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The Future of Credit Insurance in a Digital Era

Personal Opinion.  Hui Wang,  an experienced Trade Credit/Political Risk Insurance and Finance Professional

Credit Insurance has been playing a key role in the past century to promote trade domestically and internationally. Trading partners were freed up from strict payment conditions to much more flexible trading terms.

Traditionally credit insurance is for the sellers to cover the payment risks from the portfolio buyers due to financial inability to pay for the goods/services purchased with payment terms, normally within 180 days.

Gradually credit insurance is not only a risk transfer tool but also used for financing purpose. More and more sellers sell their accounts receivables (ARs) to banks and other financial institutions to get cash quickly with the support of credit insurance—under most of occasions banks or other financials will not provide financing against ARs without credit insurance.

However AR financing or factoring is not all for trade finance; especially for SMEs, they need finance at almost every stage during the trade cycle, such as they need financing after getting purchase orders from their customers to purchase raw materials or goods from various suppliers. In real business world, needs for order financing are much larger than ARs financing for SMEs. How credit insurance to meet various financing needs is a topic and challenge for credit insurance industry. We also see innovations in different markets for credit insurance, such as the loan insurance scheme and dealer financing policies etc.

Policy wording innovation is only a small part of innovation for credit insurance and the fundamental innovation should come from the underwriting and risk monitoring. We all know that the biggest problems for credit insurance are coming from the inadequate credit limits approved by credit insurers and almost every policy holders encounter such problems in daily management of their policies and the time spending most is to argue with credit insurers for higher limits.

So where this problem comes from?  The likely culprit is UNDERWRITING AND RISK MONITORING by the insurers.  Credit insurers are evaluating the payment risks based on the financials of the obligors, however due to various reasons most of the times the financials cannot reflect the true payment abilities of the obligors. More importantly, credit insurers will sit back after approving a limit and they don’t have the ability to monitor how the businesses are running after a credit limit is granted. Insurers can only know a risk that could potentially occur when they receive the reporting from the policy holder at which time the risk has accumulated for months and it is already late for taking actions to minimize the risk. So the insurers will take a very conservative approach to evaluate and approve a limit. From the other side, the policy holder side, they will never feel satisfied with the insurers as the insurers cannot meet the needs for their normal business conducting.

So what should credit insurance do to match the needs from policy holders? CHANGE THE WAY OF UNDERWRITING AND TAKE A PROACTIVE APPROACH TO MONITOR THE RISKS!  Thanks for the digital era and we are able to not just relying on the out of dated financial information but we are able to collect and analyze the trade related data in a real-time manner.  In this way credit insurers will no longer feel being hided from risks and they can see what’s going on by applying IT technology.

This article was published on July 24th 2017 on LinkedIn by Hui Wang, Experienced Trade Credit/Political Risk Insurance and Finance Professional. The article includes a number of slides illustrating the underlying thoughts of the author.

Credit Insurance has been playing a key role in the past century to promote trade domestically and internationally. Trading partners were freed up from strict payment conditions to much more flexible trading terms.

Traditionally credit insurance is for the sellers to cover the payment risks from the portfolio buyers due to financial inability to pay for the goods/services purchased with payment terms, normally within 180 days.

Gradually credit insurance is not only a risk transfer tool but also used for financing purpose. More and more sellers sell their accounts receivables (ARs) to banks and other financial institutions to get cash quickly with the support of credit insurance—under most of occasions banks or other financials will not provide financing against ARs without credit insurance.

However AR financing or factoring is not all for trade finance; especially for SMEs, they need finance at almost every stage during the trade cycle, such as they need financing after getting purchase orders from their customers to purchase raw materials or goods from various suppliers. In real business world, needs for order financing are much larger than ARs financing for SMEs. How credit insurance to meet various financing needs is a topic and challenge for credit insurance industry. We also see innovations in different markets for credit insurance, such as the loan insurance scheme and dealer financing policies etc.

Policy wording innovation is only a small part of innovation for credit insurance and the fundamental innovation should come from the underwriting and risk monitoring. We all know that the biggest problems for credit insurance are coming from the inadequate credit limits approved by credit insurers and almost every policy holders encounter such problems in daily management of their policies and the time spending most is to argue with credit insurers for higher limits.

So where this problem comes from?  The likely culprit is UNDERWRITING AND RISK MONITORING by the insurers.  Credit insurers are evaluating the payment risks based on the financials of the obligors, however due to various reasons most of the times the financials cannot reflect the true payment abilities of the obligors. More importantly, credit insurers will sit back after approving a limit and they don’t have the ability to monitor how the businesses are running after a credit limit is granted. Insurers can only know a risk that could potentially occur when they receive the reporting from the policy holder at which time the risk has accumulated for months and it is already late for taking actions to minimize the risk. So the insurers will take a very conservative approach to evaluate and approve a limit. From the other side, the policy holder side, they will never feel satisfied with the insurers as the insurers cannot meet the needs for their normal business conducting.

So what should credit insurance do to match the needs from policy holders? CHANGE THE WAY OF UNDERWRITING AND TAKE A PROACTIVE APPROACH TO MONITOR THE RISKS!  Thanks for the digital era and we are able to not just relying on the out of dated financial information but we are able to collect and analyze the trade related data in a real-time manner.  In this way credit insurers will no longer feel being hided from risks and they can see what’s going on by applying IT technology.

This article was published on July 24th 2017 on LinkedIn by Hui Wang,  an experienced Trade Credit/Political Risk Insurance and Finance Professional. The article includes a number of slides illustrating the underlying thoughts of the author.

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