In the early 1990s, Salt Lake City-based Utah Metal Works dropped its trade credit insurance policy and began to self insure. Premiums and coinsurance rates were too high and it made better sense at that time to fund a bad debt reserve to protect against non-payers.
But commodity prices spiked in 2005, requiring the $50 million, family-owned company to increase its reserves by some 250 percent. At the same time, Utah Metal Works was offered a credit insurance policy with premiums that cost far less than its previous bad-debt write-downs, so it once again decided to change direction and insure its receivables with Euler Hermes—part of the German financial services group Allianz and one of the word’s largest providers of trade credit insurance.
“Euler came in with rates that were better than what we saw in the 1990s,” says Chris Lewon, an owner/operator of Utah Metal Works, whose exports—mostly to Asian countries—account for between 30 percent and 70 percent of its annual sales. The company’s current policy includes a $4 million maximum annual payout and a 10 percent coinsurance. Two of Utah Metal’s largest customers are each insured in the range of $1.5 million to $2 million.
“We may understand our customer fairly well but it is difficult to see what is effecting their business downstream,” says Lewon. “By insuring our receivables we were basically buying a credit department. Shifting costs from a credit department to Euler Hermes offsets two-thirds of the policy premium.”
Credit insurance can play a number of important roles in a company’s finances. First and foremost, it insures against the risk of non-payment, allowing exporters to ship on competitive open terms. But it also smoothes a company’s relationship with its banks. Some banks will require or favor credit insurance when it comes to financing a company’s accounts receivable.
“It provides banks with a comfort level,” says Lewon. “They don’t have to fully understand my business in order to provide financing.”
Euler Hermes underwrites risks by collecting and analyzing every piece of available information about an insured’s customers. “We have 1,500 underwriters who do nothing but risk assessments,” says Jochen Duemler, the company’s president and CEO. “They collect company balance sheets and banking information and feed that into our analytical systems. The process is done to some degree electronically and to some degree manually, depending on when we need a qualified pair of eyes. At the end of the process each company is assigned a credit grade.”
Credit insurance is more popular in Europe than in North America, notes Kerstin Braun, executive vice president for Commercial Development at Coface North America. “Europe’s economies are more export-based,” she says, “and they have been doing it longer. U.S. exporters also tend to tolerate more risk than their European counterparts. But the understanding and use of credit insurance in North America is growing.”
Smaller exporters often obtain credit insurance through brokers, according to Carey Fiertz, president of Export Risk Management, Inc., an insurance brokerage. “Some underwriters will offer single sale policies although most will not,” he explains. “Some won’t touch anything under $25 million a year while others are happy to take customers in the $100,000 range. Some insurers are willing to handle riskier portfolios than others.”
Coface is making the insuring process easier for its customers with the introduction of an app that can be accessed on mobile devices. “This helps our policy holders assess the quality of potential buyers,” says Braun. “The app accesses our database of 60 million companies around the world. It makes it much easier to review a buyer and make quick decisions even on the road.” The app provides an instantaneous decision on the sales level that Coface will insure on open terms for a specific buyer.
Lewon had to make a claim against his credit insurance policy exactly once, in 2009. It was an established customer, a U.S.-based broker insured for up to $850,000 that shipped to several markets in Asia. The customer suffered severe setbacks when Asian economies melted down in the wake of the 2008 financial crisis, leaving Utah Metal Works with unpaid invoices totaling $589,000.
“We were told they had a problem in early January 2009 and we immediately informed Euler Hermes,” says Lewon. “By April 1, we had a check for $530,000, 90 percent of the loss.
“It didn’t make me feel good about losing 10 percent,” says Lewon, “but it made feel a hell of a lot better than losing 100 percent.”
How to Increase Sustainability in Production