrawals from the deck is very small – a single percentage figure, and focused on an even smaller proportion of firms (ie, a series of withdrawal limits apply to a single risk ). Atradius has maintained cover the vast majority of the risks, provide coverage and invaluable financial safety net in the current economic crisis.