“Fair-weather friends” prone to make “fairly arbitrary decisions.” These are a few of the criticisms recently hurled at credit insurance companies, who are seen as exacerbating the tension between buyers and suppliers during the downturn.
CFO.com put these gripes to Jérôme Cazes, CEO of Coface, a French credit insurance provider. He responded by saying that the perception of a widespread withdrawal of cover is wrong, and suggested ways that companies can work more closely with insurers to ensure coverage throughout the cycle.
In reading headlines in the business press, it’s easy to get the impression that credit insurers are withdrawing cover en masse. Is that the case?
On a macroeconomic level, there has not been a major decrease in coverage. On the contrary, Coface’s coverage increased more than 12% in 2008. But it’s true that for specific companies there has been a reduction or cancellation of coverage by one or more credit insurers.
These reductions have not been without reason. We have seen a sharp rise in bankruptcies around the world, particularly during the fourth quarter of last year. According to Coface’s own research, the bankruptcy rate for non-investment-grade corporates rose five-fold from 2007 to 2008.
So why does there seem to be so much hostility towards credit insurers these days?
When credit-insurance buyers recently began hearing from their suppliers that they are nervous and want cash on delivery, the suppliers often claim that they’re acting under pressure from their credit insurers. Sometimes it’s true, sometimes it’s not.
There has been a tendency to make credit insurers scapegoats. We only insure about a fifth of the trade in countries such as the UK, France and Germany but we are cited as the reason for altering credit terms much more frequently than should be the case. It’s difficult for suppliers to tell customers that they have lost confidence in them. It’s easier to say, “I am confident but my credit insurer doesn’t like you any more.”
What advice do you have for companies that are afraid of losing cover?
First of all, it’s useful to distinguish the position of a company vis-à-vis credit insurance. It can be a seller of goods that obtains insurance on its customers or it can be an indirect beneficiary of credit insurance as a buyer of goods from suppliers who are insured.
The buyers are not our customers. We have no legal relationship with them, but we welcome direct communication. Unfortunately, crisis communication for some firms means no communication. Some smaller companies try to delay the publication of accounts or otherwise hesitate to communicate about their financial position during times of crisis. But when there is no information, stakeholders, including credit insurers, often assume the worst. It’s better to anticipate the situation rather than react after a reduction in coverage has taken place. We have organised systems for all corporates to access to us easily.
How can suppliers — your customers — hang on to their cover?
A credit insurance contract is a kind of partnership. The best way to get a good deal is through dialogue. For example, a company should discuss with its insurer whether it shares a similar assessment of the risks it faces. With our customers, we often see that they readily provide the positive information they have, and are much more reluctant to share information on potentially negative trends.
What sorts of information do credit insurers find most useful?
It’s not rocket science — the basic financial situation of the company and its cash position. The problem, of course, is that these days balance sheets deteriorate rapidly from quarter to quarter. The challenge for customers is to anticipate and explain why a deterioration may not be as dramatic as it seems because, for example, measures are being taken and the company is able to adjust to the downturn. More and more, we consider that one of a company’s key assets is its ability to react quickly. We are not looking out three years in advance; we are looking to cover 30 or 60 days of trade.
Has the recession permanently damaged relationships between insurers and their clients, or will the “scapegoat” phase eventually pass?
There will be different reactions in different countries. In France and in the UK, there has been more of a tendency to make credit insurers scapegoats, which does not improve the dialogue. In other countries, such as Belgium, the reaction has been very different. There, stakeholders explain that credit insurance is an important tool and are working to facilitate access to it, with politicians recently scrapping a tax on credit insurance premiums, for example.
On the whole, I think that relationships will improve, though the process will vary by country.