The future of Credit Insurance - CRiON kredietverzekering · 2015. 12. 17. · Figure 15 Reverse...

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Credit or Crisis?

The future ofCredit Insurance

Paul BecueEls De SmetOrtwin Volcke

Authors: Paul Becue, Els De Smet, Ortwin Volcke

Title: Credit or Crisis? The Future of Credit Insurance

© 2012 Paul Becue, Els De Smet, Ortwin Volcke

Publisher: CRiON, Maaltemeers 84, B-9051 Ghent, Belgium, [email protected]

All Rights ReservedNo part of this publication may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying and microfilm, without permission in writing from CRiON or from one of the authors.

ContentPreamble Jean-Louis Coppers, CEO, CRiON

ReflectionsUlf Linder, Deputy Head of Insurance and Pensions, European Commission

IntroductionRudy Aernoudt, Professor European Economics, Ghent University Association and University of Nancy

Executive summary

Part 1: Background

1. Motivation: the shock of the crisis1.1. Think Tank Credit Management 20151.2. Financial-economic crises of 2008-2009 & 20121.3. Transition of world economy1.4. Credit insurance unchanged Frame: Interview with Helmut Piplack, CEO, Aon Trade Credit Germany

2. Impact of credit insurance2.1. Economic interest: the invisible bank2.2. Preventive role2.3. Pro-cyclical nature of credit insurance2.4. Multiplicator effect Frame: Interview with Stuart Lawson, Managing Director, Aon Trade Credit UK

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3. Arguments pro credit insurance3.1. Strong increase of world trade3.2. Payment performance3.3. Protection of cashflow Frame: Interview with Geert Janssens, Chief Economist, VKW Metena Frame: Interview with Kurt Vanwingh, Credit Control Director, Amcor Flexibles Europe & Americas

4. Weaknesses of credit insurance4.1. Nominal credit limits: too much air4.2. Notice period for withdrawal of limits4.3. Poor communication with the outside world4.4. Perception of credit insurance4.5. Insufficient re-insurance capacity4.6. High entry barriers for new credit insurers Frame: SWOT analysis of the credit insurance product Frame: Interview with Katrien Matthys, Group Credit Manager, Resilux

5. Building the future: change and innovation5.1. Credit insurance (un)changed?5.2. Product innovation5.3. Product improvement5.4. Fear of cannibalisation Frame: Apple Frame: Interview with Paul Becue, author of 'Manual of credit insurance. The invisible bank'

Part 2: Themes

1. Professionalisation1.1. Introduction1.2. Recommendations for credit managers

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1.2.1. Concept of a credit management certificate Frame: Advantages of a certificate 1.2.2. Working of a certificate 1.2.3. Certificate of a credit manager Frame: Which characteristics does a good credit manager need to have? 1.2.4. Certificate of credit management process within the company Frame: What is good credit management? 1.2.5. Points system 1.2.6. Continuous improvement in credit management

1.3. Recommendations for all players in the credit management market 1.3.1. Certification institute 1.3.2. Credit management association

1.4. Recommendations for insurers 1.4.1. Professionalisation 1.4.2. Valuation of good credit management 1.4.3. Consulting cell 1.4.4. Risk-related premium rates 1.4.5. Post mortem analysis of claim cases

1.5. Recommendations for public authorities 1.5.1. Education 1.5.2. Research 1.5.3. Support SMEs in professionalisation of credit management 1.5.4. Publication of financial information 1.5.5. Administrative simplification of credit management Frame: Interview with Ludo Theunissen, Chairman, IVKM (Institute Credit Management)

2. Financial security2.1. Introduction 2.1.1. External financial security 2.1.2. Internal financial security

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2.2. Recommendations for credit insurers 2.2.1. Excess of Loss and syndication 2.2.2. Expansion of cover for reverse factoring 2.2.3. Standardisation of securitisation 2.2.4. Rating of debtors 2.2.5. Alignment of credit limits to duration of bank loans 2.2.6. Low percentage of cover 2.2.7. Supplier rating 2.2.8 Solvency II and countercyclical buffer 2.2.8.1. Solvency II 2.2.8.2. Countercyclical buffer 2.2.9. Differentiated premium rates Frame: Interview with Rudy Aernoudt, Professor European Economics, Ghent University Association and University of Nancy

3. Prospection & sales3.1. Introduction

3.2. Recommendations 3.2.1. Improving communication from insurer to insured 3.2.2. Improving communication from insured to insurer 3.2.2.1. Payment behaviour 3.2.2.2. Recent information 3.2.2.3. Quality information 3.2.3. Improving communication from insurer to debtor 3.2.4. Credit marketing: database of insurer is prospection tool for insured 3.2.4.1. Introducing 'Lookalikes' 3.2.4.2. Providing basic data 3.2.4.3. Enriching limits 3.2.4.4. Providing rating 3.2.4.5. Selecting high potentials 3.2.4.6. Creating representation offices in BRIC-countries 3.2.5. Optimising risk distribution and cover 3.2.6. Presenting additional services 3.2.6.1. Supporting export 3.2.6.2. Advising payment terms

Frame: Interview with Philippe Verschueren, CEO, Govi - former director Euler-Cobac Frame: Interview with Dirk Braet, Group Credit Manager, USG People

4. Automation4.1. Introduction 4.1.1. Automation at the insurer 4.1.2. Automation between insurer and insured 4.1.3. Automation at the insured

4.2. Recommendations for credit insurers 4.2.1. Product improvement for credit insurance policies 4.2.1.1. Automation of policy administration 4.2.1.2. Credit limit management 4.2.1.3. Outstanding policy 4.2.1.4. Standard certified claims statistics 4.2.2. Product innovation 4.2.2.1. A menu based product line 4.2.2.2. Information exchange 4.2.2.3. Evolution towards a new IT-model Frame: Automation challenges Frame: Automation benefits Frame: Interview with Frédéric Wittemans, Senior Director European Credit, Ingram Micro

5. Stability & Sustainability5.1. Introduction

5.2. 'Air in the credit limits': problem and solutions 5.2.1. Premium in accordance with the credit limit 5.2.2. Commitment fee 5.2.3. Deposit according to the credit limit 5.2.4. Advisory limits 5.2.5. Guaranteed limits for seasonal sales 5.2.6. Credit limits with end and starting date 5.2.7. Credit limits linked to a price index

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5.2.8. Right of access to the insured’s accounts receivable 5.2.9. Zero credit limit

5.3. Non-cancellable credit limits 5.3.1. Differentiated validity duration of credit limits 5.3.2. Notice period for withdrawal of credit limits Frame: Interview with Steven Ponnet, Group Credit Manager, AGC Glass Europe Frame: Interview Peter Van Den Broecke, CFO, Daikin Europe

6. Globalisation6.1. Introduction

6.2. Recommendations for credit insurers 6.2.1. Global policy 6.2.2. Credit limit assessment not only based on trade information 6.2.3. Global credit limit rates and multiple use of credit limits 6.2.4. Global reporting 6.2.5. International collection Frame: Difficult points in international collections 6.2.6. Excess of Loss-variants for multinationals 6.2.7. Certification for multinationals 6.2.8. Rent-a-captive 6.2.9. Attention to the debtor in a globalised world 6.2.10. Extension of services Frame: Conditions for a credit insurer to function well in a global economy Frame: Interview with Eric Verbeek, Broking Director, Aon Trade Credit Netherlands Frame: Interview with Marie-Gemma Dequae, Senior Advisor, FERMA (Federation of European Risk Management Associations)

Word of thanksTo the members of the Think Tank Credit Management 2015To the experts who contributed to this project

Research method

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List of tables and graphs

Figure 1 GDP vs World TradeFigure 2 Reasons why a credit insurance was concluded (1)Figure 3 Why credit insurance (2)Figure 4 Reasons why a credit insurance is not wishedFigure 5 Need for certification of good credit managementFigure 6 Top Performance ModelFigure 7 Certified credit management & quality credit managementFigure 8 Judging the quality of credit managementFigure 9 Credit insurance companies benefit from companies with a good CM Figure 10 Compensation for qualitative CMFigure 11 Credit management in courses at universitiesFigure 12 View head office on credit risks of affiliates Figure 13 Credit risks and profit or lossFigure 14 Syndicated credit insurance programmesFigure 15 Reverse factoringFigure 16 GradesFigure 17 Credit insurers & guaranteed credit lines for 6 or 12 monthsFigure 18 Corporate strategy & CMFigure 19 Current Communication ModelFigure 20 Client Team Communication ModelFigure 21 Product innovation: creditworthy prospectsFigure 22 Product innovation: the potential credit limit on a customerFigure 23 Risk Category, premium rate and % of cover Figure 24 Overview of functionality - automationFigure 25 Arguments against investing in CM softwareFigure 26 Risk assessment fully automatedFigure 27 CM domain with most room for improvementFigure 28 Software: premium on outstanding Figure 29 Example of menu based product lineFigure 30 Current IT ModelFigure 31 Future: Information Exchange ModelFigure 32 Milestones: information exchangeFigure 33 IT in CMFigure 34 Centralised CM versus decentralised approachFigure 35 Multinational credit insurance programme

Preamble

Credit management and credit insurance have become boardroom issues due to the consecutive crises in the past years. This not only led to heated discussions in the board rooms, but it also ensured that credit management was on the radar of many companies once again.

Crisis leads to frustration, but frustration needn’t be negative. Nothing much happens without frustration and we then have the tendency to continue working on automatic pilot: we do the things we have always done, because we have always done them that way. A crisis gives you the chance to make better choices. Rock-bottom moments provide times of reflection and opportunities, and put a company or an industry back in the swing of things. In Chinese, the word crisis consists of two symbols: danger and opportunity. Every danger also contains an opportunity.

Based on that background, CRiON created a Think Tank, where credit managers of multinationals, academics and representatives of professional organisations critically reflected on the needs and requirements of a company at credit management level. The Think Tank and CRiON examined the product credit insurance and brainstormed on innovation and product improvements.

The Code of Conduct Credit Insurance was the first specific result of the Think Tank. It was endorsed by credit insurers, credit insured companies and credit insurance brokers in August 2011. The Code of Conduct incited a change of conduct in the industry.

In March 2012 we organised the ‘Credit or Crisis’ Conference where 180 credit management professionals debated the future of credit insurance and credit management. The results of the brainstorming sessions in the Think Tank and the debates at the conference are compiled in this White Paper. All the proposals suggested here therefore originate from the market.

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I am convinced that a dialogue between provider and consumer today is more important than ever. Credit insured companies and credit insurance brokers should become co-creators in conjunction with credit insurers and other providers of credit management services. I thank you in advance for your cooperation in creating the credit insurance of the future.

Jean-Louis Coppers,CEO,CRiON

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Reflections on credit insurance and its context

The European Commission defined the growth strategy for the next ten years of the European Union in 'Europe 2020'. We direct our steps towards a clever, sustainable economy which provides a high level of employment, productivity and social cohesion.

It is important to us to optimise scarce capital at company, national and European level. Credit management is an integral part of sound financial management in a company. As a consequence, credit insurance is equally important for large and small companies, as well as for national and international companies.

We are working on Solvency II in the context of sound credit management. In addition, we have re-shaped the reporting obligations of SMEs. For example, micro-entities with a balance sheet total of 350.000€, a net turnover of 700.000€ and an average number of employees of 10 at the most, will no longer be required to publish their annual accounts. However, the balance sheet data must be submitted to a competent authority and will be available on request.Solvency II has led to lots of reflection in the insurance industry. Therefore we are thinking of new products, new markets and new working methods.I therefore consider the work of the Think Tank important to identify critical problems for the future. I also believe the Code of Conduct to be a good initiative.

I herewith call on the credit insurance industry: take the challenge to innovate!

Ulf Linder,Deputy Head of Insurance and Pensions,European Commission

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Introduction

Credit management and the credit insurance industry face great challenges. Credit insurance is not a sexy topic, is rather unknown and carries the same mark as the bank industry: we lend an umbrella when the sun shines and take it back when it rains.

Still, credit management and credit insurance are very important for the economy, at micro, meso and macro level. Let me comment on the challenges of the industry below.

At micro level

On the offer side only 3 large players are active in the market. We de facto can speak of an oligopoly. As we know, an oligopoly has dangers, namely cartel formation, therefore a monopoly and the disappearance of healthy price competition. Therefore more players should manifest themselves in the market, but be realistic: the thresholds for access are huge. In addition, it is not because a market is an oligopoly that market players will start showing cartel behaviour. From the European competition legislation, behaviour is more important than market structures. The oligopoly structure with its inherent danger of price and other arrangements, should then best be combined with a code of conduct. This is why a code of conduct is so important for the credit insurance industry.

On the side of demand we notice that companies virtually insure all assets: fixed assets, reserves and even the money in the bank is partially insured. But the main assets are the outstanding receivables and those are often not insured. Commercial receivables represent up to 40% of the balance sheet total on average and furthermore these receivables also represent the most risky assets: 3% of the invoices are never paid. It is therefore very surprising that only 15% of Belgian companies use credit insurance.

However, to guarantee market activity, offer and demand must get in touch. In this respect, the credit insurance market shows little transparency. This is where brokers act as facilitators to promote market activity.

At meso level

As described above, credit insurers have a huge potential market. Yet, the credit insurance market is an old red ocean, to use the terminology of Chan Kim and Renee Mauborgne: there is heavy price competition, often to steal each other's clients instead of looking for a new blue ocean by offering other products and product formulas. The credit insurance market can hardly be considered a very innovative market.

At macro level

The main reason why SMEs do not export is because of the perceived risk of none payment. Credit insurance therefore stimulates export and has a positive influence on growth and employment in a country. Prospecting can also be easier, because, thanks to credit insurance, a company knows which potential customers it would better not approach.

The idea behind the Think Tank, the 'Credit or Crisis' conference in March 2012 and the White Paper is not only to strive for product improvement but also for innovation, both at product and service level, in credit management in general and credit insurance in particular.

Innovation is the key to success: 'You cannot dig a hole in a different place by digging the same hole deeper'.

Rudy Aernoudt,Professor European Economics,Ghent University Association and University of Nancy

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ExECUTIVE SUMMARY

Reason for drafting this whitepaper

In the crisis years 2008 and 2009, credit insurers saw themselves obliged to lower many credit limits, or to even withdraw them entirely, while at the same time increasing their premiums. As a consequence, many insured parties lost their confidence in credit insurance and cancelled their policies. Due to the substantial entry costs of the credit insurance market, as well as the strong reverse correlation between economic fluctuations and company profits, no new insurers have entered the market during the last decades. The oligopoly of the three largest credit insurance groups continues and, in part due to this fact, there has been little or no evolution in credit insurance, while world trade has changed strongly under the influence of rapid technological developments and globalisation.

This is the reason why the credit management consultant and credit insurance broker CRiON established the Credit Management Think Tank 2015 in 2010. This Think Tank, in which CFOs, credit managers, academics and representatives of federations and professional organizations exchange ideas, is designed to develop creative and innovative solutions for the challenges facing credit management in general and credit insurance institutions in particular.

In June 2011, the Think Tank achieved its first milestone: the publication of the Code of Conduct for the credit insurance sector. This Code has been endorsed by all market players, including insured companies, brokers specialized in credit insurance and the credit insurers that are active in our country (Atradius, Coface, Delcredere-Ducroire, Euler Hermes and TCRe). This year CeFip-KeFiK, a Belgian government agency and expertise centre for financing SMEs, has committed to monitor compliance with the Code on a semi-annual basis. At the start of 2013 it will publish its first report.

The Think Tank achieved a second milestone on 15 March 2012 when it organized a congress on the future of credit management. This congress did not address theoretical considerations. Instead, debates were held in a number of workshops about specific proposals for the improvement and renewal of credit management. The congress concluded with a group debate, in which amongst others representatives of all important credit insurers participated. The

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conclusions of these debates have been used as the basis for this White book. (1) The White book outlines some innovative ideas and initiatives in the area of credit insurance. The suggested product improvements or innovations must, however, still be worked out further by the providers, including the market scope and the financial feasibility, which still has to be analysed. The providers also need to test these innovative ideas against their mission, vision and strategy. Moreover, values themselves must be critically examined in the context of rapid developments and trends.

(1) For an overview of all surveys, interviews and debates forming the basis of this White book, see last page of this White book.

Conclusions and recommendations

1. Professionalization

The successive liquidity crises in recent years have made credit management and credit insurance a boardroom issue, but the appreciation of credit management still does not go far enough. More work is still required with regard to the professional status of credit managers and credit management. One means for such an upgrade is to establish a certification procedure. Such a certificate needs to be devised at two different levels: a personal certificate for the credit manager and a process-oriented certificate for the company. The final objective must be an integrated credit management procedure, in which continuous improvement forms an inclusive part of the process.Credit insurers can contribute to this by acting proactively instead of reactively. Here we are thinking of intensive credit management courses and joint post-mortem analyses of claims, and especially raising the status of certified credit managers and certified credit management processes.Under the stimulus of Solvency II, insurers are today evolving towards completely risk-based pricing based on the probability of default. Good credit management is no longer a factor in pricing. The focus of the insurers is on the claim history and the quality of the debtors, but not on qualitative elements such as correct assessment of credit risks by the credit managers of the insured parties, adequate collection procedures, etc.

2. Financial security

One of the members of the Think Tank summarized financial security as follows: 'It means that we don’t want to be engaged in a domino game'. Falling dominoes can however come from many different directions: major customers can go bankrupt; the economy can turn sour, causing credit limits for all debtors in certain countries or sectors to be withdrawn; or the credit insurer can come under pressure and respond not in an appropriate way.Insured parties can accept that less risk is assumed in difficult times, but they cannot stop delivering to their key customers. In practice failure to deliver would result in the permanent loss of these customers, with the consequence that divisions or complete production units would have to be closed.

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The core question is therefore how the credit insurer can operate in a countercyclical manner. One way to do this is: instead of cancelling credit limits, keep the limits but specify lower coverage percentages, or retain the limits up to a certain level so the commercial relationship can remain intact. Other options include differentiated premium rates, syndication (distributing the risk among several insurers) in case of high credit limits, etc.

3. Prospecting and sales

Credit insurance is often perceived as restrictive. Can we alter this perception? Even more, can credit management really stimulate sales? Well, perception is linked to communication, and communication is nowadays lacking in many ways. As a result of the mergers and increased scale of credit insurers, as well as the cost cutting measures they have implemented and their focus on debtor risk, the insured parties have been shifted to the background. They receive automated e-mails with credit limit withdrawals, for which the reason is often unclear. The person who decides on credit limits is no longer directly accessible, and management hides behind vague macroeconomic verbiage.There is also a need for a Client Team Model. The Client Team must develop a thorough knowledge of its clients and of the products and strategic objectives of the insured parties. Insurers need to evolve from 'close to the risk' back to 'close to the client'. Credit insurers not only need to know the insured party better, but also need to give their clients a greater say.To limit costs, some of this can most likely be automated. Some examples are the automatic exchange of payment history information and other qualitative information that is often more valuable than public commercial information, which is often outdated. If the databases of the insurers were automatically enriched with information on the payment history of all their insured parties, these databases would become extremely valuable prospecting tools. Here as well the credit insurers can evolve from reactive to proactive. They can help their insured parties select the right prospects. Or if they refuse or withdraw credit limits, they can suggest alternative and creditworthy clients. And furthermore, they can enrich their credit limit decisions with the commercial information available to them. This is known as credit marketing.

4. Automation

The current lack of interest in breaking the oligopoly in the credit insurance market is probably due to the fact that the necessary IT investments are too massive. However, the falling costs of data transfer and storage are making it increasingly more likely that a newcomer may enter the market. Further automation can therefore lead to dissolution of the oligopoly. Once that occurs, the credit insurers will become even more determined in their search for cost optimization, which can only lead to a still higher degree of automation. By the way, this on-going automation can only help to improve communication between insured parties and credit insurers. Information can be exchanged more quickly, and the time needed for a decision can be reduced substantially. This means that limits could be granted automatically on the basis of internal ratings; limits could be adjusted automatically on the basis of days sales outstanding and expected loss; the corresponding premium could be calculated automatically; etc.Automation also makes customization possible. It should enable the insured party to choose from a range of options, such as top up cover for some debtors, single risks in certain uninsured regions, different levels of coverage for debtors, non-cancellable limits for projects, a combination of sales and outstandings policy, etc. And finally, interfaces to other financial service providers, such as banks and factoring firms, can be fashioned in order to optimize the client’s cash conversion cycle.

5. Stability and sustainability

Due to the economic fluctuations and crises of the last few years, the call for stability is becoming increasingly loud. For example, companies holding credit insurance expect insurers to guarantee their limits for longer periods, extending as far as non-cancellable credit limits in the ideal case. However, other and less far-reaching solutions may also be possible, such as differentiated validity periods for limits depending on the creditworthiness of the debtors concerned, with limits for debtors with low risk granted for a longer period than for debtors with a lower degree of solvency. We also advocate grace periods for reducing or withdrawing limits. With such advance notice of a limit restriction, the insured party could then use the

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grace period to try to avert the pending action by collecting new and better information on the debtor. This is in some cases already possible now, but it always amounts to a 'favour' on the part of the insurer and is rarely specified in a contract. How many insurers are willing to convert this favour into a competitive advantage?The credit insurers, for their part, want to have as little leeway in the limits as possible (unused or not fully used limits). Presently two-thirds of approved limits are not used, on average. We suggest a large number of ways to avoid this. For instance, the premium can be made dependent on the extent to which the approved limit is used, or a commitment fee can be charged on unused limits. A consignment is also possible.

6. Globalisation

In a globalised world it seems straightforward to draft a single master insurance policy for a multinational, with translations in the languages of the various branches. We also assume that limits could be requested locally, with worldwide credit risks monitored at the central level. This also applies to insured turnover, disputes and collection, as well as imminent or actual claims, etc. However, the reality still proves to be different. Some insurers are unable to generate the apparently straightforward reports in real time, and international collection is still problematic due to inadequate knowledge of local languages and insufficient awareness of the differences between legal systems and commercial practices. Credit limits in West European countries are granted on the day of the request in more than 80% of all cases. Furthermore, an average of 80% of requested limits are approved. Outside Europe, these percentages are much lower. Although many non-OECD countries are now included in insurance policies, in practice limits are only approved for large companies in these countries. Credit limits for small and medium-sized companies are seldom approved, because little or no commercial information is available. On the basis of payment history or other qualitative information provided by the insured party, it should nevertheless be possible to insure the deliveries of the insured parties. In the light of the spectacular growth of trade from and to non-OECD and BRIC countries, a major opportunity can be seen here for insurers.

Next steps

The respondents to the surveys and the participants in the debates, which form the basis of this White book included representatives of all West European countries. Nevertheless, Belgians were overrepresented, so it appears advisable to extend this study to all European countries in a following step. Such an expanded study would be carried out in all major economies, including those of growth countries.

The vast majority of the participants in the various research activities are specialists in credit or financial management. To be able to achieve important innovations, contributions from other professionals will most likely be necessary. For instance, a larger contribution from sales and purchasing managers appears desirable, and from CEOs and senior managers.

“Experience is simply the name we give our mistakes”Oscar Wilde

PART 1 BAckgRound — 1. Motivation: the shock of the crisis 33

PART 1 BaCkground

1. MoTIvATIoN: ThE ShoCk oF ThE CRISIS

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1.1. Think Tank Credit management 2015

In July 2009 it was decided with the credit insurance broker CRiON to create a Think Tank on credit management: Think Tank Credit Management 2015. The purpose was to exchange ideas with the academic and business world on credit management, and how credit insurance can play a part in this. The perspective was future oriented as the crisis demonstrated that the credit insurance industry needed resourcing. This White Paper publishes the reflections made during the various meetings.

1.2. Financial-economic crises 2008-2009 and 2012

The financial-economic crisis that started in March 2007 and erupted in September 2008, scarred many industries.

Through the massive interventions of the public authorities via support measures and the very flexible monetary policy of the central banks (low interest rates and liquidity injections) the world economy, led by Asia, recovered surprisingly quickly. The nightmare of the thirties was avoided.The crisis still clearly demonstrated that there was a system crisis, and that the world economy needed structural adaptations in its transitional process to globalisation. The advantage of crises is that they show us the shortcomings of a system, but you then need to learn the necessary lessons from them. We must admit, however, that the system crisis was and is so far-reaching that in our opinion it is too early to already present global solutions. This has become clear from the current debt crisis in Europe and the USA.Indeed, the solutions provided to avoid an economic disaster carry the germ of additional problems: by saving the banks and implementing incentive measures, public finances in numerous countries come under pressure and the financial markets speculate on the ‘default’ of a few PIGS countries(2), with Greece in the lead.

(2) PIGS: Portugal, Italy, Greece, Spain


1.3. Transition of world economy

Compared with earlier crises, the environment has considerably changed:› in the past the world economy was mainly restricted to the OECD countries (North America, European Union, Japan);› since the 1990s globalisation has come fully to the fore, and we see an increasingly greater interdependency between the various national economies.

The BRIC-countries(3) now act as the locomotive of the world economy, but that economy is still based on the principles of the older world economy, with its roots in the old Europe, and where, after the First World War, the centre of gravity progressively shifted to the New World of that time, the United States of America.The United States, as the largest economy in the world (approx. 23% of the world GDP), actually abuse their position of power: the US 'drug' the economy with liquidity injections, the 'Quantitative Easing' programmes. Quantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy. The Central Bank of the USA implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money in order to inject the money into the economy.In case of mismanagement the bill is presented sooner or later: money always has a price. It is difficult to exactly forecast how this will happen, but we can assume that the economic centre of gravity in the world will progressively shift to Asia. We more particularly have China and India in mind: both have a population of more than 1 billion people, and therefore these countries possess great potential.

1.4. Credit insurance unchanged

The bank industry, crucial to the economy, was first examined by the prudential and regulating authorities. Basel III aims to reinforce solvability requirements and now attaches a lot more attention to the liquidity position: the latter was neglected by Basel II.

(3) BRIC: Brasil, Russia, India, China

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For the time being, the authorities are leaving credit insurance untouched, also on a European level. Nevertheless, credit insurance was not spared. In the past 10 years the industry was characterised by a consolidation process that led to an oligopoly of 3 global groups. The first decade of the twenty-first century was one of prosperity. As long as all goes well, there is not a cloud in the sky, and we are not aware of potential problems. The catharsis, however, came together with the crisis. It showed that the credit insurance industry had a few structural problems:› there had been a considerable reduction or withdrawal of credit limits;› the communication on this matter had not been optimal;› the product is slightly outdated.

In essence credit insurance has not changed the last decennia, but the world underwent a deep metamorphosis.

Interview with helmut PiplackCEO, AON Trade Credit Germany

The credit insurers have to communicate better and have to share more and better information with the insured. Can you agree on that?Steady communication between the credit insurer and the insured is vital for a successful credit insurance contractual relationship. Compared to other kinds of insurances the credit insured faces several reporting obligations during the time of contract, especially whilst discussing the prolongation or granting of limits or in case of claims. Insurance brokers usually take an integral part in facilitating this communication and finding solutions

How can a credit insurer contribute to higher sales/higher turnover of a credit insured?Credit insurers may contribute in two ways. First of all they assist companies in considering the solvency of potential customers and


rendering decisions to sell. Beyond this, credit insurers cover the risk of cash loss. This enables the insured to act more safely and to evaluate customer risks which stabilizes business.

Is paying premium based on outstanding instead of on turnover a better system?There are legitimate reasons for both ways. Which one suits better has to be considered in respect of each insured's individual needs. A third way should be kept clearly in mind: 'The limit premium' based on capacity is the most effective one for all parties.

Economic resurgence and crises are expected to follow up each other rapidly. And now a new crisis is raging, the credit insurance sector will have to do more than streamline the internal business processes. They will have to reinvent themselves. Can you agree on that?To keep up with the ever-changing requirements of the market is an essential task of credit insurers and brokers as well. Insurers come up with new modular policies, global solutions and top-up cover models for example to face current market challenges. From our point of view it is important to keep offering customized solutions.

Some risk federations believe that credit insurers should be obliged to develop anti cyclical buffers e.g. by law or through Solvency II, can you agree?Whether credit insurers sign limits or not is no question of accumulated reserves or reinsurance capabilities. It is a question of being willing to take a risk or not. During the crisis in 2008 and 2009 the credit insurance industry lost their client's confidence but we think they learned a lesson and do better now.

2. IMPACT oF CREdIT INSuRANCE

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The intention of this chapter is to briefly explain the economic impact of credit insurance. The most important aspect is the influence of credit insurance on the working capital of a company.

The credit insurance industry does not have a ‘sexy’ reputation. However, we are convinced it does. Yet the sector should wake up from its winter sleep. Globalisation and the metamorphosis of the world economy provide an excellent opportunity.

For a clear understanding, we want to point out that the insurers have undergone important evolutions at an operational level. Thanks to new technological opportunities they now manage to work much more efficiently and are able to create economies of scale.

We will explain the main aspects of credit insurance below, mainly approaching the subject from an economic point of view.

2.1. Economic interest: the invisible ban(4)

Credit insurance covers the credit risk on trade receivables. The covered trade receivables are only one side of the coin. A trade receivable or trade credit granted by one company is a supplier debt or supplier credit obtained by the other. If the credit insurer acts restrictively towards a certain company, the suppliers of that company will insist on shorter payment terms, even on cash payment.

Consequently, this company will need an increase of its working capital. This situation will lead to more pressure on liquid assets.

For that reason the credit insurer has an immense (economic) impact on the funding cycle of a company. This impact has even increased as a result of the consolidation within the credit insurance industry. If a branch belonging to one of the three large credit insurance groups, acts restrictively towards a local debtor, this policy will in principle be adopted by the whole credit insurance group.

(4) BECUE, P., Kredietverzekering. Uw bedrijf goed verzekerd?, Leuven, Lannoo-Campus, 2011, p. 201-203;BECUE, P., Handboek kredietverzekering. De onzichtbare bank, Antwerpen-Oxford, Intersentia, 2008, p. 91-92('Manual of credit insurance. The invisible bank')

PART 1 BAckgRound — 2. Impact of credIt Insurance 43

Formerly the debtor concerned could still try to trade with a supplier from another country, where the local foreign credit insurer was not that pessimistic about the financial situation of that debtor. Due to the sector consolidation things are different now. A negative attitude of the credit insurer will quickly be spread in the market among various suppliers.

The fact is, however, that this key position of the credit insurer is not always accepted by various other parties in the financial markets (a.o. the financial institutions) operating beside the credit insurers.

In this respect we could say that the credit insurer acts as an invisible bank, although no real funding in cash takes place. The credit insurer’s negative attitude thus indirectly leads to a decreased supplier credit granted by the seller of goods and services.

2.2. Preventive role

The main role of credit insurance is prevention: it is the intention of a credit insurer not to take any risks on companies which can become insolvent at short notice (i.e. within one year). The knowledge and expertise thus acquired will be shared by the credit insurer with his insured companies. Clearly a company will not continue to supply a customer who we expect to go bankrupt with a relatively high degree of certainty. Turnover will only be realised as soon as the invoices are paid.

On the one hand the insured supplier is not happy with this situation because he will lose part of his turnover. Yet, on the other hand he is forced to search for prospects that he can start a new and healthy commercial relation with: the dynamics of the company are thus maintained. The credit insurer can assist the insured in that search: he has a rich database in which information of many companies is collected worldwide. Each company receives a rating. That rating is the yardstick for the solvability of a debtor and is based on several criteria, which more specifically enable assessment of the repayment capacity of a company within one year. With this rating instrument the supplier quickly knows on which companies he should focus his prospecting efforts on.

CREDIT OR CRISIS?44

Let us finally point out that a credit insurer would not survive long without prevention. If he accepted all risks, even bad ones, he would quickly go bankrupt. This would be a disadvantage for all the insured companies who carry out a debtor management in good faith: they would not obtain indemnification from a bankrupt insurer. The added value of the insurer therefore consists in making a distinction, as accurately as possible, between the debtors showing high risk of bankruptcy within one year on the one hand, and those who are healthy on the other hand.

“We are selling prevention before selling insurance. Assessment is our business.”Xavier Denecker, Member of the Executive Committee, Coface Group

2.3. Pro-cyclical nature of credit insurance

The companies reproach credit insurance for reinforcing the crisis, instead of alleviating it. However, we should not forget that the crisis was not caused by the credit insurers. The air bubbles in the financial world dragged the economy into an economic malaise.

The role of the credit insurer consists of facilitating trade transactions. He takes over the debtor risk in exchange for payment of a premium. Yet, for some transactions the risk becomes too high compared with the premium an insured company pays. In this case there are two options:› either the premium becomes so high that the profit margin the insured supplier makes on that transaction disappears;› or the cover is decreased or cancelled.

It doesn't make sense that the credit insurers continue to cover all possible risks: they too must ensure that their balance sheet remains healthy.

If the insurers had a clear counter-cyclical effect, they would have to continue accepting covers which are actually uncoverable. Consequently, all their insured companies would have to put up with very high premiums, which is

PART 1 BAckgRound — 2. Impact of credIt Insurance 45

mainly to the disadvantage of those with a relatively healthy debtor portfolio. After all, in insurance everything turns on the mutualisation of risks.

2.4. Multiplier effect(5)

When the credit insurer decides favourably on the main part of the requested credit limits, and provides cover, this will promote business between the involved trade partners. This stimulates general economic activity.

This was confirmed by the Dutch Central Bank. It carried out research in 2010 which demonstrated that credit insurance had a positive multiplier effect of 2.3 on international trade. In other words: every euro covered by the credit insurer leads to an increase in international trade of 2.3 euro.

(5) VAN DER VEER, K., 'The Private Credit Insurance Effect on Trade', Working Paper nr. 264/2010, Amsterdam, De Nederlandsche Bank nv, October 2010, 43 p.

CREDIT OR CRISIS?46

Interview with Stuart LawsonManaging Director, Aon Trade Credit UK

Some CFO’s doubt credit insurance is a good tool to improve working capital. What is your opinion?I believe the key is ensuring that you have the right structure and programme to meet the specific needs of the business. If you get this right, then credit insurance can be a very effective tool in accelerating cash-flows and improving working capital. How can a credit insurer contribute to higher sales/higher turnover of a credit insured?Credit insurance can identify customers which are better credit risks and assist targeting of prospects. Personally, I believe major benefit of credit insurance in respect of sales growth is to allow companies to develop and penetrate new markets. In the UK, we have one major client who sees credit insurance support in new markets as the key to growth. The credit insurers have to communicate better and to share more and better information with the insured. Can you agree on that?Absolutely. Credit insurers are selling insight and knowledge as well as protection so it is essential insurers are able to deliver this to clients in the right way at the right time to enable companies to make informed business decisions. The Credit Insurer should be totally focused ensuring this is achieved.

Some risk federations believe that credit insurers should be obliged to develop anti cyclical buffers e.g. by law or through Solvency II, can you agree?I remain unconvinced whether greater regulation supports or hinders business. However one thing is for sure, it is essential that

PART 1 BAckgRound — 3. Arguments pro credit insurAnce 47

a credit insurer has sufficient reserves, capital and reinsurance support throughout the economic cycle.

Globalisation feeds a growing need for syndicated credit insurance programs. Is it possible to work in an oligopoly with syndicated programs/syndicated credit limits?Yes, you need an advisor who can ensure that this is built in correctly. We are certainly seeing more syndicated solutions at Aon to address the effects of globalisation and concentrated exposures that are just too big for one carrier. We also have the benefit of having access to Aon Benfield Financial Risks team to provide reinsurance solutions that facilitate access to additional capacity.

Economic resurgence and crises are expected to follow up each other rapidly. And now a new crisis is raging, the credit insurance sector will have to do more than streamline the internal business processes. They will have to reinvent themselves. Can you agree on that?I believe the key to providing valued services is to ensure that you are totally committed to providing thorough and objective risk analysis capability which recognises the need to underwrite acceptable commercial risk.Of course, the industry needs to adapt and evolve to ensure it is relevant and meaningful to its clients. Certainly at Aon, I believe innovation and product enhancements are key to our success. I am great advocate of Darwinism!

3. ARGuMENTS PRo CREdIT INSuRANCE

CREDIT OR CRISIS?50

After the crisis many asked themselves whether credit insurance still made sense. We would like to demonstrate that it definitely does. The globalisation and the growth of world trade lead to an exponential increase of possible payment risks. With their worldwide network the credit insurers are placed in a good position to assist the business world in the matter.

3.1. Strong increase of world trade

The table below demonstrates that the world trade and the world GDP have grown despite the crisis. The only exception is the recession year 2009. The reason for the growth is related, among other things, to the increasing globalisation of the economy and the rise of China as an economic super power. This growth is very important for credit insurance: it covers the credit risk related to the trade receivables on debtors. With the increase of the world trade, credit risks have considerably increased too, and along with them the potential credit insurance market is growing as well.

3.2. Payment performance

It goes without saying that in a weaker economic situation the companies will pay their outstanding trade debts slower than in better times.

Figure 1: GDP vs World Trade

Source: Euler Hermes

10,0%

5,0%

0,0%

-10,0%

-5,0%

-15,0%

15,0%

20,0%

GDP BelgiumWordtrade

2005 2006 2007 2008 2010 2011 2012Forecast

2009


The longer the payment term of outstanding trade receivables, the greater the possibility that a receivable will not be paid on the due date. This can jeopardise the continued existence of the company. A lack of payment discipline also has an impact on the profitability and cash flow of the creditor. Late payments slow down growth and reduce productivity because fewer financial means are available to carry out the necessary investments.

A study of the collection agency Intrum Justitia demonstrates that 70% of the interviewed companies are faced with solvency problems due to poor payment behaviour. The study also shows that European companies, authorities and non-profit organisations cannot cash 3% of their invoices.

3.3. Protection of cashflow

The payment term also influences the financial structure of a company. The longer the average term of outstanding trade receivables (D.S.O. = Days Sales Outstanding), the greater its impact on the assets. This has an important impact on the funding of company capital.

Late payments and invoices that remain unpaid cause liquidity problems in European companies. The written-off receivables in Europe grew in 2012 to a record sum of 340 billion euro, which is an increase of 28 billion euro compared with 2011. More than half (57%) of European companies experience liquidity problems because customers pay their invoices increasingly later. Yet, there are great differences by country. In Greece no fewer than 96% of the companies suffer from liquidity problems, whereas only 37% do in Finland.

With the new Directive 2011/7/EU, the European Commission prepared simulations based on the new proposal (payment terms of 30 days). These simulations only concern the B2B environment, with exclusion of the public sector. In the most optimistic scenario (reduction of the payment terms to 30 days and no delays) there was a gain of cash flow or liquidity of 192.8 billion euro in the whole European Union.

CREDIT OR CRISIS?52

It is therefore not surprising that the protection of cash flow is one of the main reasons to buy credit insurance:› protection of cash-flow: 71%;› getting to know customers better: 64%;› appeasing the conscience: 77%.

Figure 2: Reasons why a credit insurance was concluded (1)

Source: Credit Management Research Centre Univ.Leeds Business School (2000)

Appeasing conscience

0% 20% 40% 60% 80% 100%

39% 38%

42%

32%

45% 26%

13%35%

17%32%

24% 5%

13%

22%Get to know customers better

Access new markets

Additional funding

Cash-flow protection

Growth of the business

Previous experience with unpaid receivables

2

3

4

Absolutelynot important

Extremelyimportant


Credit insurance shortens the DSO because the collection is intensively managed, first by the insured, then by the collection department of the insurer. In addition, the credit insurer indemnifies bad debts, so the latter no longer have a negative impact on the DSO.

Figure 3: Why credit insurance (2)

Source: Credit Management Research Centre Univ.Leeds Business School (2000)

',"# '+"#*$"#

'("#)'"# **"#

100%90%80%70%60%50%40%30%20%10%

0%Previous experience with unpaid receivables

Growth of the business

Cash-flow protection

Additional funding

Access new markets

Get to know customersbetter

Appeasing conscience

Important Not important

49% 48% 71%

29%

45% 64% 77%

CREDIT OR CRISIS?54

Interview with Geert JanssensChief Economist, VKW Metena

Does the credit insurance industry still have a future?If we don't reinvent ourselves soon, we must fear the worst. Credit insurers behaved really badly in the crisis of 2009. Their conduct can actually be defined as a breach of trust. The unilateral and short term withdrawal of credit limits has caused much damage to the insurers' image. The consequence is that many companies question the added value of credit insurance. Larger companies even wonder whether it would not be better if they are at the helm themselves.

Are there lights at the end of the tunnel?The Code of Conduct created under the impulse of CRiON ensures more transparency and searches for better justification. That Code of Conduct actually is a Gentlemen’s Agreement by which credit insurers and credit insured companies commit themselves to reaching a better exchange of information and understanding. Brokers as well can rely on the Code to achieve an atmosphere of openness and trust. They can do that because the large credit insurers in the market endorsed the Code. By doing so, the insurers promise to better inform their clients, a.o. when the rating of a buyer changes. They will also publish their credit policy and be more transparent about their pricing.

Will that be enough?A lot will depend on the way competition will work. The credit insurance market is characterised by an oligopoly. A few large players cover 85% of the market. They know each other and watch each other like hawks. Strong competition is typical in those markets and leads to razor sharp prices. That is good in itself but


it also removes the important margins. The sector cannot build up sufficient reserves. At the slightest setback the credit insurers get frightened. There are booms and busts in a capitalist economy. In order to survive, the credit limits system was introduced. When the situation is bad, credit limits are withdrawn so that less cover is given. This makes it possible to survive, however at the expense of the client.

How do we get out of that deadlock?It still must be possible to reach an agreement in the sector. The credit insurers should set minimum prices which guarantee a margin that in turn leaves room for the creation of reserves. Obviously, higher prices will weigh on the volume of the market. On the other hand, a greater transparency in the market may also have positive consequences. The credit insured companies will have to try to obtain more accurate financial data from their clients. Companies should also work more on healthy credit management themselves. Even those who do not use credit insurance might be willing to pay for information. They might want to make certain information available about their clients. Maybe there is room in the sector for a new business model. In any case, the increased attention for working capital provides a perspective.

CREDIT OR CRISIS?56

Interview with kurt vanwinghCredit Control Director, Amcor Flexibles Europe & Americas

Which positive evolutions did you notice in credit management in the past period? Which players have used the past crisis to develop further?The supply of trade information has considerably developed in the past 2 years. Some data providers have had the courage to question themselves, their approach, selling process, cost structure and invoicing method. One of the consequences is that there now is a direct dialogue with credit managers and the focus clearly is on the supply of up-to-date quality information and the further expansion of new 'tailor-made' products that perfectly meet the specific needs of the customer.

Please explain.'One size fits all' solutions are clearly outdated. The present level of credit management in the company is taken as a starting point. The optimal functioning of the risk management key drivers such as risk identification, defining credit lines, payment pattern, payment term, the type of company and the sector prevail and also act as starting point for the development and supply of new products.

How did it get to that point in your opinion?The change in attitude from 'your company should be grateful to be our client' to 'we as supplier must bring added value' has led to huge growth for the innovators. Of course, this happened at the expense of traditional, conservative suppliers.The creation of own databases as a basis for own financial reports is a new approach. In the long term this is less expensive than buying information country by country via various instances, and


it is a lot more reliable as well. It also enables purchasing this improved information at a lower price.

Which other advantages did you notice?A transparant invoicing system ensures that it is no longer necessary to work solely with advance payments. The total information cost can be defined in advance. But that amount should also be the maximum cost at the end of the year. No more surprises because f.e. more than the 'pre-paid' units were used.

Do you also see advantages as a multinational in our globalised world?The compilation of a consolidation contract enables central cost management and working with one account manager who is perfectly informed of the arrangements.For most multinationals providing a local service remains a 'must' because direct support must be present in all countries.Amcor has also obtained to pay a 'flat fee' combined with 'unlimited access' to data. This resulted in huge cost savings but NOT at the expense of quality. Information and analyses relating to the payment behaviour are also transferred to the credit insurer. There is a mutual exchange of information. This enables the creation benchmarks versus other suppliers. It also makes information even more up-to-date and enables us even more to work proactively and to support the sales organisation better.I think I have thus given enough food for reflection for other credit management departments to take this road as well.

4. WEAkNESSES oF CREdIT INSuRANCE

CREDIT OR CRISIS?60

In this chapter we would like to briefly indicate what, in our opinion, were the main weaknesses in credit insurance during the crisis. This will be complemented with other already perceived defects, or defects which may become visible in time.

4.1. Nominal credit limits: too much air

The current outdated system of nominal credit limits should disappear in the future. We presume that the allocated limits are only used by approx. 30%, but this is not certain as the usage percentage factor is not accurately known.

In the current philosophy the insured does not pay for the higher outstanding nominal credit limits: e.g. if the insured has a 1 million euro credit limit, but only uses it effectively for 200.000€ based on the realised turnover, he will only pay a premium on those 200.000€.

We should find a system in which the nominal credit limits do not exceed the actual use too much (e.g. maximum 20% more). This might lead to fewer reductions of credit limits by the insurers.

Another aspect is Solvency II, which will apply to the credit insurers. For the calculation of the optimal capital base (Risk Allocated Capital or RAC in short) it is important to know the actually covered risk, and therefore also the actual use of the nominal credit limits.

The solution to this problem must be pragmatic: the fact that many industries are affected by seasonal effects must be considered, and therefore higher credit limits are temporarily necessary.

“Air in the limits? The insurers can work with 'capacity prices'. The price is defined by multiplying the risk category of the debtor with the size of the limit.” Helmut Piplack, CEO, AON Trade Credit Germany

PART 1 BAckgRound — 4. Weaknesses of credit insurance 61

4.2. Notice period for withdrawal of limits

In principle, a credit insurer can reduce or even cancel the credit limits as a preventive measure from one day to the next without it being possible for the policyholders or the debtor to intervene. It would be quite logical if the policyholder or the debtor could turn back that negative decision on account of new or complete information. In this case a notice period could prove useful. This already exists in the banking sector: loans are cancelled with a notice period of 1 month.

Some credit insurers already use this in certain policies, but it is not a generally accepted rule in the sector yet.

“Credit insurance is unique because the insurer can change the conditions during the life of the policy. That is not possible in other insurances. And personally I would like to see credit insurance evolve to long running commitments, just as for traditional insurances.” Mike Holley, CEO, Equinox

4.3. Poor communication with the outside world

During the financial-economic crisis the credit insurers reacted in panic. Companies suffered from cash drains: because of the strong drop in turnover they could no longer cover their fixed costs.Many companies appeared to get liquidity problems. The credit insurers, contrary to the bankers, had no insight in the liquidity position of a company and even less in the private capital position of the managing director of that company. Therefore the credit limits of companies where the insurers had doubts about were considerably reduced or withdrawn.

In many cases, these reductions and withdrawals, which were sometimes severe, were not sufficiently justified and this caused lots of frustrations. Nevertheless, in our current modern society, good communication is of essential importance.

CREDIT OR CRISIS?62

4.4. Perception of credit insurance

A study of the Credit Management Research Centre of the University of Leeds Business School researched (both in credit insured and uninsured companies)how their perception of credit insurance was(6). In the random sampling of 2000 companies 51% were credit insured.

The problems that came forward are still up-to-date:› lack of flexibility;› work intensive;› credit insurance would be too expensive;› lack of innovation.

Product innovation obviously draws the short straw. The various satisfaction surveys by credit insurers confirm this image. The credit insurers cannot liberate themselves from the red ocean of cut-throat competition. The blue ocean remained unattainable for each of them. This is only possible by creating an undisputed market where competition is off-side: no longer dividing the existing demand and taking competitors as a benchmark, but increasing demand and disconnecting oneself from the competition. The corner stone of the blue ocean strategy is value innovation, whereby companies align the innovation on customer value, price and cost position. By doing so the whole system of activities of a company is adapted to the striving for differentiation and low costs(7).

The reasons why a credit uninsured company did not wish to take a policy were similar.

(6) Credit Management Research Centre Univ.Leeds Business School, Credit Insurance supports profitable growth. An independent research study of 2.000 businesses in 10 European economies, Parijs, Euler Hermes, 2006, appendix 1, p. 64-65(7) CHAN KIM, W., MAUBORGNE, R., 'Blue Ocean Strategy – How to Create Uncontested Market Space and Make the Competition Irrelevant' , 2005


The uninsured companies mention 3 main reasons not to take a policy. They think that 'les services de gestion et assurance du compte-clients présents sur le marché sont ‘chers’, ‘lourds’ et ‘limitatifs’' (8). (Credit management services and credit insurance are 'expensive', 'heavy' and 'restrictive')

Firstly, credit insurance is too expensive (74% agree). If the premium only is compared with possible indemnities to be received, it might indeed look that way. But credit insurance must be seen from a wider perspective in the context of the debtor management in a company: there are many indirect benefits linked to it.

Secondly, 59% of the interviewed uninsured companies say that the credit insurer provides insuffient cover. This may be the result of an insufficient acceptance degree on the credit limit applications.

Finally, 54% reproach a credit insurance policy as requiring too much administration. This is true. Credit insurance above all is a management instrument in debtor management. This implies a much greater active input by the insured, contrary to other insurance policies (e.g. a fire insurance: you only call the insurer if there has been a fire).

(8) ROSEN, B., Le financement des ventes, La collection Cahiers Financiers, Bruxelles, De Boeck & Larcier, 2004, p. 15

Figure 4: Reasons why a credit insurance is not wished

Source: Credit Management Research Centre Univ. Leeds Business School

2

3

4

Absolutelynot important

Extremelyimportant

Not a good image

Too expensive

No appropriate cover

Too much administration

Use of other credit services

0% 20% 40% 60% 80% 100%

7%

34%40%

25%34%

21%

13%17%

33%

11%

CREDIT OR CRISIS?64

Those criticisms are confirmed in various other studies. The European Commission confirms this in a study of 2005, and mainly in relation to SMEs. The opinions of industrial professional associations, as demonstrated by a survey in SMEs, stress the fact that costs and complex structures question the applicability of credit insurance for SMEs. On the other hand the study states that product and process innovation, if simplified and standardised contracts are introduced, including internet-based solutions to speed up the exchange of information, lead to lower costs and increase the applicability of credit insurance for SMEs.

4.5. Insufficient re-insurance capacity

Credit insurance is considered risky in comparison with other insurance sectors. This became apparent in the Directive 87/343/EEG of 22 June 1987, that modified the Directive 73/239/EEG of 24 July 1973. Prudential rules were imposed on the credit insurers (guarantee fund, egalisation provision, solvency margin), which are more severe for the credit insurance industry on the one hand, and specific for them on the other.

Re-insurance was not spared either. Consideration 22 of Directive 2005/86/EG provides that 'a reinsurance company that carries out reinsurance activities for credit insurance and of which those activities form more than a small part of its whole activities, must be forced to make an egalisation provision which is not part of the solvency margin'. The reason for this stricter treatment is that credit insurance is considered as a very risky activity. The Directive 2002/13/EG of 5 March 2002 alludes to it in the introductory observation no.12: 'For specific branches in the insurance industry characterised by a particular changing risk profile the existing solvency margin must be increased considerably, to ensure the required solvency margin complies better with the actual risk profile of the branch concerned'. It is clear that credit insurance is intended here.

The reinsurers are not always enthusiastic about credit insurance for that reason: on the one hand there are stricter prudential rules requiring more capital; on the other hand there is strong pressure on the premium rates due to fierce competition. For that reason reinsurers are not always pleased with the ROE,


especially after a severe crisis when claims have increased considerably. Therefore there are lots of rumours circulating in the market about the willingness of the reinsurers to provide credit insurance capacity.

4.6. high entry barriers for new credit insurers

Currently the access threshold for new accessors in this oligopoly market is still high: heavy investments in databases, well skilled analysts, data collection from companies in more than 150 countries, etc.

CREDIT OR CRISIS?66

SWoT-analysis of the credit insurance product

Strenghts: › Supports the growth of an insured company;

› Plays an important preventive role: better not deliver to problem

customers (also e.g. to avoid problems relating to so called 'quality

disputes', etc.);

› More than 40 million potential customers in each database of the

Big3;

› Speed in which limits are issued (>80% in 1 day);

› Possibility of an integrated solution: credit worthiness assessment +

collection + insolvency cover;

› Premium percentage has more than halved in the last 15 years;

› Often political and commercial cover can be combined;

› Credit limits can be issued on debtors in more than 120 countries;

› The Big3 are developing globally integrated systems.

Weaknesses:› Credit management and credit insurance are often treated poorly

within the organisation of a company. Most persons or departments

are only truly confronted with credit insurance when credit limits are

withdrawn or reduced (= negative decision);

› Stop and go policy: credit insurers can cancel credit limits from one

day to the next without communicating the motivation behind their

decisions well. This is not a good basis for a long term relation;

› The various business models in the sector sometimes include a lack of

professionalisation;

› In (current business) education little attention is paid to credit

management and credit insurance;

› Negative perception of credit insurance in the market.


Threats:› Limited number of players;

› Lack of innovation because of oligopoly structure;

› Credit insured companies no longer need credit insurance because

there are cheaper solutions (e.g.: free databases online).

opportunities:› Companies search for an overall credit management solution

(analysis, cover, collection);

› Due to globalisation payment risks tend to increase;

› Covering political risk is not the greatest asset of the sector. How can

micro- and macro-economy be further integrated?;

› In the last 50 years nothing fundamentally new has happened in the

sector as far as the product itself is concerned (without considering

the consolidation, operational efficiency and the use of ratings).

CREDIT OR CRISIS?68

Interview with katrien MatthysGroup Credit Manager, Resilux

How did your company face difficulties in the financial crisis. Were specific actions started?We have never mentioned the excuse of financial crisis or withdrawal of credit limits by the insurers to our customers. File by file we further assessed the quality of our customers and the payment experiences. In our company, far more elements were considered such as prices and margins concerning those customers and whether there were specific demands to production or not. We also asked our salesmen and local management for more advice. This definitely improved communication between all departments. A new procedure, based on competences was also created; top management is more involved in this procedure as well.

Do you think that the advised credit limit indicated on trade information reports can be adopted as an internal credit limit?No. Trade information is only based on limited payment experiences and published data and the whole is then translated into a scoring model. We think differently: each company has its own story. The people behind the companies and our personal contacts also count, as well as the prices, the products, new markets, and our own payment experiences. Each sector is different as well and therefore must be dealt with differently. Close cooperation between credit insurers, collection agencies, banks and trade information agencies would perhaps give a more accurate insight. In our company the ratings of trade information reports are only mentioned informatively on our decision document. However, we have noticed that certain insurers do follow these ratings and credit indications.


How can you best position the credit manager in the organisation?Credit management remains a financial matter, and as such we are part of the financial department and report to the CFO.With respect to the physical place of the credit manager, I think he needs to be as close as possible to the sales & production department. This will make communication smoother, and trust and interaction between the departments will grow.

Would you be in favour of pricing differentiation depending on the risk?Definitely! Clients like Nestle, Pepsi, Coca Cola, … should be insured at a lower premium. Debtors with a higher risk level can also be scaled in higher premium levels. It seems quite logical to me. Another possibility is to grant lower percentages of cover to debtors with an increased risk profile.

A credit insurer should always indicate the possible maximum credit limit in addition to the requested limit. This enables sales to focus on the good customers. What do you think of this?This would indeed be a very good recommendation and strengthen the relationship between sales and credit management. It would also be useful to know the total amount of credit limits the insurer currently has on a buyer and whether claims have already been reported on this buyer.

5. BuILdING ThE FuTuRE: ChANGE ANd INNovATIoN

CREDIT OR CRISIS?72

5.1. Credit insurance (un)changed?

Credit insurance is a product that has already existed since the 19th century. Those who read the book by Jean Bastin on credit insurance, will find out how the current product/business model originated. This historical overview demonstrates that the credit insurance sector has experienced a difficult origin. A useful instrument that guaranteed the profitability and solvency of the sector was achieved only by trial and error(9).

The credit insurance product has not fundamentally changed a lot in the past 50 years. On the other hand the world has experienced a serious metamorphosis. Do not get us wrong: at an operational level various remarkable improvements were achieved, for example the consolidation of the sector into three large groups and the introduction of credit ratings for debtors. This led to important synergy effects which resulted in a strong decrease in premium rates in the past 10 years. For those reasons the product should be adapted in certain aspects.

The crisis of 2008-2009 has shown that the current structure of the product contains a few weak points. One of the reasons for this is precisely the existence of the oligopoly which seems to slow down the urge for innovation. The users or clients are slightly guilty as well because they exercise insufficient pressure on the credit insurers.

“Credit insurance has shown the features of a commodity for many years. The differences between the credit insurers have been reduced in such a way that the products are experienced as identical. The commodification only emphasises the price. The credit insurers therefore urgently need to come up with differentiation strategies.”Jean-Louis Coppers, CEO, CRiON

5.2. Product innovation

A distinction must be made between product innovation and improvement. The true challenge lies in the innovation, which is strategic by nature and therefore focused on the long term. The point is to think outside the box, and

(9) BASTIN, J., L’assurance-crédit dans le monde contemporain, Paris, Editions Jupiter - Editions de Navarre, 1978, p. 7-46.

PART 1 BAckgRound — 5. Building the future: change and innovation 73

to forget about existing products. We want to apply disruptive thinking: what the product should be to truly meet the needs. We must not limit ourselves to existing companies. According to Schumpeter the basis of innovation lies in a combination of things: e.g. use of coffee pods, creation of the post-it at 3M.

Innovation can lead to the ‘Blue Ocean’, which creates a new market independent from the red ocean where the current market participants compete each other to destruction, mainly through price dumping. The credit insurance industry is now characterised by this ‘Red Ocean’. The competition mainly occurs at the level of pricing, but not by means of real innovative solutions that lead to a broadening of the market. The market size almost remains equal, so existing companies mainly change insurers because of the price. There is a lack of truly creative innovation, the cause of which can be found in the oligopoly market: the Big3 look at each other, and thus they are stuck in their own trenches. They are scared to leave them for fear that the front becomes too destabilised.

5.3. Product improvement

Product improvement is rather focused on the short term, and its purpose is to apply a few pragmatic improvements to the existing products.

On the other hand the progressive improvement is the greatest enemy of innovation. Nokia for example did not invent the blackberry: it has improved the mobile phone, but failed to see the need to read emails on a mobile.

Innovation is very difficult, and actually needs a run-up. In that context you should do both: progressive improvement and innovative thinking. In the latter, time must be considered and you should impose on yourself a strict plan of action to prevent you from getting stuck in the swamp of the secondary product improvements.

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5.4. Fear of cannibalisation

In the book 'Blue Ocean' it is stated that cannibalisation is often used as an argument against innovation (or the new unknown blue ocean market). Issues like assumed cannibalisation or the creative destruction of established companies appeared exaggerated. Blue oceans enabled profitable growth for each company that found one, both for new and existing companies.

Fear exists however that this could lead to the cannibalisation of the core product, the credit insurance. The term cannibalisation entails that there will be a drop in the turnover or the market share of a product (in this case credit insurance) by the introduction of a new product.

On the other hand, there are not many means to cover the payment risk. Whatever the information available, you can always make an error in the analysis of the debtor's risk, or be faced with unexpected negative events. Who could have thought in the summer of 2008 that numerous banks would be on the verge of bankruptcy in the following autumn?

In addition, negative current information does not always come through on time. For that reason credit insurance will always keep its added value: if credit limits are mistakenly issued on a defaulting debtor, the insurer will pay an indemnity.

The latter is partially demonstrated by the evolution in the latest decade:› despite their great financial resources to create an efficient credit management department, large multinational companies remain credit insured due to the important added value they see in it;› thanks to the evolution of the internet the access to (public) information has become much easier and cheaper, but the turnover in the credit insurance sector has not dropped because of that.

In this quickly evolving world other market players might enter the core activity of credit insurance. If the credit insurer remains too passive, he will run the risk that other parties may cut the grass from under his feet.


Apple

A nice example of an innovative and dynamic company, where the

fear of cannibalisation seems to be of no importance, is Apple. Apple

is very profitable and the share quotes continue to increase. In 2011

the sales of iPod no longer grew. 'That is not illogical: if you possess an

iPhone you no longer need a separate music player. The iPhone therefore

cannibalises the market for iPods. It is expected that the sales of iPods will

see a a serious drop in the next quarter (Q4 2011)' (10). In 2007 the late

charismatic head Steve Jobs already recognised that the iPhone could

cannibalise the iPod: but if it has to happen, much rather by another

Apple product.

The same now occurs with the iPad: 'The iPad is clearly going to affect

notebook computers' says Steve Jobs. CEO Tim Cook also believes it is

good for Apple that the iPad takes a part of the PC sales.'Cannibalisation'

is good for Apple in general: 'There is some cannibalisation, but I also

think that there is some halo effect from Apple product to Apple product.

We brought many people into Apple in Taiwan through the iPhone,

and we’re now introducing many more (in Asia) through the iPad. They

are buying into the Mac. If that’s cannibalisation, then it’s good for us.

Remember, we have a low share in the PC market, so if the other guys

lose a lot more, we have a lot more to gain. The iPad teams are building

the best iPad for the future and the Mac teams are building the best Mac'.

(10) x, 'Analyse. Most optimistic analyst predicts a quote of 666 dollars. Apple on way to podium', De Standaard, 23 and 24 July 2011, p. E13

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Interview with Paul BecueAuthor of a.o. 'Manual of credit insurance. The invisible bank'

Which important challenges do you see in credit management in your company in the next 5 years?The sector will continue to become more professional. This includes a.o. that automation will increase but also that companies will outsource more to third parties specialised in the matter, e.g. collection, scoring and rating, automation of business processes, etc. The business world will increasingly realise that credit management is the pillar of good cash management and healthy liquidity management.

IFRS does not allow percentage creation of reserves for bad debts. Should this change? Will the credit insurer be willing to take significantly more risks in a recession if sufficient reserves were built up in better times?IFRS is also broader: IFRS 7 imposes an obligation on the companies to evaluate the credit risks, e.g. based on a rating system. The average risk profile can thus be defined. I think this is very positive. Building up more reserves in good times will in my opinion not lead to more aggressive credit policy in worse times.In addition, the Belgian taxation is not that flexible with respect to the fiscal processing of reserves: a bad debt only is eligible for deduction if the loss is established and certain.

If the quality of your credit management were certified by a third party, would such a certificate contribute to the stabilisation of your company? Who could be that third party, and what benefits for credit insurers, rating agencies, banks, etc. would that result in?Whether a certificate of credit management contributes to stabilisation is difficult to assess. It is a mark of good management, and as such the company concerned will also apply this to other domains. From that perspective this company will obtain better


ratings from credit assessors such as banks and credit insurers, which contributes to the stabilisation of the company. With this certificate a credit insurer might give the insured company more confidence and therefore more autonomy, which will also contribute to greater efficiency in the cooperation between them because of fewer administrative obligations, such as credit limit requests.

Which recommendations can you give to providers of credit management services?Ideally: tailor-made solutions. But in reality, this is not always possible: the supplier of credit management services must also work efficiently and therefore provide standardised products as much as possible. However, ‘fine tuning’ up to a certain degree must be possible.

What is your opinion on commercial finance or factoring?I think strong developments are ongoing in factoring, but at content level the product has not really changed much. A lot of work is needed there as well. Factoring is doing very well for prudential-technical reasons: it is a type of asset based financing which requires less equity of the bank. This is why banks promote this product. Companies increasingly use factoring because they experience it as an efficient way to fund their working capital. In combination with credit insurance, it can even be ‘factoring without recourse’, which means the balance structure becomes lighter.

Do you think that the advised credit limit indicated on trade information reports is enough to take over your internal credit limit?I don't think so as this is simply linked to a scoring system, which only takes into account a few financial variables like equity. However, it is not based on 'real' payment experience, by which a.o. manual credit limits are granted on request. This may be an opportunity for the credit insurers: in addition to providing real

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insurance, the insurers could also focus on credit management advice, and combine this with a partial commitment of a cover of 5 to15%. However, credit insurers are not enthusiastic about this for fear of cannibalisation of the classic credit insurance product.

Which products are possible between funding solutions and credit covers?Let me give a few examples. Banks give straight loans if a credit insurance policy is concluded, the so-called bankers’ endorsement scheme. Another option is to conclude a factoring contract without recourse based on a credit insurance policy, which serves as guarantee for the factoring company. And finally a company can use reverse factoring: the debtor must not pay the factoring company until the due date of the invoice, but the factoring company immediately pays the suppliers and therefore the debtor realises high discounts of 2 to 3%. That gives the debtor a high return on the transaction.

What is the added value of the credit manager in the sales process? Can the credit manager increase the turnover/sales?I think so. ‘Sales are vanity, profits are sanity’. A sale is only successful when payment is made. The credit manager analyses the customer and grants internal credit limits on that basis. This can be the starting point of a long term relation of trust and therefore lead to recurring sales. On the other hand salesmen do not need to spend time and energy on customers or prospects who are insufficiently creditworthy.

Does credit insurance contribute to the stability and sustainability of a company?Certainly, and for the following reasons: you avoid exceptional losses on trade receivables, which can undermine the equity and working capital. The credit insurance policy imposes a certain discipline on the insured with respect to the observance of the


payment of trade receivables. If he reports unpaid invoices too late he risks losing his cover. With that discipline the DSO will lower, and the needs for funding of working capital will decrease. The improved liquidity of the company will obviously also be beneficial to the profitability and therefore the long term survival chances of the company.

Proposal for product innovation in credit insurance: the insured reports monthly the outstanding customer balances to the credit insurer so the latter will gain a better insight in the outstanding risks, can make better decisions and will reduce the credit limits less quickly/frequently. What do you think about that?That is to be recommended. Of course manual work must be avoided. Automation through online services is one solution. An outstanding risk position is automatically and monthly transmitted to the insurer, who can then check to which extent nominal credit limits are being used. If necessary the insurer may proceed with an administrative reduction. Consequence: less chance of actual reduction of limits.

Which added value will the credit insurer have in 2015/2020?The credit insurer should present a greater diversity of types of products such as world policy, SME policy, fixed premium, CAP, Topup cover, Excess of Loss, single risk, etc., in conjunction with more options such as for example non cancellable limits for a certain (notice) period to be defined, deductibles, etc. When the insured has made his choice by means of a type of dashboard, the insurer must be able to automatically calculate the premium based on the probability of default linked to the rating, to which an expected loss is linked. In addition to effective cover the insurer should also be able to provide advice on credit limits, possibly linked to a low percentage of cover. The credit insurer should be able to develop more service providing activities in the broad credit management frame with his data. This could also slightly temper the cyclical nature of the sector.

PART 2 Themes — 1. PROFESSIONALISATION 81

PART 2 themes

In this part we will attempt to paint a picture of the credit insurance sector of the future, based on the work of the Think Tank Credit management 2015, led by credit insurance broker CRiON. The Think Tank is called credit management, but in an ideal world credit management and credit insurance act as Siamese twins. In that context, the Think Tank also deals with credit insurance.

After a brainstorming session by the Think Tank six topics were selected:› professionalisation;› financial security;› prospecting and sales;› automation;› stability and sustainability;› globalisation.

Each topic was considered by a team. The topics were simultaneously discussed at a conference attended by 180 credit management professionals, including representatives of the credit insurers. You can read the results of those reflections and debates below.

83

1. PRoFESSIoNALISATIoN

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1.1. Introduction

Credit management has come a long way: a considerable evolution from the mere registration of payments via chasing unpaid invoices towards the structuring of more (risk) preventive credit management. Automation has boosted that evolution. The recent crises offered opportunities for the professionalisation of credit management as well.

In the financial-economic crisis of 2008-2009 credit management was highlighted: it was a liquidity crisis and ‘cash was king’. In this context more attention was given to the management of working capital, and particularly to reducing the need for it. This meant having lower stocks and fewer outstanding trade receivables. For that reason debtor management, and credit management, suddenly became more important in a company.

However, the recognition of its importance has not grown enough. During the crisis credit management was a ‘board room issue’: professional emancipation was strived for, along with efforts to raise credit management to a higher level. Banks were not that keen on granting loans, and everyone tried to decrease the need for working capital in order to release cash. For pragmatic reasons the focus was on short term collection, although credit management is more than that.

The private equity funds have been aware of this for a long time: through credit management they shorten the DSO of their trade receivables. The released cash and liquidities were used to pay off the huge debts. Additionally, it is a fact that credit management generally has a privileged position in multinationals: they definitely see its importance.

Globalisation, the quick succession of economic and financial crises, etc. make professionalisation of credit management an absolute necessity. Initiatives for a further recognition of the credit manager, the certification of credit management and training, can contribute to this.


1.2. Recommendations for credit managers

Those who limited their credit management in crisis times to the occasional sending of a reminder letter 1, 2 and 3, have experienced in person that this is insufficient. Further professionalisation of the credit management imposes itself. A training programme leading to professional certification can contribute to this.

1.2.1. Concept of a credit management certificate

Credit management is not always equally appreciated in a company. A positive element could be the introduction of a certificate for credit management, issued by a third party. That certificate could be included in the annual audit.

Such a certificate can be developed on 2 levels: person-oriented and process-oriented. It is the combination of people and processes that guarantee a high quality of credit management. Both cannot be separated: processes cannot operate without skilled credit managers. On the other hand it should be avoided that, if a credit manager leaves the company, the quality of the

Figure 5: There is a need for certification of good credit management

Source: inquiry Congress 'Credit or Crisis'

1. Fully agree

2. Agree 3. Slightly agree

4. Disagree 5. Fully disagree

8% 7% 4%

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process diminishes considerably. This is why we recommend to aim at a two-fold certificate: person-oriented on the one hand and process-oriented on the other.

› Person-oriented: certificate for the credit manager. This certificate confirms that the holder of the certificate meets the conditions of a good credit manager.› Process-oriented: certificate for the credit management process. This certificate guarantees a high quality credit management process within the company.

The minimum requirements to obtain the certificate can also be subject to changes. After all, the world changes continuously. Changing market conditions lead to other basic conditions for an excellent credit manager and a high performance credit management process.

“Certification of credit management procedures, as well as of credit managers is a good thing. The US are years ahead of Europe in the matter. The certification not only results in fewer claims but also has a very positive influence on the working capital of the company.”Paul Overeem, Member of Supervisory Board and Managing Board, Euler Hermes Europe

Advantages of a certificate:

What can a company achieve with such a certificate? Why would

companies aim at obtaining this certificate? Let us list both the internal

and external advantages.

Within the company:

› Checking current credit management.

An objective view on the current maturity level of the credit management


process and team, clarity on the extent to which procedures are

followed.

› Benchmark with credit management in other companies.

How is the credit management positioned compared with other

players in the market? The credit management of our competitors will

have an influence on our customer portfolio.

› Improvement path.

Clear view of the path to follow to achieve excellence in credit

management.

› Focus on quality.

The team is stimulated to continue working on optimising quality.

› Access to alternative types of credit management, such as excess of

loss.

› Insurers can offer Excess of Loss as an alternative to traditional credit

insurance for companies with good credit management.

External advantages:

› Market.

A certificate has a great impact due to the image you portray:

companies will want to work with you because the certificate helps

facilitate trust.

› Insurer (see further).

Advantages such as for example, a lower premium, higher self

assessment, higher percentage of cover, etc.

› Bank.

In the framework of Basel II/III the bank as well could potentally

reward the company with a better internal rating, and thus a lower

interest rate on the granted loans.

› Access to public subsidies (see further).

› The certificate is only an intermediary step and should mainly

contribute to the protection of the SME.

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1.2.2. Workings of a certificate

Below you will find a first indication on how such a certificate can be implemented.

FrameworkThe certificate contains a framework of features of an excellent credit management process based on best practices, complemented with conditions from the credit management procedures of the company.

Execution of the frameworkThe practical application of procedures and best practices in credit management are checked.

PersonsProcesses cannot operate without employees. They too are subject to a number of minimum requirements: see person-oriented certificate.

External auditAn external, independent party checks, based on an audit, whether the certificate conditions are met.

Limited validityA maximum validity of 3 years is recommended. If not, the certificate will lose its value and credibility. This is also important for external parties who can grant a possible advantage based on the certificate (see below).

Path of improvementIn the audit, points for improvement are also indicated to ensure the audit not only results in a certificate, but also in a plan of action for further professionalisation of the credit management.

Recognised by external partiesIn view of the impact of credit management on the financial health and continuity of the company, external parties such as credit insurers, banks and public authorities can grant certain advantages to the holders of a certificate.


Review assessmentIn a review assessment a new audit is carried out by the external audit company. Next to the compliance with the minimum requirements, the development, compared with the previous measurement, will also be assessed.

Inclusion in the annual auditIt is also recommended to include credit management in the annual audit, for example as part of SOx (Sarbanes Oxley) compliancy audits.

Part of corporate governanceA good credit management (certified by an external party) is part of good corporate governance.

“The auditor also needs to audit whether the procedures are applied in practice, and whether they cannot be overwritten by, for example, a business unit manager who really wishes to sell despite the negative signals.”Tom Vantyghem, Group Credit Manager, Sioen Industries

1.2.3. Certification of a credit manager

This is a personal certificate: has the person got the right profile to be a credit manager? Has he got the correct competences? Has he got enough knowledge? Training to become a credit manager could be helpful. Formerly the Antwerp Management School (AMS) offered a credit management course, but this course was stopped in 2011. ICHEC Brussels Management School partially took over in 2012. It remains to be seen whether the initiative can continue. Beside this, there is no training available in Belgium.

Certification of a person or function is already being applied in other sectors: e.g. the certificate of environmental coordinator.

In credit management we experienced a shift from mainly administrative tasks (e.g. sending reminders) to a more advisory role (e.g. advice on whether to supply to a customer or not). Additionally we also notice a change in the profile of a sound credit manager. The 'accountant- grey mouse profile' will no longer do.

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1.2.4. Certificate of credit management process within the company

To assess the quality of processes various techniques and frameworks are available. These can provide inspiration to create an evaluation plan to set up a certificate of an effective credit management process.

There is for example - in a more IT related context - the Capability Maturity Model Integration (Carnegie Mellon University/SEI) that provides a frame for professionalisation of processes and individuals (People Capability Maturity Model). Some principles are also applicable to credit management, namely the identification of the maturity level of credit management and the evolution to an organisation working on continuous improvement.

Another possibility is translating the 'top performance model' into a credit management context.

Figure 6: Top performance model

Source: top performance model (Nelson & Burns)

High level performance

Proactive

Active

Reactive


We see similarities in the top performance model with the evolution to a mature and innovative credit management process:

› Reactive credit management. Credit management as a reaction to certain problems: actions are only taken when invoices remain unpaid a long time after their due date;

› Active credit management targets are defined and actions are directed towards the present rather than only the past: collection actions are taken before the due date has passed;

› Proactive credit management give attention to prevention: taking actions that can reduce risks and losses for the future such as a credit risk policy with, a.o. defining and observing credit limits;

› High level: an integrated credit management process, in which continuous improvement is integral to the process.

At the same time this goes together with the evolution from a purely operational credit management to the development of a strategic credit management. However, there is no single best credit management system. Both internal and external parties must strive for professionalisation.

“Certification of the credit management process will surely contribute to professionalisation and will therefore lead to fewer losses on bad debtors. We fully endorse this.”Vincent-Bruno Larger, Secrétaire Général, AFDCC (France)

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What is good credit management? What can you concentrate on to further professionalise your credit management?

As a process is much more than a mere chain of activities, we will

not discuss the activities that must be part of a comprehensive credit

management. We will look at factors that can stimulate further

professionalisation of the credit management process. Working on these

supporting factors of professionalisation, means further expanding a high

quality credit management process.

Structure› Procedures.

Provide a framework for good credit management, not only structured

from a credit management perspective, but after consultation with

other departments.

Resources› Having various tools in the tool box: warning signals, working on

creative solutions, what is risky?

› Reporting.

Good reporting is essential to know what can further be improved.

› Targets.

Targets contribute to efficient and progressive credit management.

People› See person-oriented certificate

Roles› Adviser for the sales department.

Sales can rely on the credit manager as an adviser for questions

on business with companies in other markets: payment terms,

payment means, guarantees, …


› Business partner.

Contribute as a business partner to the development of business

in more risky environments with customers that are risky or not. A credit

manager is not there to stop sales but to avoid risk.

› Supporting export.

Supporting the export to new markets.

› Supporting profitable growth.

In the first place credit managers are not ‘preventors of sales’.

Integration› Integrated credit management.

Credit management not as the last link in the chain, but centrally

placed in the company, connected with the other departments.

› Cooperation.

Active cooperation and avoiding power games: the company objectives

are the priority, rather than individual department objectives.

values› Attention for added value.

Ensure that credit management is not only perceived as a cost, but that

the added value is clear, for example by presenting business

opportunities.

› Efficiency.

Attention to cost efficiency: credit management is often still considered

an overhead expense. The message therefore is obtaining excellent

results with limited means.

› Flexibility.

Adaptability to changing circumstances: e.g. the rules for granting a

credit limit can vary depending on the market you are active in, or in

the event of a crisis.

› Continuous improvement.

It is up to the people in credit management to question themselves

continuously, and to come up with proposals to change procedures

and approaches.

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“The credit management department must contribute to the profitable growth of the company and vice versa: the sales department must also contribute to achieving fewer bad debts and increasing timely payments. This is the way to create an interactive and healthy relation: you really become a business partner.”Kurt Vanwingh, Credit Control Director, Amcor Flexibles Europe & Americas

1.2.5. Points system

Another type of recognition for good credit management, is a system of points based on:› credit management procedures;› credit management software; › credit management team.

When obtaining a specific minimum score the company can apply for various levels of benefits offered by an insurer, and by other external parties such as banks and public authorities.

1.2.6. Continuous improvement in credit management

Organisations will create processes for innovation: innovation does not occur by itself, it is everyone's responsibility and it can be developed. We can develop the skills in coming up with ideas. Innovation requires an integrated approach: bringing people together from different disciplines guarantees the best results. Innovative projects and initiatives for continuous improvement complement each other.

The post mortem analysis of claim cases – preferably in consultation with the credit insurer (see further) – can also provide input for continuous professionalisation of the credit management process.


“We use the kaizen philosophy (continuous improvement) in our company. Procedures are good, but if you always stick to procedures, you don't move forward. For example, I try to stimulate my team to analyse bad debt cases and learn from them. We must permanently question what we do: have we still got the correct procedures adapted to the economic situation? It is not because something worked last year that it still works today. In addition, I ask my team to come up with a proposal for improvement every month.”Peter Van Den Broecke, CFO, Daikin Europe

1.3. Recommendations for all players in the credit management market

1.3.1. Certification institute

Who issues such certificates? There is no independent institute that examines credit management and issues certificates e.g. like the ISO-certificates for company safety.Various institutions can be considered:› the credit insurer;

Figure 7: Certified credit management contributes to a continuous quality of the credit management process


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› the broker;› the auditor;› another neutral third party: this can be a consultant in credit management that is accredited by the authorities (after a legal regulation);› the sector can also create an institute themselves, e.g. the federation of credit managers.

1.3.2. Credit management association

There are already various online forums (e.g. LinkedIn) on which credit managers can discuss credit management topics. In addition face-to-face contact is obviously extremely important, and an important role is reserved here for a credit management association for credit managers.

An association of credit managers can provide a forum for the expansion of knowledge, exchange of experience and best practices between credit managers and networking. This can be realised a.o. by organising training courses, networking activities and publications.

Figure 8: Who should be the party judging the quality of credit management?


1. Self assessment by CM department

2. Internal audit department

3. Auditor (as part of annual report)

4. Insurance company

5. External certification company

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1.4. Recommendations for insurers

1.4.1. Professionalisation

Insurers cannot stay behind when professionalisation is concerned. The top performance model (see earlier) is also applicable to them. An evolution of reactive interaction with insured companies (e.g. communication: giving information after a customer asked a question) to proactive action (e.g. giving sufficient time to insured companies to take action when credit limits are withdrawn).They too need to strive for an integrated approach in which cooperation with the insured is essential as well as the sharing of information (e.g. a mutual post mortem analysis of claim cases).

“Insurers as well must become business partners of the insured companies and meet the following requirements: they must be cost efficient, they must provide added value and have a good speed of execution. These are the 3 elements credit management is evaluated on. If they improve with respect to these 3 points, this will open doors for them.”Kurt Vanwingh, Credit Control Director, Amcor Flexibles Europe & Americas

1.4.2. valuation of good credit management

A credit insurer receives a completed form from the insured, calculates a premium rate on that basis and defines the other policy conditions.The elements to be considered are: the industry, the country, the evolution in turnover, the claim history, the largest customers, the spread, etc.

The credit insurers in the past mainly observed the claim statistics of the last 3 years for the calculation of the premium: they also checked whether the preventive role of the insurer could have avoided the claim, which would lead to a lower premium rate. Under the influence of Solvency II insurers nowadays evolve more towards a risk based pricing model: each buyer rating is linked to a probability of default, in which the preventive role of the insurer is also indirectly considered. However, this risk based pricing model does not reward

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a company’s good credit management.In fact, the debtor portfolio of the insured/prospect should first be adapted to the acceptance degree by the insurer: consequently weak debtors who are refused will not burden the premium rate.

Yet, the quality of the credit management does not influence the premium calculation because the credit insurer cannot (objectively) assess this aspect. In the current approach the insured companies experience a certain disinterest from the part of the insurer regarding the procedures of the credit management applied by the insured. The focus of the insurers today is the figures (e.g. claim history) rather than qualitative elements such as good procedures, approach of the insured in the assessment of credit risks (e.g. financial information, input from sales and market).The professionalisation of the credit management within a company must lead to a more 'tailored' approach by the credit insurer, with an impact on the policy of the insured.

A parallel with the 60s-70s can be drawn: in this period there were many company fires and it was difficult to obtain good insurance. This changed when companies started to undertake preventive actions: they were then rewarded. The same thing should be possible in credit management, and credit insurance linked to it. Credit management should be the basis of a long term relation with the insurer (sustainability), in which not only price is important.

These are the consequences for the insurers of a professional credit management in the insured company:› More intense communication between insured and insurer. Information supplied by insurers is questioned. The insurer needs to supply more extensive and thorough information.› Less administration. If a higher amount of self assessment is granted on the basis of a certificied credit management, the insured should receive more autonomy in granting credit limits. This implies that he needn’t always consult his insurer; this procedure will lighten administration.› Less collection work. Insured companies with professional credit management work preventively


to a high extent and also react quickly at collection level. This will lead to less work at the collection departments of the credit insurers.› Fewer losses (see vote results Figure 9), Credit managers believe that professional credit management results in fewer losses for the insurers.› Opportunities for product development. As credit management reaches a higher level of professionalism the needs of credit insured companies change. This will result in opportunities for product development for the insurers.

This also means a shift in the required competences of staff in credit insurance companies. They too will not escape from the further professionalisation of the credit management landscape.

“Because of restructuring valuable experience and knowledge have been lost. In the insurance sector in general a competence problem thus occurs: this is not specific for credit insurance, but for insurances in general.”Gaetan Lefevre, Risk & insurance Manager, CMI

Figure 9: Credit insurance companies benefit from companies with a professional credit management: fewer losses


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Role of the insurers in a credit management certificate

Which role can the credit insurer have in the credit management certificate? Can he be the one to audit the credit management process?

The credit management certificate indicates that a company practises competent credit management. On that basis the insurer can grant various advantages to a certified insured company:› Increased autonomy for the insured in the allocation of credit limits;› Higher credit limit decisions;› Automatic second layer on the credit limits/top up cover;› Higher degree of cover;› Longer period to do the collection themselves;› Longer grace period;› Access to alternative forms of credit insurance;› As companies acquire a better organised credit management the insurer can react on this by developing new products;

Figure 10: Compensation for qualitative CM


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1. Reduced premium %

2. Higher amount in self assessment of limits (discretionary limits)

3. Higher percentage of coverage

4. Longer period for collections

5. Longer grace period before cancellation of limits

1. Reduced premium %


› Decrease in price: good credit management will normally lead to fewer claims. This implies a lower risk for the insurer and therefore might be linked to a lower premium rate.

“Greater professionalisation of credit management does not have to mean the end of the credit insurance era. A true blood credit manager may be convinced that if he delivers good work, he no longer needs credit insurance. However, if your house is on fire and you are a fireman, you still need your insurance.”Arjan Stigter, General Manager, BurlinQ Academy

1.4.3. Consulting cell

The credit insurers do not dispose of a consulting cell to optimise credit management. Nevertheless, such a consulting cell would be in the insurers' interest e.g. with respect to Excess of Loss policies. An audit of the credit management procedures is usually a basic condition for an Excess of Loss policy.

1.4.4. Risk-related premium rates

Risk-related premium rates may be the result of better credit management. If the credit management is good, the insured should obtain better conditions from the credit insurer: the portfolio will be regularly screened, and you will pay another premium rate per rating category of debtors. The premium rate therefore depends on the risk profile of the buyer.

The credit insurers increasingly work on that basis. Cfr. supra: the risk based pricing model, that will be applied more under the influence of Solvency II. An insured company with a bad, risky portfolio will pay more.

“The quality of the credit management must largely define the price of a policy.”Vic Verbiest, CEO, TCRe


1.4.5. Post mortem analysis of claim casesIn an integrated approach the insurer needs to analyse the claim cases together with the insured: what were the signals, which measures could have reduced the risk further, and mainly which lessons do we learn for the future. This will enable both the insurer and the insured to take structural measures to reduce the possibility that similar claim cases could occur in future.

1.5. Recommendations for public authorities

1.5.1. Education

Education

The poor knowledge of credit management can be compared with that of credit insurance: credit insurance is almost unknown by students. Courses dedicate only a few lines to public credit insurance (ONDD - Ducroire in Belgium).Therefore we recommend including a basic course in credit management in business and management courses (see above: ICHEC Brussels Management School).

Figure 11: Credit management should be part of courses at universities


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Continuous learningThe continuous learning of credit managers is crucial for the professionalisation of credit management. A specific training as credit manager can be an important step. In other countries such courses have existed for a long time. Public authorities could contribute by subsidizing those courses. The curriculum of a credit manager course contains the key elements of credit management knowledge (e.g. solvency analysis) and also pays attention to the development of the necessary competences (see also the elements for a person-related certificate indicated earlier).Courses on export should also include credit management and credit insurance topics.

Business management for starting entrepreneurs

The consequences of bankruptcies are not limited to the involved companies and their employees. Public authorities also experience the strong impact of failing companies: e.g. increase in unemployment. There is a considerable snowball effect: a supplier who does not get paid by one or several customers due to bankruptcy or payment difficulties is in turn another supplier’s debtor who he cannot pay on time either. A business management course for starting entrepreneurs should therefore include a basic course in credit management.

1.5.2. Research

Research in credit management and credit insurance is still relatively undeveloped. As research stimulates innovation, it could pay an important contribution to further professionalisation of credit management and the credit insurance landscape.

1.5.3. Support SMEs in professionalisation of credit management

SMEs are often particularly vulnerable to the consequences of bad debts and bankruptcies of their customers: these can mean a threat to the continuation of their activities. Supporting SMEs in creating solid credit management means


increasing the survival chances of SMEs. This may be possible by means of the credit management certificate and by making the credit management training accessible to them, for example with public financial support.

1.5.4. Publication of financial information

Financial information is essential to obtain a complete picture of the creditworthiness of a debtor. Which companies are subject to publication duty and what kind of information they publish is important for any credit manager. Providing recent, extensive financial information about as many companies as possible in a standardised IT-friendly way contributes to the professionalisation of credit management.

1.5.5. Administrative simplification of credit management

Initiatives that contribute to the administrative simplification of credit management, deserve recommendation, e.g. new accounting rules on write-offs on losses, power of proof of email reminders, etc.


Interview with Ludo TheunissenChairman IVKM – Instituut Voor Krediet Management

If the quality of your credit management was certified by a third party, would such a certificate contribute to the stabilisation of a company?Certifying credit management can lead to a whole series of advantages for the company: besides the obvious opportunity to improve the own credit management based on a professional audit, a certificate creates advantages in relation with other parties. Firstly, the presence of solid and well functioning credit management will positively influence the relation with the credit insurer.In the context of Basel III, the cooperation with the bank will also benefit from a quality label for credit management and it could possibly result in better conditions. Finally, a well organised credit management will positively influence the credit worthiness evaluation by suppliers.In any case, the condition to achieve all these advantages is the credibility of the certificate and of the certification process. De facto, this implies that the certifying organism is an independent organisation, that has sufficient expertise and knowledge of credit management. A cooperation between the various companies and organisations involved in credit management seems necessary here. The various parties involved are credit insurers, information suppliers, consultants, factoring companies, collection agents and of course representatives of the credit managers.

How do you see the task of the credit manager within ten years?Do you agree with the statement that it is possible to fully automate your credit risk evaluation, as a result of which the role of the credit manager will eventually disappear?


The credit manager’s basic responsibilities will be largely similar today, but in some aspects the working method will change, as well as the attention and time devoted to certain duties.The duties of credit managers will evolve in various ways. Firstly, electronic business, in all its aspects, will have an important impact: the electronic creation and sending of invoices, often with automatic delivery receipt from the customer, will simplify the administrative process of the supplier and of the customer. Secondly, some types of dispute will disappear. Customers will no longer be able to say they have not received an invoice, or discuss the time of receipt. In addition, to the extent a customer processes invoices electronically, the acceptance of the invoice will happen a lot faster. Further automation of operational processes will lead to routine tasks requiring less from the credit manager. This will result in more time for other aspects: a more conscious and thorough application of preventive credit management and a thorough and solid collection process. Thus, a shift to a professional management of customer relations will be possible. Consequently, stricter demands will be made on the credit manager.A further globalisation of economic relations will also have an impact, which will considerably depend on the specific industry and individual company. In any case, 'Global thinking' will be on the agenda.

Do we need a fully-fledged Bachelor in Credit Management?The lack of such a course in Belgium is unfortunate. Maybe this is a vicious circle: as long as the professionalisation of credit management does not receive enough attention in the companies, it will be difficult to create an interest in a bachelor or master course in credit management. As long as the Belgian market lacks well trained credit managers, the position of credit managers in


companies will be difficult to improve.This is why cooperation between all involved parties is crucial to stimulate interest and to reach sufficient number of candidates for such a course.With respect to the high demands required by an official accreditation of a bachelor or master education, this is a project in which far-reaching cooperation with a college or university is important.

2. FINANCIAL SECuRITY


2.1. Introduction

Financial security is a notion that covers various needs and topics:› Reduction of the risk that an insurer would not be able to indemnify claims. Credit insurers must therefore be financially healthy;› Limitation of losses on bad debts;› Optimisation of working capital;› To have credit limits maintained on the insured company itself;› To have credit limits maintained on the debtors of the insured company.

“Financial security means for Balta that we’re not engaged in the domino game.”Johan Blauwblomme, Risk & Credit Control Manager, Balta Industries

We can discuss financial security from two points of view: an external and an internal.

2.1.1. External financial security

A company may use capital that comes from the external market. This may be a loan and can have a different form depending on whether it comes from the public market, the bank or suppliers credit (indirectly granted through credit insurance limits). The opportunities to obtain capital from the public market are limited for the private industry, as a result of the fact that this market is largely taken by public authorities who are in heavy debt position.

Let us make the following distinction:

Securities for the main stakeholders.

The main stakeholders in the credit management process are suppliers, bankers and credit insurers. Can we think of products or procedures to optimise communication with those stakeholders?

PART 2 Themes — 2. FINANCIAL SECURITY 113

Receiving securities from the main stakeholders.

The law imposes rules to financial service providers (bankers, credit insurers) with respect to expertise, good management, transparency and financial security. However, as we learned during the financial crisis of 2008-2009, open communication disappears quite quickly as soon as a credit insurer finds himself in trouble.

2.1.2. Internal financial security

A first requirement is that the company must have a good insight in its trade risks. In large groups with lots of branches, this may not be easy. Yet, it appears to be possible.

Credit managers are well aware of the fact that the credit risk determines whether a company is profitable or not. It is therefore important to protect oneself sufficiently.

“Without credit insurance, there will be trade problems.”Pierre Schils, CFO, Prayon

Figure 12: The head office has a good view on all credit risks of the affiliates

Source: Belrim

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How can you protect your company against bad debts? Obviously, this is what all traditional credit insurances and Excess Loss covers do.If we look at it from a wider perspective, we should discuss the optimisation of working capital. This is why we will discuss products that have affinity with credit insurance: commercial finance formulas, supply chain finance, etc.

“To us the ‘Excess of Loss’ insurance is like a fire insurance: if a disaster happens, we want to be indemnified for a large part of the losses. But at the same time you hope that something like that will never happen.”Pierre Schils, CFO, Prayon

There are various resources a company uses to protect its capital: guarantees to obtain ‘payment on time’, trying to limit claims and avoiding ‘write offs’. Thus, the company wants to maintain its working capital. This can be done by means of comfortable credit limits, obtained from the credit insurer to cover the trade receivables.

Figure 13: Credit risk determines whether a company makes a profit or loss


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Yet, credit insurance would be more adapted to traditional finance products, if credit limits were issued for 12 months (the non cancellable limits, for example for maximum 1 year): a company would be able to obtain funding on that basis. Another possibility would be to obtain comfortable credit limits for most of the debtors by means of a differentiated premium rate per customer category depending on the risk profile of that category.

“At the moment, credit insurance is a flat rate product. It would be better to pay premium on the probability of default of a customer.”Chris Parratt, CFO, Ontex

2.2. Recommendations for credit insurers

2.2.1. Excess of Loss and syndication

Credit insurance aims at covering the credit risk on the trade receivables of the insured. The insured company thus avoids exceptional losses which can hollow the equity and the company’s solvency. Equally, the need for funding of the working capital can increase too, which could lead to liquidity problems. This can be avoided with a credit insurance policy.

An Excess of Loss policy covers the insured company against important losses (see also chapter Globalisation). This is why it is called a calamity policy. The insured performs the main part of the credit management himself, and must therefore have good credit management procedures and experience.Some credit insurers are not enthusiastic about the traditional Excess of Loss product, because you can suddenly be faced with very high losses.This is why syndication of this large risk among various credit insurers is an innovative solution. In syndication, very high claims will be divided among the various credit insurers.


2.2.2. Expansion of cover for reverse factoring

In reverse factoring the agreement applies to one customer and one or several suppliers. This is often used in environments in which a large customer demands conditions that (small) suppliers, who very much wish to deliver, cannot get financed, e.g. payment terms of 120 days. Reverse factoring makes sure the supplier receives the money immediately, in exchange for which the customer receives a discount on the purchase price.

In the context of a reverse factoring contract the customer receives goods from his supplier and sends a copy of the received invoice to the factor. The latter immediately pays the (often small) supplier after deduction of a discount of e.g. 2 or 3%. On the due date – e.g. 90 days later – the customer pays the factor.

“Credit insurance doesn’t cover the public sector because there’s no risk. However, Ontex would like to have coverage (and pay for it) for technical reasons: factoring is cheap financing and the interest rate for a normal revolving credit is 7%, but it’s only 2% in a factoring contract… but you need credit insurance cover.”Chris Parratt, CFO, Ontex

Figure 14: Globalisation feeds a growing need for syndicated credit insurance programmes


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All parties are satisfied:› the supplier gets his money quickly;› the customer has excellent buying conditions (discount for cash payment);› the factor benefits from a margin on the interest rate he applies.

At first sight this might be the ideal world, albeit with a few conditions and sometimes traps. The factor takes a concentrated risk on the customer. If the factor prefinances one supplier, the risk will be limited, but if the factor finances most or all suppliers, the funding will rise to 10% of the total turnover or more. Most factors can deal with a risk of up to 250,000 euro on one debtor by themselves, or by means of their own insurance. However, in a reverse factoring contract the risks soon reach a 50-fold of this. On one debtor!

Therefore factors must ask additional insurance (to the classic traditional insurers: Atradius, Euler Hermes and Coface), which often requires complex and lengthy negotiations. Because of the risk concentration this technique will be a prerogative of very healthy companies, often large stock listed companies.

Figure 15: Reverse factoring

Source: CRiON

Supplier (SME) Supplier (SME) Supplier (SME)

Debtor large &solvent company

FactoringCompany

3. Notice acceptance of the invoice

1. Delivery & invoice

5. Payment on due date (90 – 120 days after delivery)

4. Immediate payment of 97... 98 % (total amount invoice minus cash discount) 2. Copy

invoice


Small and medium-sized companies will fall out of the race.

A solution for the risk concentration is the syndication of risks, a principle already applied in reinsurance: two or more credit insurers share the risk. This makes it possible to insure much larger risks.

With respect to syndication the following difficulty arises: due to the oligarchic relations in the global credit insurance world the insurers have constant fears of being accused of cartel formation and of being accused of making price arrangements. This makes cooperation difficult. However, certain agreements and control mechanisms can be negotiated with the European Commission. In Belgium Assuralia can be the channel to start a dialogue on this subject.

2.2.3. Standardisation of securitisation

Securitisation is the transfer of trade receivables to a company created for that purpose - a special purpose vehicle (SPV) that issues tradeable securities for funding covered by those assets.

In fact it is a much more far-reaching form of transfer of trade receivables, and slightly comparable with factoring. As the trade receivables are usually sold ‘without recourse’ to the SPV, they disappear from the company's balance sheet. This leads to better balance sheet ratios.Credit insurance can play an important part here: by covering the trade receivables it has a credit enhancing effect on these assets. These will obtain a better rating based on the rating which the credit insurer has. Which facilitates on its turn the funding of the SPV.

This technique usually applies to large company groups with lots of branches. Their turnover is large enough to 'neutralise' the cost of this structured product.The challenge is to develop standard products for this purpose for companies in the sub-top.During the crisis the securitisation did not stand in a positive light: during that period companies had to deal with financial excesses. The proposal we deal with here is linked to the real economy.


2.2.4. Rating of debtors

Maybe suppliers do not wish credit insurance; they may find the trade information too superficial and therefore they may be interested in a rating. This can possibly be linked to a low degree of cover, so as to obtain a partial commitment from the insurer.

Today credit insurers assess customers and give credit limits to insured companies. Credit insurers can also thoroughly analyse these customers and give them a rating (like the rating agencies S&P, Moody’s, Fitch), without actually issuing a credit limit. That rating can be combined with a credit limit advice. The advantages are clear: based on that rating, suppliers can grant credit themselves. In addition to this it enables suppliers to know the risk profile of their customer portfolio: this actually is in line with IFRS 7.

Figure 16: Grades

Source: CRiON

GRADES

Standard & Poor’s

Long term Short term

Example Credit insurer

Probability ofdefault

Grade

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AAAPrime

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Default with prospect

for recovery

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CCC+CCCCCC-CCCD

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As described in Part 1, the enemy of innovation is fear of cannibalisation. Up to today the credit limit advice product remains undeveloped, because the credit insurer fears cannibalising its existing traditional product. Still, we are convinced that the market can grow by developing this product (the topic is further dealt with in the chapter Stability and Sustainability).

2.2.5. Alignment of credit limits to duration of bank loans

The credit insurance policy can be considered as a security for short term bank loans. Credit insurance must be adjusted to the traditional funding products, e.g. by issuing a credit limit for 12 months, or for the duration of the funding. We mainly bear in mind short term loans, that contribute to financing the working capital.

“To achieve innovation in the credit insurance sector you really have to challenge its basic assumptions. An example is the habit to cancel credit limits from one day to another.”Jan Adriaanse, Owner of the Turnaround Powerhouse, Prof. Turnaround Management, University of Leiden

Figure 17: Credit insurers should offer a guaranteed credit line for 6 or 12 months and can charge an extra fee for this


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In principle, credit limits can be withdrawn immediately and without any notice. However, we prefer the principle of the non cancellable limits (see also topic ‘Stability and Sustainability’). This gives the insured more time to look for commercial alternatives. Yet, this will lead to a higher premium rate: longer notice periods increase the risk for the insurer.

For this form of innovation the credit insurance sector must be willing to question its traditional principles: respecting a fixed duration of the credit limits, or working with lower percentages of coverage (see above).

This principle is also advantageous to the banker: a cover of the outstanding receivables of the client by a credit insurance policy may lead to a lower burden on the bank’s equity. Basel II & III mention a 'haircut': guarantees such as mortgages, insurances, etc. may be deducted from outstanding loans. More research is needed.

“Industry is prepared to pay a higher price for continuity. Because of the oligopoly in the credit insurance industry there was a decrease in premium rates. Industry, however, would be happy with a small premium increase in exchange for more stability. More premium means more profit, and this could lead to a larger buffer.”Johan Blauwblomme, Risk & Credit ControI Manager, Balta Industries

“Silox, 50% Prayon affiliate, has a traditional credit insurance policy. However, they were not happy with what happened in 2008-2009. The insurer can withdraw credit limits from one day to the next, without much explanation. A solution could be a type of notice of e.g. 15 (calendar) days: during this period the insurer and insured can exchange information with each other; for the insurer this is a way of showing his sense of responsibility.”Pierre Schils, CFO, Prayon


2.2.6. Low percentage of cover

In the US the term 'moral hazard' is used. This is an economic notion referring to the possibility that redistribution of risk (e.g. credit insurance) can change human behaviour. In this context it means that people will act less responsibly when they know that the damage they cause, will probably be covered by third parties (the credit insurer). This happened in the past when the degree of cover was 100%: the insured felt safe and forgot that he had to continue monitoring the risk with due care.In the redistribution of the risk the following situation is not imaginary: despite the fact that a credit insured company is (unofficially) aware of liquidity problems of a customer, this company will keep on supplying this customer, especially because the company’s competitors do not wish to deliver anymore, e.g. because they are not insured.

However, we might put it differently: instead of the insurer offering a cover of 85 to 100%, the covered percentage can be limited for larger risks to, for example, 35%. The possible moral danger of an insured behaving irresponsibly will thus be avoided. Indeed, the insured’s own risk of 65% is 5 times higher than his profit margin of 15% for example.Secondly, instead of completely withdrawing credit limits we could work with very low percentages of cover. By doing so the commercial relation between supplier and customer will continue to exist. The risk of 'moral hazard', however, will be absent: the supplier will continue to monitor the debtor risk attentively.

“I don’t like the unilateral withdrawal of credit limits. During the crisis the limits were withdrawn without any option to look for a solution. You are left with nothing, and this is a problem.”Johan Blauwblomme, Risk & Credit ControI Manager, Balta Industries

“Instead of withdrawals there should be different levels of risk sharing. It’s not black or white.”Mike Holley, CEO, Equinox


2.2.7. Supplier rating Suppliers are important stakeholders in a company and generally companies enter into long term relations with them. After all, some production processes in the company are specifically designed to meet the product characteristics of the supplier. It is therefore good to know whether the supplier is credit-worthy, and not on the verge of bankruptcy.

The current ratings used in credit insurance database are often only valid for a short term. With a 'supplier rating' the credit insurer can provide insight in the survival chances of a supplier in the short, mid and long term.

In this context we would like to refer to research done by Professor Hubert Ooghe, who works with a failure prediction model. The study of failure production models started with the models of Altman (1968) and Beaver (1967). Since then a lot of research concerning the development of better failure prediction models has been carried out worldwide. A failure prediction model describes the relation between an imminent bankruptcy, and a number of determining financial variables by means of a model score based on the information from the annual accounts. The discriminating ratios differ according to the number of years before failure: 1 year before failure, 2 years, 3 years, etc. The obtained model scores are general risk indexes giving the user an indication as to the financial status of a company: a company can be positioned in reference groups of failing or healthy companies. Best known in Belgium are the linear discrimination models Ooghe-Verbaere 1982 and models of Ooghe-Joos-Devos 1991.These models all have their own advantages and disadvantages. Depending on the situation (size of the company, industry, number of years before failure, etc.) one model will perform better than the other.

Based on these models, and variables outside the balance sheet and profit-and-loss account, the company can be benchmarked.This means that the company is compared with its current and future competitors. The objectives, strategy, products, etc. of the company are also taken into account, as well as the profit potential, productivity, growth potential, innovation potential, etc.


Based on a qualitative survey we noticed that companies are willing to pay for such thorough analyses. They wanted to have the opportunity to have such analyses carried out for their top suppliers, key customers and direct competitors.

“I don't believe in ratings if I don't know their formula and sources. It is not just about figures but above all it is about interpretations.”Pierre Schils, CFO Prayon

“What’s the value of ratings? The market is too reliant on ratings: the first downgrading of Greece from A- to BBB + only occurred in December 2009. The rating agencies didn’t see it coming.”Karel Lannoo, CEO, Centre for European Policy Studies (CEPS)

2.2.8. Solvency II and countercyclical buffer 2.2.8.1. Solvency II

Basel III is a new global regulatory standard on bank capital adequacy, and its liquidity. Part III of the Basel accords was developed as a reaction to the shortcomings in the financial regulations which became clear in the global financial crisis. Basel III reinforces capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.

The credit insurers will have to respect Solvency II. Solvency II is based on economic principles concerning the assessment of assets and liabilities, but it will also coincide with a system based on the intrinsic risk which will enable measuring that risk by means of consistent principles. The capital requirements (risk allocated capital) of the insurer will thus depend on the actual risk. In that context Solvency II has much larger effects than Solvency I.

The Solvency II accords contain a broader solvency capital requirement, that includes the following points: › limiting the risk that an insurer is unable to meet claims;


› limiting the losses of the insured as much as possible, if the insurer cannot meet all claims;› making sure supervisors provide early warnings and intervene swiftly if capital falls below the required level.

“The insurers complain about Solvency II, but watch out: more might be coming. The Code of Conduct could help if at least the credit insurers listened.There are a few examples of such a Code: it is mostly used by a sector to prevent a new regulation. However, if you don’t follow the Code of Conduct, it may attract the attention of the regulators and lead to more regulation.”Karel Lannoo, CEO, Centre of European Policy Studies

Actually, credit insurers are now feverishly working on Solvency II in the greatest silence and darkness. What about transparency and communication?It is important for the financial security of the insured company that the credit insurer has a high degree of solvency, and therefore is a financially stable partner. The insured who pays a premium, wants to be sure that he will be indemnified according to the policy conditions in the event of a claim.

“For credit insurance it is a matter of transparency, partnership and service.”Gaetan Lefevre, Risk & Insurance Manager CMI, chairman Belrim

“Credit insurance shows a lack of transparency: this is the most important problem. Often, the supplier cannot understand why credit insurance cover has been changed: this is a problem. If we don’t understand the decision process, we shall not want to use the product. We can’t control it. It’s important to define how decisions are made.”Chris Parratt, CFO, Ontex

Just like a stock listed company, the credit insurer should publish his outstanding claims, premium income, indemnified claims, impact of losses on capital, to all insured and brokers on a monthly basis. In addition they should give a complete insight in the reinsurance structure.


Credit insurers are 'monoline insurers'. In other words, they only insure one type of risk.Most large insurers, on the other hand, are 'multiline': when an insurance branch is in difficulty, these insurers can better maintain their relation with the reinsurers because various (better) insurance branches are involved in it. In this respect 'monoliners' are more vulnerable.

2.2.8.2. Countercyclical buffer

Credit insurance is subject to fluctuations in the economic situation. This makes it absolutely necessary to end the 'shareholder value' approach, in which the highest possible profit for shareholders is aimed at.On the contrary, a considerable part of the 'profits' in years of economic growth must be 'captivated' to bear losses in a declining economic situation. By doing so, economic cycles can be neutralised. After all, credit insurers should also play an social economic role in addition to maximising value for their shareholders.

In less prosperous economic times the buffer will enable to take more risks. If there is ‘less air’ in the limits, more efficient reductions will be possible and will not cause unnecessary panic.

But can we demand from a credit insurer to set up a 'countercyclical buffer' in the context of Solvency II? The sharp competition in this oligopoly market causes the premium rates to be too low to create a good buffer. Capital and, linked with it, credit is a scarce commodity.Such a reserve must also be fiscally supported and free of taxes.

“As an insurer you can create higher buffers but then your ROI will drop even more, which means shareholders will no longer be interested in investing in the credit insurance sector. The return is already very low now and also very cyclical.”Dirk Terweduwe, CEO, ONDD Ducroire


2.2.9. differentiated premium rates

In the banking industry Basel II applies and it will be modified to Basel III. The credit insurance - as an insurance branch - depends ‘de jure’ on Solvency II. Because of its niche position the credit insurance stands ‘de facto’ between the banking and the insurance industry. Certain elements of Basel II/III will be of interest to the credit insurance sector, e.g. ratings, as well as risk factors such as the probability of default (PD).

Solvency II (normally as of 2015) should guarantee the solvency of the credit insurance sector. However, in order to further guarantee this, premium rates should reflect the degree of risk. In all European documents (Solvency II, reinsurance) credit insurance is mentioned as one of the most risky insurance branches. Nevertheless the premium rates have considerably been lowered in the last decade, there is a strong price competition and it can even be said that the premium rates are too low.

It is therefore advisable that we should reflect on future pricing. Let us consider the possibilities below.

For a better knowledge of the real risk a commitment fee can be imposed. Such fees are comparable to the reservation fee of a bank loan. The aim is to encourage the insured company to cancel unused credit limits. After all, insurers will more or less be forced to do so in the framework of Solvency II.

“Companies do not understand that for example 20 million euro of unused credit limits continue to exist in the books, while a new application of 15 million euro therefore cannot be honoured.”Gaetan Lefevre, Risk & Insurance Manager CMI, chairman Belrim

Premiums can be differentiated by countries and payment terms as before. The longer the credit term, or the more bankruptcies in a specific country, the higher the premium. In the past however, these extensive matrixes were cancelled and replaced by average premium rates because of the heavy administrative burden such a system involved. With current IT possibilities the exchange


of data should occur automatically, both for the insured company and the insurance company.

In addition premium rates can be differentiated according to the actual risk.If you work with a scale from 1 to 10, in which 10 is a bad risk, a premium rate of 0.20% may be charged for a 'risk 4' and a premium rate of 0.35% for a 'risk 5'.(see also chapter ‘Prospection and Sales’).

“I expect the same things of an external credit manager in a credit insurance company as of an internal credit manager, i.e. that they know my industry and my products well. I also expect them to think along with the company and the sales team. Anyone can make a decision sitting at his desk, but only after visiting 'the field' you truly know what is possible and what isn't.”Renaat Berckmoes, CFO, Telenet


Interview with Rudy AernoudtProfessor European Economics, Ghent University Association and University of Nancy

'From insurer to financial partner'

What is the greatest challenge of the credit insurance sector?Credit insurance unfortunately remains a marginal aspect of the financial policy; a peripheral condition particularly necessary for companies that export and that only reaches the boardrooms in times of crisis. It remains a story of insuring against non-payment.

The credit insurance should slowly free itself from its cocoon of 'insuring' and become more of a partner in the credit policy.

Can you illustrate this approach with an example?Look, we currently live in times of crisis. Inherent to the globalisation, and our position in Europe, crises will be more frequent and more sustainable, to use a fashionable word. We must learn to live in a quasi permanent crisis.

For the credit insurance sector this can be considered a nightmare: more claims, more problems with unsatisfied customers due to the withdrawal of credit lines, etc.

But crises also point out the need for a permanent credit policy framed in a broader financial policy. And that is the challenge for credit insurance. They have data and knowledge to support companies in their credit policy.

Do you think there is too little financial policy?For SMEs in particular that remains a problem. Too often the


financial policy is still considered a type of glorified accounting. However, while accounting is historical (it registers the past), financial policy is focused on the future. Financial policy is a management tool to make the best possible decisions on financing, working capital management, customer and supplier management and dividend policy.

Let's look at the management aspect of the working capital. The average DSO of a Belgian SME is 75 days whereas the European average is 57 days. That means that a Belgian SME has a financing challenge that includes no less than 18 days turnover more than its immediate competitors. That is huge. That is no less than five per cent of the turnover. If we base on an average cost of capital of 10% - the funding is often done with cash credits – that means that the profitability ceteris paribus is 0.5% lower, expressed on the turnover, than the surrounding countries. And that is without mentioning the almost three percent of invoices that remain unpaid.

Is profitability the main parameter to check the financial policy on?No, profitability is only one of the criteria, but not unimportant. There actually is another important parameter, consisting of various criteria, and that is called a rating. The rating can of course be issued by a rating agency, but bear in mind that all banks must rate their customers. Two out of three SMEs does not even know whether they have a rating, and of the one out of three who know they have a rating, there only is one out of five that knows it. Summarising, only one out of 15 SMEs knows its rating. And that while the rating is the decisive factor for obtaining credit or not and defining the credit costs. Those who know their rating can therefore negotiate much better with their bank or other financial- and trade partners.


Whether we agree or not, we are pushed more and more in the restrictions of the rating culture. SMEs must prepare themselves by initially knowing their rating, and secondly undertake actions to improve their rating. It is also important that SMEs build up reserves. Financial policy will only become more important in the next years.

What is the link with the credit insurance sector?Well, in my opinion the objective of the credit insurance sector should mainly be to improve the credit policy of companies: for example supporting them in limiting the DSO with the European average as a minimum target.

Better credit policy leads to fewer claims, improvement of relations between credit insurance companies and credit insurance policyholders, and possibly to a change in image of the sector from insurer to claims preventer. The credit insurance brokers also play a crucial part in this movement. That's why an initiative like the Think Tank is so dear to me.

3. PRoSPECTIoN & SALES


3.1. Introduction

In many companies the sales department is opposed to the credit department. According to the credit department the salespeople are too oriented on their sales figures and too little on the final profitability of the company.According to the sales department the credit department slows down sales time and time again by asking for additional analyses or guarantees. And in many cases the credit department even prevents good sales. The ultimate frustration of any salesperson is, just when after months of hard work he finds a new customer, to hear that the company is ‘not credit-worthy’ and that the deal cannot be done without advance payment. The chance is real that the prospective customer/customer gives up and goes to the competition. Frustration for the customer and a demotivated salesperson.

If a credit insurer is involved, you can replace the 'credit department' by the 'credit insurer' above.

Good credit management in general and credit insurance in particular are often seen as restrictive. Many entrepreneurs are of the opinion that by following credit limits a company limits the turnover. How can we change this? How can credit management stimulate healthy sales? How can credit insurers support their customers in their prospecting and sales?How can the credit insurers, trade information agencies, collection companies, factoring companies, etc. help in building the credit marketing supplier?

Figure 18: The corporate strategy of my company fits best to:


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PART 2 Themes — 3. PROSPECTION & SALES 135

“The department ceramics and chemicals of Umicore has more than 2000 customers and the payment terms vary from payment in advance up to 30 days and even 120 days.A credit insurance provides some comfort but it would be better to supply the insured with qualitative information: why are risks accepted or refused. Based on such sound advice a company can then decide for itself whether it is justified to deliver or not.Furthermore 'credit insurance' must be given another name and provide more than a mere insurance.”Kristof Gabriel, Commercial Director, Ceramics & Chemicals Umicore

3.2. Recommendations

3.2.1. Improving communication from insurer to insured

The strength of the relation credit insurer-credit insured depends on the quality of the information exchanged, and is as important as the communication itself.

With technological possibilities such as 'automatic scoring systems', the speed of limit issuance has greatly improved in the past 10 years but the quality of information, a.o. with unclear 'refusal codes' has dropped at the same rate. In addition, communication is done via automatic emails or a help desk in the best case. In any case, the credit decider is kept as far away as possible from the insured.If 'human' communication would be possible between insured and credit decider, understanding from both viewpoints can grow again. The credit insurer actually is the 'external credit manager' of the insured and therefore needs to communicate well and directly with the insured: why do we not accept that debtor or why do we decrease an existing credit limit? The credit insured needs to negotiate directly with the insurer.

The insurer needs a 'customer intimacy' between him and the insured: the insurer gets to know the insured, the market of the insured, the products, etc. completely. The better the insurer knows the goals and problems of the insured, the better he can propose an optimal solution and the happier and more loyal the insured will become. In other words, the stronger the 'intimacy' between


both parties will become. 'Customer intimacy' creates a vicious circle that benefits all parties.

“The insured not only needs to receive emails and/or one contact person at the insurer. The insured needs to have a 'client team' at the insurer. A team where all departments are represented: sales & policy knowledge, limits, collection, receivables, invoicing. In addition, the client team needs to closely consult. In short, the client team needs to thoroughly know the client, the products, the debtors, the strategic objectives of the insured, but also the claim history and the profit on the policy”Philippe Verschueren, CEO, Govi

“The credit insurers must be the example of ‘economies of scale’: they need to unite large, performing databases and instruct specialists to make good analyses. Credit insurers must not be an example of ‘diseconomies of scale’: i.e. ‘too heavy’, bad, contradictory communication or no longer have direct points of contact for the client.”Steven Ponnet, Group Credit Manager, AGC Glass Europe

Figure 19: Current Communication Model

Source: CRiON

Chinese walls

Credit limits

Chinese walls

Claims

Sales

Chinese walls

Collections

Billing

Client


“The principle of 'close to the client' is definitely not the most cost-effective for the insurer. I am convinced, however, that the client must be able to contact a limit underwriter and a claims processor directly.”Dirk Terweduwe, CEO, ONDD Ducroire

“We want to have close communication with our insurance company. We need to have better understanding about their business but we want also from the insurance company that they understand better our business and that should result into better limits. They are focusing on our customer on assessing the limits that we need, but we think that they should invest in understanding our business and company.”Arjan Stigter, General Director BurlinQ Academy

3.2.2. Improving communication from insured to insurer

3.2.2.1. Payment behaviour

Systems of credit scoring are mostly based on the latest published accounts and negative indications (payment arrears, Social Security, etc.). The disadvantage is that the annual accounts data is at least 6 months and often more than 1 year old. In short, the decision is made based on little current information.

Figure 20: Client team Communication Model

Source: CRiON

Credit limits Billing

Claims

Sales

Collections

Client


To evaluate whether a company will meet its financial obligations, four basic elements are of importance: its ability of repayment, possible securities or guarantees, the general impression the debtor makes and the payment behaviour.

The payment behaviour is an important risk indicator. But it is not the speed a company pays with that is important: changes in payment behaviour are often one of the first signs of financial difficulties, and are considered as one of the most ominous elements of a bankruptcy.And here a lot of ICT resources crop up again, that create pretty dashboards which give a direction to the decisions. Business Intelligence therefore is increasingly more valued by the credit manager. One of the main reasons is that the high level of automation in the sector makes it increasingly easier to collect, combine and analyse large volumes of data.Intelligent use of data, and predictive methods, assesses future payment behaviour of debtors and the collectability of claims easier.Many companies have in the meantime invested in advanced dashboards which includes the main KPIs (Key Performance Indicators) for credit management. Via early warnings the credit management department is alerted quickly to matters requiring urgent action.

In other words, many companies are ready to systematically transfer the payment behaviour and other internal KPIs to the credit insurer. However, many credit insurers are not ready to process that mass of data in their credit policy. One of the greatest challenges to credit insurers will be to not only include negative information in their scoring modules (overdues), but also positive payment behaviour. The credit insurers should evolve from reactive (e.g. balance sheet of 6 months looks worse ➜ withdrawal of credit limit) to proactive (e.g. despite worse balance sheet figures the payment behaviour evolves to good ➜ proposal for higher credit limit). See also earlier: top performance model, professionalisation.

“Credit management bridges financial management and sales, risk and profit, the internal organisation and the client.”Ludo Theunissen, Professor Finance & Accountancy, University of Ghent


3.2.2.2. Recent information

In addition the salesperson could be encouraged to collect as much credit information as possible from the first contacts or in any case the salesperson could be made aware to pay attention to important credit conditions: solvency, liquidity, payment behaviour, growth potential, etc.

“To resolve the eternal battle between sales and the credit department: reward sales based on losses on bad payers, and credit managers based on turnover increase.”Renaat Berckmoes, CFO, Telenet

3.2.2.3. Qualitative information

Quantitative information is information given in the form of numbers (and most likely calculations). Qualitative information is mostly non-numerical facts. Qualitative data is typically descriptive data and as such is harder to analyze than quantitative data.

Insured or uninsured companies would do well to collect qualitative information in the market in addition to financial information.Their own salespeople are in daily contact with customers. They can systematically enter qualitative information in the internal database. Are many trucks unused at the debtor? Are there strike rumours? How is production, or are there overstocks? But other companies tell a lot about their competitors or neighbours too: imminent take-overs or failed mergers, sales at dumping prices, customers who suddenly massively change suppliers, personnel leaving after years of service, etc.In short, we collect qualitative information and enter it in a database in a coded way. Besides financial information, this qualitative information can be used to feed a scoring model and thus generate a more accurate limit.For an internal scoring model processing that information is feasible. It is a great challenge to process qualitative information in scoring systems of credit insurers.


One of the solutions could be to allow the insured giving their own rating based on qualitative information, e.g. 'Normal', 'Negative Outlook', 'Positive Outlook'. The insured would have to transmit the modifications every month/quarter. If many 'errors' are reported the cover of the insured decreases, or the cover increases with a good track record.If the insured has built up a good procedure, long experience and a good track record, the insurer can allocate more importance to the qualitative rating of the insured. In particular in countries (e.g. Eastern block but until recently German debtors too), sectors or companies where little or no information is available.In the future this information could become even more important as soon as the EU cancels the obligation of accounts publication for SMEs. It also enables the insurer to collect different opinions on one debtor, and to follow the developments in specific segments. What do the suppliers think about the development of the building sector in Poland for example? Just as for moderated figures data where partial results are compared, combined and correlated, it is perfectly possible with qualitative data to make links between the data, connect them and analyse recurring patterns. That method is called pattern analysis. The qualitative information obviously is not isolated, and should be compared with the financial information and the payment behaviour.

“The credit manager must have the competences to realise a higher turnover in a safe way. The credit department supports the sales department.”Pierre Schils, CFO, Prayon

3.2.3. Improving communication from insurer to debtor

The Code of Conduct for the credit insurance sector (www.codeofconductcreditinsurance.com) stimulates the transparency between all parties. In many cases the debtor does not belong to them as debtors only are object of the contract and not a party.A greater openness of the insurers can stimulate the debtors to provide more information.

In France, a first experiment was organised as a counter service for the


French CAP system. EHSFAC, at the request of the French government and the professional federations, has created a website called 'infoacheteurs'. More transparency was desired regarding the analyses of EHSFAC on the debtors. That site is only accessible after registration by an EHSFAC validated company (i.e. whether the person concerned was authorised to represent the company; there also must be an exposure on the company). The site gives access to two important infos: the rating and a fork system that indicates the exposure. The debtor is also encouraged to provide information online which can support the evaluation by EHSFAC. There also is an alert system that enables warning the debtor proactively when the rating or the fork exposure changes. In June already 15,000 debtors were registered after approx. 2 years.The database demonstrated that it was mostly the weaker debtors who were sufficiently motivated to co-operate in this.

Another idea that goes a bit further is the opportunity to give direct access to the debtor (after registration) to the rating and indicate his motivation. This would only be for the non-confidential part.

3.2.4. Credit marketing: database of insurer is prospecting tool for insured

Succesful acquisition starts with selecting the appropriate prospective customers. That results in a high response and high conversion rate of marketing campaigns. Also, the new customers must remain customers for a long time, and definitely pay their outstanding invoices. How does a company find the most profitable prospective customers? How can a credit insurer free itself from the shadow of always being the limiting factor? How can the credit insurer become the partner of the sales department of the insured?How can a credit insurance policy double the turnover of the insured in 3 years?

Credit insurers have a wealth of information in their databases. However, this is only used to keep their credit risks within bounds. They need to transform that database into a commercial database, a prospection tool. We give a few examples.


3.2.4.1. Introducing’ Lookalikes’

If credit insurers refuse a limit, they can propose alternatives. Which steps can they take for this?Credit insurers can estimate a specific profile of the insured's customers based on the existing customers portfolio of the insured. It would be best if they created various profiles by country and sector for one insured.Based on those profiles, they can then indicate who the potential, credit-worthy customers are.The insurer therefore looks for several credit-worthy 'lookalikes' in the same sector and region if a credit limit is refused or withdrawn.

Herewith the insurer also indicates what the solvency of the prospective customer is. If the customer orders within 6 months, the insurer shall effectively insure that delivery.

When that product proposal is expanded the insured can - based on his profiles - buy packages to approach certain export countries.

Figure 21: Product innovation: the insurer provides creditworthy prospects & guaranteed coverage


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“Credit insurers should play an important proactive role in prospection: via the delineation of a prospective target group (activity and region) the insured must easily be able to select the insurable prospective customers.”Dominique Hugelier, Director Administration, Van Marcke

3.2.4.2. Providing basic data

Credit insurers could publicise their credit policy on debtors to third parties. The insured applies for a certain limit and this is honoured or not by the insurer.To use the database as a prospecting resource, the insured could gain insight in a limited quantity of information, for example: a/ How many limits were granted on a specific debtor? b/ What is the longest running limit? c/ In which range do the limits fall? (A limits e.g. higher than 200.000€; B limits between 100.000 and 200.000€, etc.)

The option c/ is approximatively the @rating of Coface and therefore it should be considered whether it should not be a paying option. Option a/ and b/ however are indications for a sales team to approach the prospective clients, with the knowledge that the chances are high that a sufficiently high limit will be granted.

3.2.4.3. Enriching limits

The credit insurers buy their information from trade information agencies. Even stronger, the credit insurers are shareholder (35 to 100%) in some agencies. The credit insurers will then also have the option to enrich the limit with all available data from the information sources. The insured thus obtains (in addition to an approved limit) also all the trade information about the debtor.

In addition, the insurer can benchmark the debtor with their direct competitors.The supplier thus obtains a complete market analysis which enables him to direct his sales towards new target groups. The insurer thus becomes a partner from the prospection phase until the payment/non payment.


“The added value of the insurer consists of the optimal division from credit-worthy prospective customers from the other.”Dirk Braet, Group Credit Manager, USG People

3.2.4.4. Providing rating

Many insured apply for a too high limit. It is often 'easier' to always apply for the same amount, or it is not known whether an important or a smaller order will be made. For the insurer, that brings 'air' into the limits. Capacity that is not used, but for which reinsurance capacity must be planned more than necessary.

A solution is to add an extra rating to the indicated limits, e.g. ‘with 50% potential’ or ‘with positive outlook’, to be compared with the ratings of Standard & Poor’s, Moody’s, etc, (see also stability and sustainability topic).

“The problem of unused limits can be simply resolved by asking a commitment fee for the unused part; cfr. banks on unused credit lines.”Dominique Hugelier, Director Administration, Van Marcke

Figure 22: Product innovation: the insurer communicates the potential credit limit on a customer at the time of limit decision


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3.2.4.5. Selecting high potentials

Young companies are usually low rated by a credit insurer. That means those companies usually do not get limits. However, if companies and credit insurers only focus on healthy companies with a long track record, all companies will fish in the same pond and only part of the market will be reached.

That's why it is necessary to create a second system: the 'high potentials'.Can credit insurers separate the wheat from the chaff in the group of young companies?Usually there is too little information available, but still insured and insurer can enter a partnership to approach that group.

The degree of cover can be lowered on this target group to ensure the insured has a higher own risk and will completely co-operate in reporting risk increasing indications. In addition to this the ‘allowed’ arrears will be decreased for this group to 30 or even 10 days after due date: the second delivery is only made if the first one was paid.

3.2.4.6. Creating representation offices in BRIC countries

China, Russia, India and Brasil are the growing countries. However, Belgian exporters export little to the BRIC countries and definitely not on an open account basis. Everything occurs on pre-payment or L/C basis. Therefore few limits are requested and the limits requested for small and medium-sized companies are usually refused because no information is available. At present more than 80% of the credit insurance premiums are collected in Europe. However, an insurer must follow or even anticipate trade flows. Even if only out of personal interest their presence must be strong in those growing countries.

The insurers do face a challenge in the BRIC countries: which information is relevant for the definition of limits in those countries? Balance sheets, arrears in social security or VAT are relevant in Belgium and other European countries, but other parameters are important in China. For example: quick growth, increase of number of employees, complaints in the sector about the customer/


colleague/competitor, contacts with the public authorities, political power of the owner, etc.

To be able to collect that information correctly and directly it is necessary that credit insurers massively invest in local representation offices in the BRIC countries. These can also act as a collection agency.

“I expect from a credit insurer that he informs me whether a prospective customer is sufficiently credit-worthy or not. That is his preventive role. Afterwards I want to supply under a wide type of Blind cover or Self-assessment. Of course I pay a risk premium for that risk cover.”Philippe Verschueren, CEO, Govi

3.2.5. optimising risk distribution and cover

Usually an insured pays one premium rate on the insured turnover. The premium rate is an average: based on the turnover of the previous years a weighted average calculation is obtained considering countries and sectors. Although this system is beneficial, because it is simple, it can simultaneously be disadvantageous due to its lack of differentiation based on the existing risk profiles.

In addition, the insured is not motivated during the lifetime of the policy to shift in the portfolio from slightly higher risk debtors to slightly less risky debtors. The insured always pays the same premium anyway.

Furthermore the insurer is also not motivated to cover the complete portfolio of the insured's risks. The insurer receives an equal amount for low and high risks. Therefore too high risks simply are not given a limit.

Can systems be introduced to motivate the insured to shift his portfolio to better risks on the one hand, and on the other hand to motivate the insurer to cover the complete portfolio?

We provide an example below to illustrate the principle:


The insurer can divide the portfolio in e.g. 10 risk categories. For the high risks he charges a (very) high premium and a low premium for the low risks. That way, the customer is motivated to upgrade his portfolio and phase out his bad risks. His complete portfolio still remains covered.

In addition, work with lower cover percentages and faster delivery stop is also possible. The insurer thus contributes to a credit management with a particularly preventive section: screening the solvency of the debtors and encourageing the insured to move the debtor portfolio towards low risk (see also chapter Financial Security).

3.2.6. Presenting additional services

3.2.6.1. Supporting export

Credit insurance must be combined with export support: legislation, import duties, local networks, local advertising opportunities, local fairs, etc. Most credit insurers have local branches in that market which means they can centralise knowledge.

Source: CRiON

Failure High risk

Low risk

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Premium rate 100.00% 8.00% 4.00% 1.20% 0.80% 0.45% 0.24% 0.12% 0.06% 0.03%

% of cover 0% 35% 50% 75% 80% 85% 90% 95% 95% 100%

Delivery stop (days after due date)

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Figure 23: Risk Category, premium rate and % of cover


Practical support in credit management must definitely be possible: reminders in all languages, guarantee letters in the local language & legal conditions, 'special' means of payment in certain countries, etc. The credit insurer can provide a type of 'first line help' in all those cases. Further detailed applications must be referred to local specialists (see also Chapter Globalisation).

3.2.6.2. Advising payment terms

The credit insurer can act in an advisory role in the number of days credit the debtor is granted.

In a competitive market with qualitatively little differentiated products, the payment term is a commercial instrument. The customer-oriented credit insurer recognises that market data and helps to achieve the sale by giving advice on payment terms.

He can collect data from the debtor's balance sheet as well as the payment behaviour of the company (e.g. many trade reports indicate payment terms), but sector- and country-specific data can be added too.


Interview with Philippe verschuerenCEO, GOVI NVFormer director of Euler-Cobac Belgium

How is the cooperation between the credit management department and the sales department in your company and how should it ideally be?Every three weeks we organise a meeting with the sales team and the financial department (credit management) in which all outstanding receivables are generally discussed. We do this to keep the sales department alert to the needs of working capital. More particularly, all individual customers with overdue invoices are thoroughly talked about. Each file is discussed separately and the necessary actions are planned (requesting additional info, the customers being ‘chased’ by sales, credit management and general management if necessary). In case of recurring problems the customer is blocked in the system for each new order (we have quite a few returning customers) and delivery will not be done as long as there is an overdue invoice. Ideally the sales department should systematically obtain figures from our customers as soon as a balance sheet is published, but the salesmen’s attention does not reach beyond the sale itself and the profit margin. An alternative that we also apply is adapting the price if the risk becomes too high (risk and reward).

Which steps do you undertake in your company in the automation of the Order to Cash process?Our ERP-package (Navision) was 'customised' with a module that, at the moment of the order input, automatically sends an email to credit management and the account manager (salesperson) if there is an overdue, if an internal credit limit is exceeded, or both.


This system therefore generates 'flashing signals' which, following the internal discussion between Credit Management and Sales, can only be cancelled by General Management to proceed with the order.

How do you think the collection of trade information will evolve in the near future? Which influence do you expect from the internet ?It will become more transparent, more user-friendly and most of all more pertinent! When requesting information on a company, you often obtain financial information (if there is any available) of 2, 3 or more years ago. That information should be excluded from the files of the information provider. It also regularly happens that you receive a report (and pay for it!) which bluntly states that the company is not obliged to divulge information. Of course, such a report is completely useless, yet, it is still charged…

How can you best position the credit manager in the organisation?The credit manager usually works closely together with (or is the same person, in smaller organisations like ours) the financial director or accountant. In function however, the credit manager has what I call a 'licence to kill'… In close consultation with the financial department a 'risk-reward' analysis must be made of the relation with customer x for the company. The realised turnover will ultimately only be valuable, if it is paid for. In my opinion the role of the credit manager must be in line with the policy defined by the Direction.

Does the Single Euro Payment Area (SEPA) influence your credit management process? Which influence do you expect in the coming years?SEPA definitely leads to much more transparency. The speed of


reporting of payments (foreign too) benefits the credit management. Whether the opportunities of direct debit in future will provide many opportunities for a traditional customer-supplier relation is still the question. Personally I doubt it (no disputes will be possible any more, or only after payment, which will only make it more difficult to discuss the matter), but if it does work, it will become a particularly strong tool to simplify credit management!

Do you think that the European Commission should allow creating a tax-free reserve for bad debts of e.g. 1% of the turnover?The Belgian textile sector formerly had the possibility to fiscally deduct a certain percentage of the stock (at that time applicable to temporary collections). It would be useful to set aside a certain percentage (in % or in absolute figures) of the turnover as a tax-free provision, however under strict conditions and control in order to prevent abuse. This would simplify prospection activities partially.


Interview with dirk BraetGroup Credit Manager, USG People

How has USG People faced the difficulties during the financial crisis?Due to the beginning crisis in late 2008, increasingly more credit limits on customers were withdrawn by our credit insurers. In addition, it became difficult to have new customers accepted by the insurer.A general project was started to centralise and further professionalise the credit management. The cooperation with the credit insurer was examined, and strict monitoring was developed. The credit procedures were sharpened too. In addition, various tools were implemented to both smooth the collection and make the credit risk clearer.For USG People that insight was important to identify risky customers better and quicker, and simultaneously limit the impact of a lower acceptance ratio. This enabled more objective discussions with the credit insurer.

Can credit insurers cooperate more closely with their clients in future?Credit insurers must opt for a partnership with their insured companies in view of long term commitments. The necessary condition for this is possibly receiving better feedback from the insured companies, which enables better insight in the insurer’s real commitments. For example, the insured companies could communicate the outstanding debtor balances on a monthly basis to the credit insurer, so as to ensure he obtains a more complete and transparent view of the outstanding risks, and may therefore grant higher credit limits or maintain them for a longer period.In other words, as a service in return for the greater insight and


the decrease in 'air' in the credit limits the credit insurer should provide more durable and higher commitments to his insured. This will be a win-win situation for both parties.

Where do you see most opportunities for product innovation?The credit insurers could play an important role in prospection and support of the sales department.Besides the requested credit limit, an indication about a possible increase could be useful. This can be mentioned as a potential credit limit amount, rating, +/- indication, etc. At the start of a commercial relation this would make it possible to define immediately which customers are interesting to approach further. Another idea is to spontaneously offer cover on withdrawn limits again, as soon as a positive evolution makes it possible.

Do you see other opportunities in 'Credit Marketing' ?A credit insurer has 'data' which should enable, possibly in cooperation with a trade information company, to detect new potential customers and thus support sales.

How efficient would it be to not only direct sales towards new customers, but also have a certainty of 100% that those customers can be insured, and Credit Management afterwards does not have to point out that the company is not creditworthy?

4. AuToMATIoN


4.1. Introduction

Changes in technologyWeb services are the new technology that must enable easy communication between various databases for data exchange. It offers many opportunities for the future. The same applies to cloud computing.

“Web services are process management. There will be more evolution in defining business processes. It’s more important than cloud computing, because in that case you rent in fact a piece of software. This new evolution is now possible because there’s more standardisation, and it’s therefore easier to switch software.”Michel Haesendonckx, Senior Manager, Delaware Consulting

Automation as enabler of innovationAutomation enables new developments in the business environment of credit insurance. The goal is to develop an overall solution for credit risk management and the monitoring of cash flows for insured and insurer.

Automation acts as an enabler of innovation for the credit insurance market at different levels:

› Information exchange between insured and insurer;› Product improvement of the current credit insurance policies, eliminating existing weaknesses of credit insurance;› Product innovation: new products, not necessarily linked to credit insurance;› Lower entry threshold for new players in the credit insurance market.

“Automation is key to us: we generate 2,8 million invoices and 600.000 reminders every month. It is important to us that our external partners are correctly computerized to process that flow of information.”Renaat Berckmoes, CFO, Telenet

PART 2 Themes — 4. AUTOMATION 157

Some automation goals› Providing one overall solution for different credit insurance policies and additional products;› Simplifying administrative tasks within the policy e.g. turnover declaration, filing claims, etc.;› A simple access to credit limits and automatic processing in the ERP-system of the insured;› Setting up group limits with automatic follow-up;› A better insight in the risk portfolio;› A better insight in the status and statistics of credit insurance policies;› Direct communication between insured and insurer;› Etc.

We can distinguish various angles in automation:

4.1.1. Automation at the insurer

The credit insurance industry stands at the beginning of challenging times. Currently it is still an oligopoly market but the entry threshold for newcomers lowers because of decreasing information costs. Thanks to the internet, financial and trade information becomes cheaper and the knowledge is available to process these data in a structured format. Internet and IT-developments such as cloud computing, web services, etc. imply lower IT-investments.

“In the past it wasn’t possible to start a credit insurance activity without an information company on your side. However, thanks to the internet this changed: Equinox has now access to 90 million companies in the world. The entry barriers are also lower because of the IT-developments.”Mike Holley, CEO, Equinox

The downward pressure on the premium rates by the sharp competition, forces credit insurers – even more than in other industries - to work more efficiently e.g. through automation. Furthermore, automation has an impact on the human resources needed, resulting in lower salary costs, which is one of the main costs of a credit insurer.


Lower entry thresholds will stimulate existing credit insurers to prove their added value and their innovation capacity, to guarantee their survival chances.

“Entry barriers in the credit insurance industry will decrease due to cheaper IT-developments, more automation and cheaper information gathering. It will prove to be a challenging environment for the industry. The only way forward is to innovate. Automation will play an important role in this.”Paul Becue, author of ‘Manual of credit insurance. The invisible bank'.

“The credit insurance sector experiences serious competition: this results in a reduction of premium rates. For that reason the sector must work more efficiently (automation) which implies fewer employees. However, this also implies fewer opportunities for good cooperation with the insured: the service has drastically decreased.”Pierre Schils, CFO, Prayon

4.1.2. Automation between insurer and insured

Currently every insured and insurer have their own system, but these systems do not 'communicate' with each other.

Example: handling a credit limit request

› The insured records a credit limit request in the online system of the credit insurer: he manually enters the name or the national identification number of his debtor – which is already electronically available in the insured’s ERP system – into the online tool of the insurer;› The debtor is looked up in the system of the insurer;› The credit limit request is registered in the IT system of the insurer;› The credit insurer handles the request automatically, or the request is sent to an underwriter;› The credit limit decision is sent by an automatic email to the insured;› The insured has to file the email and enter the decision in his ERP system.

This is an example of double data entry at the side of the insured.


Web services make the mutual access to the various databases easier: the databases of the insurer, the insured and the information agency will easily be connected with each other in the future. In future the development should rather be directed to systems that exchange information with each other: credit limit applications by the insured, the entry of certain data. Both sides should free more time for it and give more information. This goes hand in hand with a more individual approach of the insured by the insurer.

Current software tools enabling information exchange between insurer and insured: overview of functionality.

Different software tools and links already allow exchange of information files between the insured and the insurer (e.g. Policy Manager by Credit Tools).This could be further expanded (see recommendations).

Figure 24: Overview of functionality

Source: CRiON

ovERvIEW oF FuNCTIoNALITY

CoNTRACT ovERvIEW

PRoCESSING

CuSToMERS

CoMMuNICATIoN

LIMITS

REPoRTING

> Contract details> Regional conditions> Policy rules> Contract reports

> Collections> Filing of claims> Under claim threshold> Credit limit requests> Credit limit cancellations

> All customers> Added to contract (customers with a credit limit)> Excluded from contract (rejected or withdrawn credit limits)

> Automated processing of collections, claims, etc.> Automated credit limit requests and cancellations> Automated calculation of discretionary limits> Direct communication through XML

> All credit limits> Discretionary limits> Temporary credit limits> Below claim threshold

> Extensive credit limit reports> Reports of the insured risks> Claim and collection scoring reports> Turnover declaration


“Automation can be useful to free time for other tasks. At Prayon we work in a very automated way with the factoring agencies. We always automatically send an extract of the Prayon SAP-system to the factor. In credit insurance web services are involved: anything manually that creates no added value must be automated. ”Pierre Schils, CFO, Prayon

4.1.3. Automation at the insured

Credit management and credit insurance functionalities in standard ERP and accounting applications are mostly limited to the automatic sending of dunning letters. However, dedicated credit management software and separate, specific credit management modules from ERP-systems, already provide a lot more (workflow driven) functionality. The workflow in these systems is focused on automating tasks with a low added value e.g. checking whether a customer fulfilled his payment promise, making excel based reports, etc.

Insured companies are in favour of automation but there still is a certain restraint, mostly not from the side of the credit managers, but due to other reasons (see voting).

Figure 25: The main arguments against investing in credit management software

Source: Credit Management Cyclus voting

32%

27%22%

8% 7%4%

0%

5%

10%

15%

20%

30%

35%

25%

Budget IT strategy

Other projects have priority

Lack of time

No management

support

No further automation

possible


In most companies credit management is not on top of the IT-investment priority list. Focus is first on production and sales processes. Invoicing and accounting have also gone through an automation process. In credit management automation was mainly focused on the administrative part of the collection process.

Currently almost 80% of all invoices and reminder letters are sent out automatically and undoubtedly some progress can still be made. Yet, automation is in general limited (see further: automation challenges).

“Most people believe it is about automation of invoices and dunning letters. Still, if possible you have to call the buyer who’s paying late: it is the best thing to do.”Arjan Stigter, General Director, BurlinQ Academy

With respect to the creditworthiness part of the credit management process, there is even more room for further automation: automated scoring models, financial data directly interfaced from the information agency or credit insurer into the insured’s system, etc.

Figure 26: The risk assessment in my company is fully automated

Source: Belrim

8%

17%

32%

43%

0%0%5%

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45%

1. Fully agree




In this domain as well, current dedicated credit management software and software ERP-modules already provide a lot of functionality. The use of these software tools can assist companies in the further automation of the credit risk management.

Examples of functionality of dedicated credit management software are:

› Credit scoring, risk categories and credit limit functionality;› Follow-up of overdues based on different collection strategies;› Administration of credit insurance policies;› Registration and handling of disputes (integrated in the collection process);› Electronic credit management files for all customers;› Reporting – automatically generated and sent to the employee who needs it;› Etc.

The evolution towards web based credit management software will contribute to the implementation of these tools in a broader range of companies. The investment cost will decrease, and therefore help to eliminate one of the main reasons for not implementing these tools.

Source: Belrim

Figure 27: The credit management domain with most room for improvement on automation is:

31%27% 25%

11%

5%1% 0%0%

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10%

15%

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35%

1. Credit limit mgt

2. Risk analysis

3. Collections 4. Credit insurance admin

5. Customer creation

6. Complaints handling

7. Payment administration


“Automation can simplify the life of the credit manager. You can develop models by which you can decide credit limits on an automated basis. Not for all the buyers, but for the small ones. You can thus focus on the real risks, and take away emotion. It also helps you to prioritise items.”Frédéric Wittemans, Senior Director European Credit, Ingram Micro


We make a distinction between:› product improvement and;› product innovation.The difference between the two concepts is explained in the first part (Part 1; 5.2 and 5.3).

4.2.1. Product improvement for credit insurance policies

4.2.1.1. Automation of policy administration

The administrative obligations the insured has towards the insurer (turnover declaration, credit limit applications, filing claims, etc.) are an important obstacle to start with credit insurance. Automation should provide a solution.

The following areas may be involved:› Credit limit management;› Collection transfer;› Filing claims;› Turnover declaration.

In future insurers will also evolve to 'efiles', containing all documents relating to e.g. the last three years, including correspondence with the insurer, policy documents and cover proposals. The efile can even contain documents from other insurers. Allianz would like to proceed with this as of January 2013. This confirms the general trend in economy towards an 'online' economy.


4.2.1.2. Credit limit management

When further automating the credit limit management, the following aspects can be considered:› A system (based on software installed at the client’s) implemented at the start of the policy: it can be a win-win for insured and insurer;› Automatic requests in the case of exceeding the credit limit;› Automatic decreases in case of non-use ('air out of the limits');› Reporting;› Etc.

It can be about a mix of own credit limits or external credit limits from third parties (e.g. transfer when changing insurer). The credit limits are entered in the system and the credit decisions are made through this system. The salespersons can possibly be informed (via cc.) by means of an internal email.

Further automation can provide a more flexible solution to the problem of several branches supplying a common customer without knowing the total outstanding or risk on the customer.

“Credit limit management is possible IT-wise. We don’t speak about credit limits input alone. There are options to go further. Linking data offers a lot of possibilities, but the information flow is very fast: how far do I want to go with the input of new data, and adapt the credit limit. The change of credit limits should be based on forks.”Michel Haesendonckx, Senior Manager, Delaware Consulting

4.2.1.3. Outstanding balance policy

If information exchange problems between the insured and the insurer are solved by software/technological developments, the following question rises: would an outstanding balance policy provide advantages compared to a turnover policy? In an outstanding balance policy the premium is paid on the outstanding and insured balances per month (or per week, etc.).


The outstanding policy has several advantages: no additional administration and more accurate premium calculation (fewer exceedings; stimulus to strive for lower outstanding balances).

A policy based on outstanding balances is not only interesting, it is also fairer: it avoids premiums being paid on non-insured turnover. It is based on the actual insured turnover and corresponds more to reality. However, a minimum cost is associated with the risk (translated in the minimum premium). Now in principle, premium is only paid on the effectively declared turnover, but in reality it is sometimes different: the turnover on debtors of whom the credit insurer has only partially accepted the credit limits is completely declared (a premium is paid on the complete turnover with those debtors although it is only partially covered). The premium calculation on the real outstanding balances will also be an incentive to shorten the DSO.

Automation also enables to shorten the reporting frequency of those balances, e.g. weekly, resulting in other premium rates. Insured companies agree that balance policies have advantages.

Source: Belrim

Figure 28: Software: premium calculated on outstandings instead of on turnover

50%

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1. Very good



4.2.1.4. Standard certified claims statistics

Each credit insurer, as well as specialist brokers, have their own version of claim statistics. The credit insurance sector should approach the market with their own uniform statistics. For example, this is the case for car damages: all companies in Belgium use the same standard form with statistics that can be transmitted to each other. Thus there is always one correct statistic, which is less subject to interpretation. It also exists in other insurances e.g. property. This has nothing to do with cartel formation, because cartel formation usually implies making arrangements with respect to price and market share.

The differences in statistics, between the insurers do not make it easy for the insured companies in Belgium. The loss ratio can be calculated differently depending on the statistics: is it based on the intrinsic risk (risk attaching), or on the loss that ocurred.

The idea was launched for a common IT-platform between the insurers, which is a long term improvement project. It is recognised that if all credit insurers continue to work with their own system some inefficiencies will remain for the insured. On the other hand, the software is also a way for the insurers to differentiate themselves from their competitors. The creation of a common IT-platform is therefore not a straightforward innovation idea.

Can a common IT-platform for credit insurers be interpreted as a kind of cartel formation? The answer is no for various reasons:› In certain insurance branches a standard form for claim statistics (car, property, etc.) is used as well. This idea could be adopted by the credit insurance industry. 'Assuralia' is currently discussing with the credit insurance sector in Belgium a design for claim statistics which must be transferred to the new insurer by the former insurer at the time of a policy transition;› A common IT-platform implies more than standard documents. In the banksector a common IT-platform for payment traffic was developed together with Isabel. It is expensive, but offers advantages compared with the L/Cs (letter of credit or documentary credit) for which every bank has its own system;› Cartel formation only relates to making price and market share arrangements


4.2.2. Product innovation

4.2.2.1. A 'menu' based product line

Credit insurers willing to expand their business should evolve towards a menu based product line. In credit insurance today the global turnover policy is still common practice. The risk strategy of a company may distinguish several risk categories, each requiring a different risk approach supported by various risk solutions.Companies with this kind of credit risk strategy may not find an integrated solution within the current insurance product range. Automation can support the development of a menu based product line. The recommendations in this White Paper can provide ideas to develop a menu based product line.

Example of menu based product line (based on recommendations in this White Paper).

Figure 29: Example of menu based product line

Source: CRiON

EXAMPLE OF MENU

BASED PRODUCT LINE

PROSPECTION AND SALES MENU

PROFESSIONALIZATION MENU

STABILITY AND SUSTAINABILITY MENU

FINANCIAL SECURITY MENU

REPORTING

> Look a likes prospects> High potential customers & prospects> Information on customers

> Valuation of credit management certificate> Post mortem analysis of claims> Credit insurance with risk based pricing

> Credit insurance with grace period> Commitment fee> Credit limits linked to price index

> Credit limits for 6 months> Credit limits with lower percentage of cover> Syndication products

> Information on customers in non OECD countries> Global reporting> International collection


How does it work?

› Exchange of information (see also below): the insured exchanges information with the insurer on his debtor portfolio, prospects, credit management, industry, etc.› The customer marks the desired credit management products for the applicable range of debtors, e.g. > for one risk category (linked to a specific business line), the raw material prices are important, for this category of customers the credit limits linked to the price index are chosen; > for another risk category, the customer is looking for additional prospects (only the information, not the insurance); > he also occasionally needs support in international collection for certain regions.› The system calculates based on the rating, loss statistics, and the 'expected loss' - the associated premium that reflects the intrinsic covered risk, or the system presents an offer for the non-insurance products. The customer agrees with the offer online and business can start.› For existing customers the system can signal alerts on the customer’s portfolio, and suggest products that might offer a risk solution for the increasing risk, or growing opportunities for certain segments in the portfolio.

“The word ‘credit insurance' is no longer the right word to be used. It should be called a ‘credit service’. The objective of credit insurance is rather to provide a database with lots of information than to pay out indemnifications.”Gaetan Lefevre, Risk & Insurance Manager CMI, chairman Belrim

4.2.2.2. Information exchange

The key to innovation in the credit insurance industry is information exchange. Automation can and must play an important role in the exchange of more and faster individual information (e.g. the rating).


A distinction can be made between the exchange of information relating to real outstanding risks, payment experience and disputes.

“Legally and contractually, the policyholder is obliged to communicate his payment delays and disputes on covered buyers to the credit insurer.”Paul Becue, author of 'Manual of credit insurance. The invisible bank'.

Real outstanding trade risks of the insured

The IT-interface between the ERP-systems of the insurers and insured should lead to a more automatic interaction and detection process (e.g. insufficient credit limits). The automation should thus contribute to the support of growth in companies and 'enable business'. Through the interaction between the credit insurer and his customer, the insurer can inform which options are possible on credit limits (e.g. exchange of files per week).

The credit insurer thus has an insight in the extent to which the nominal credit limits are actually used. In consultation with the insured those nominal credit limits can be reduced, with consideration of seasonal effects.

Currently, this process is not fully automated yet, due to technical reasons, but this is only temporary. 71% of the companies agree to automate this, provided there still is a possibility to check the data before changes are recorded.

Payment experience

Many companies are in favour of receiving further access to the additional services of the insurer, even if they don’t use the cover. In the first place we think about sharing information. The insurer has crucial, real payment experience and can also sell his ratings on debtors. With that income the credit insurer can create a buffer against its cyclical activity.

Companies would also like to inform the insurer of their payment experience (73%), but not everyone wishes to do that automatically.


A lot depends on the relation with the credit insurer. It often happens that the credit insurers withdraw credit limits on debtors, without asking the insured for their payment experience. Insured companies want to avoid that credit limits on debtors are reduced because of one day overdue. This is why an 'intelligent' way of automation must be installed, e.g. from 90 days overdue.

“When exchanging information on payment behaviour, there is a lot to be gained for both parties, customer and credit insurer.”Frédéric Wittemans, Senior Director European Credit, Ingram Micro

disputes

Some 42% of the companies (voting result during the congress) do not want to share their dispute information with the insurer. Apparently, it is mainly a matter of trust. Technically it is possible but what would be the added value for the insurer? Disputes usually are commercial discussions relating to e.g. the quality and other non-structured information data.

In addition there are some customers who always object: they are of no interest to the credit insurer. This only applies to debtors facing financial difficulties: they hide themselves behind disputes to conceal financial problems.

4.2.2.3. Evolution towards a new IT-model

The evolution from the current IT-model in credit insurance towards the new IT-model is presented in the scheme below.

Key elements in this evolution are:› We move from manual data transfer towards an automated data transfer;› The nature of the information exchange enlarges: it will no longer be limited to information that is strictly necessary for the working of a credit insurance policy;› On the insured’s side, we foresee an evolution towards software with more credit management and credit insurance functionality;› On the insurer’s side, we expect the Chinese walls between the different


insurers to disappear, because of e.g. the standardised claims form;› From the side of demand, we no longer mention ‘the insured’ but ‘the customer’ because in the menu based product line, an insurer may also have ‘non-insured’ customers.

Source: CRiON

Figure 30: Current IT Model

Chinese walls

Insurer 1

Chinese walls

Insurer 2

Chinese walls

Insurer 3

...

Insured Manual

ERP:almost no

credit insurancefuntionalities

available

data input(mostly credit limit

applications)

Response

Source: CRiON

Figure 31: Future: Information Exchange Model

Insurer 1

Insurer 2

Insurer 3

...

Customer Automaticexchangeuser of multiple

credit managementproducts

ERP:credit management &insurance functionality

> outstandings> payment experiences> disputes> credit limit decisions> prospect information> benchmarking> ...


This transition from the current IT-model towards a new IT-model cannot be realised in one step. We may identify possible milestones in this transition with respect to:› Information exchange;› Frequency of exchange of information;› The way information is being exchanged;› Evolution from the single product line (credit insurance) towards a menu based product line.

The Chinese walls between the credit insurers should gradually disappear (e.g. Standard certified claims statistics 4.2.1.4.).

Source: CRiON

Figure 32: Milestones: information exchange

MILESTONES: INFORMATION EXCHANGE

Type of information

Information exchange: how

Frequency

Credit limit applicationsInsured turnoverLosses & claims

Current situation Step 1 Step 2

No direct link

Ad Hoc/Yearly

Outstanding

Direct link withreview possibility

Direct link withreviw possibility

Payment behaviourDisputes

Monthly Dailycontinuous


Automation challenges

Automation entails challenges for credit insurers, credit insured

companies and the entire credit management market.

❱ Transparency Automation will lead to more 'data sharing', and thus to greater

transparency. There are restrictions to the 'full sharing' and transparency.

In the process of 'data sharing' confidentiality must be respected: if

anyone has access to the database of the insurers, the consequence

can be that debtors, banks, etc. no longer wish to provide confidential

information.

❱ Boundaries to automation: attention for human intervention Currently an upload of credit limits is possible (instead of the

individual applications). However, for reasons of transparency you

cannot automate everything. Motivating a credit limit withdrawal or

rejection based on a code or with one sentence, is unsufficient. A

more detailed explanation given by an underwriter provides added

value for the insured.

Another example is the prediction of payment behaviour: each

algorithm-based decision includes the chance an error is made.

Therefore negative automatic credit decisions should be manually

checked.

❱ Global approach Every country is different: in one country (e.g. Belgium) more

structured data are available than in the other (e.g. Germany). One

country is also easier because there is a better payment discipline

(e.g. Germany: 95% and more is paid on time), than in the other

where delayed payments are ingrained in local business culture (e.g.

Italy). There is a need for a global approach also for reasons of business

continuity: customers worldwide need to have access to the database


of the insurer during their business hours.

❱ Need for well-structured information Automation is also important for reporting: it must enable the

follow-up of 'key risk indicators'. For that reason information needs to

be well structured. This also applies to payment behaviour information

and the prediction of payment behaviour. In this context automation is

an important tool for prevention.

❱ Automation in international groups A challenge for companies is to coordinate the data of various

affiliates, and to integrate the various systems through interfaces. ERP

is the solution here.

❱ define clear business rules In every automation project you first need to consider some ‘business

rules’: how do I want to automate my credit decisions, and to which

extent. The law of Pareto pops up here: 80% of the decisions are

processed automatically, and only some 20% manually.

❱ Increasing dependency A possible weakness of further automation of information exchange

between insurer and insured, is that you depend more on the

software provider and the insurer. A high degree of dependency on

one supplier is sometimes considered to be dangerous.

❱ Security and maintenance The maintenance of information systems is disadvantageous too.

Additionally there is the security aspect of exchanging confidential

data, or allowing external sources to enter data directly in the database.

❱ (Ex)change only relevant information Information must be dealt with intelligently and it must be avoided


that e.g. credit limits are continuously changed with each new element

of information.

Automation benefitsLet us summarise some of the benefits of further automation below.

❱ Automation is an enabler of innovation!

❱ Moving towards an integrated credit management

Credit management is not an island within the company. Automation

supports information sharing with the sales department, and

contributes to the professionalisation of credit management and the

cooperation with sales. This is a step forward towards an integrated

credit management: improved integration, internally with other

departments and externally with third parties such as credit insurers;

❱ Improvement of internal control

An additional advantage is that internal control improves. The possibility

of entering wrong credit limits is smaller, and human errors can be

avoided;

❱ Increase of efficiency;

❱ Fewer claims through better and quicker insight in possible risks;

❱ Less risk of uncovered claims because of late or incorrect policy

administration (e.g. late entry at the insurance company);

❱ Easy processing and therefore improved customer satisfaction;

❱ Doing more in less time, focus on core activities;

❱ Extended communication loggings (audit trail);

❱ Automated (internal) 'reporting';

❱ Less work, improvement of personnel efficiency;

❱ Improved 'reporting' that also supports turnover declarations;

❱ Possible interface with banks/factoring companies that grant funding

based on 'asset based lending';

❱ Etc.


Interview with Frédéric WittemansSenior Director European Credit, Ingram Micro

How does the cooperation between the credit management department and the sales department in your company work and how should it ideally work?At Ingram we try to bring those two departments as closely together as possible. Credit and sales people are physically sitting close together in most European countries, although the credit department belongs to the financial department.In addition, we have very clearly defined who can do what: credit decisions cannot be overruled by sales. However, we have implemented a clear and transparent escalation procedure to give sales the opportunity to appeal against an (unfavourable) decision of the local credit team.

How can you segment your customers to monitor them optimally?Customers are divided in business segments and all customers will also get a credit 'rating'. These ratings take into account both internal and external factors.This procedure results in a more flexible credit management on the one hand, for example for financially weaker companies in a booming sector, and a more restrictive management for stronger customers in a sector faced with difficulties.

Are there specific points with respect to the management of an international debtor portfolio we should pay attention to?There are obvious differences between the various countries, both culturally and financially. You therefore cannot apply the same rules (e.g. for the calculation of a credit limit) in another country.In addition you need to consider the fact that the same customer works with your company in different countries. In this case you


need to look at the global risk. Finally, it is very important to integrate macroeconomic trends in the various countries in your credit management. That will hopefully enable you to anticipate possible crises or recoveries well.

How should a multinational be serviced? Centralised or decentralised?This will depend on various factors such as company culture, sector, etc.At Ingram we chose a structure that sometimes is centralised and sometimes decentralised, depending on the tasks concerned.In credit management I decided to leave more authority to the local entities as they have more and better knowledge of local customers, are up-to-date on rumours, and also because I feel it is better to do your collection activities locally. I also opted to centralise a number of tasks: e.g. the management of credit insurance contracts, and the risk management of multinational customers.

How can you 'penalise' badly performing branches in a credit insurance programme and 'reward' the good performers?If you have a general credit insurance contract for different branches you can choose to pay your premium centrally, and then charge the branch different premiums, e.g. based on the loss ratio performance of the branch over the past 3 years (to eliminate one time events).

What added value will credit insurance have in 2015/2020?We consider our credit insurer as a partner in our 'credit risk' management. The sector definitely has an added value in the optimisation of competences and analysis of (mainly) external


information. It is a challenge for the industry to find the correct way to collect information intelligently, and to analyse and share it with their clients.The predictive nature of ratings and scorings could definitely be improved, and should help everyone to make the correct credit decisions.As a partner I therefore expect our systems will be better integrated in future in order to enable optimal exchange of information.

Are you willing to exchange payment experiences with your credit insurer? How would you put this into practice, and which contributions would you like to get from the insurer in return?In the context of an optimal exchange of information I am an absolute advocate of the exchange of payment experiences with our credit insurer, even for uninsured clients!If we expect a credit insurer to communicate openly with us, we must do the same. Payment experiences are an important ele-ment in a credit decision, at least if you interpret data correctly. I mean that a onetime late payment might be less significant than a tendency of delaying payments.

If the quality of your credit management were certified by a third party, would such a certificate contribute to the stabilisation of your company? Who could be that third party, and what benefits with regard to credit insurers, rating agencies, banks, etc. would that result in?

A certification of our credit management would definitively be a plus: credit management is always a bit of an outsider in the financial department, and it is difficult for the general management to understand whether matters are handled well or not. For insurers and banks a certificate would also create more trust with respect


“I agree that ‘full’ automation is not possible. There should be a human aspect.”Arjan Stigter, General Director, BurlinQ Academy

“The challenge in reporting does not concern the figures, but rather the unstructured information. How can you deal with disputes? How do I put it in some sort of report?”Michel Haesendonckx, Senior Manager, Delaware Consulting

to the quality of the financial management of a company.Does the Single Euro Payment Area (Sepa) affect your credit management process? Which influence do you expect from it the coming years?The decisions made at SEPA level will definitely influence our credit management processes.We now have thousands of customers who pay by direct debit in all countries of Europe. SEPA will standardise the processes (which enables centralisation), but unfortunately it looks like it will lead to more uncertainty with respect to payments. We try to prepare ourselves as well as possible; however, it is still not entirely clear how SEPA will be managed by the banks.

5. STABILITY ANd SuSTAINABILITY


5.1. Introduction

The economic cycle changes quicker and quicker. Whereas the economy progressively seemed to recover in early 2011 from a worldwide crisis in 2008, a new cyclical weakening occurred in the second half of 2011. It is expected that economic recoveries and crises will follow each other quickly in future.

In a world with frequent recessions, pronounced business cycles, high or variable inflation, financial and bank crises, credit insurers must be rather anticyclical than procyclical. Due to the limited number of credit insurers a panic reaction of a single one can even cause a mini credit crunch. In this increasingly volatile market there is need for stability. Credit insurers should alleviate the consequences of the cyclical fluctuations for the insured. For example, the insured therefore has been wishing a long time that credit limits are guaranteed for longer periods. The insurers refuse to do this because they want to react quickly on cyclical changes. In addition, they point out that many credit limits remain unused: various research demonstrates that on average only 30% of the credit limits are actually used.

“What is stability? If fire insurers learn that the Vesuvius is about to erupt, they can quickly stop all fire policies in Naples? No! If a severe economic crisis is threatening, can the credit insurer massively withdraw credit limits?”Jan Adriaanse, Professor Turnaround Management, University Leiden

However, we should not become defeatist as the recent economic crisis also offered opportunities. Managers who emphasised innovation, have survived the crisis better than others. Some of them even came out of it stronger. Credit insurers and other financial service providers can also learn from crises. Actually, they should do this if they want to restore confidence they have lost with many managers. Now a new crisis is raging, the credit insurers will have to do more than only streamline internal operational processes, and their relations with policyholders. They will have to reinvent themselves.

PART 2 Themes — 5. STABILITY AND SUSTAINABILITY 183

“The credit insurers work too procyclically: they worsen the economic cycles.In many cases their actions also work as a ‘self-fulfilling prophecy’: becau-se some credit insurers fear something, they take actions (e.g. a massive withdrawal of credit limits) which make their fear more probable.”Vincent Larger, Secretary-General AFDCC – L’Association des Credit Managers FRANCE

5.2. ‘Air in the credit limits’: problem and solutions

Currently credit insurance works strongly procyclically and that must be avoided: in other words, we need to avoid that credit limits are unrealistically high in times of economic growth which means credit limits must be reduced too abruptly and too strongly in a recession. With such actions the negative cycle is even reinforced.In short, by removing ‘the air’ from nominal credit limits, we decrease the procyclical nature of credit insurance.

In the last decade a considerable rise in raw material prices led to a spectacular rise in nominal credit limits. The economic growth from 2002 to 2007, and linked with this the even faster growth in global trade also contributed to it. The


Figure 33: IT is an important element in credit management and its stability

0%

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30%

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1. Fully agree




problem of the credit insurer is that he never exactly knows how many of those credit limits are actually used, the so-called ‘use’ factor. Consequently the insurer has no insight in his underlying real risk position either. The nominal credit limits create a huge potential obligation for the insurer: it is generally accepted that the current use factor is only 30%. In other words, on average 2/3rd of the granted credit limit amounts are not used.In a crisis, the turnover of the insured decreases. Therefore the receivables on a large number of debtors decrease too. Logically an insured could give signals to halve certain credit limits, or reduce them to the expected outstanding balance on a debtor. However, in the current philosophy the insured is not motivated for such an action. If an insured has a credit limit of 1 million euro on a certain debtor but only uses this credit limit for 100.000€ based on the realised turnover, he only pays a premium on those 100.000€.

Lets list the possibilities when 'air in the limits' may occur:

❱ The insured companies request credit limits on prospects, but these

prospects never become customers.

These credit limits are often maintained for 1 year because sales still

hope to achieve the sale.

❱ Credit limits are requested on suppliers and competitors to check their

solvency. Of course there is never a delivery.

❱ As described in the introduction, turnover decreases due to a

recession.

❱ Projects (e.g. software installation) last a few months; afterwards there

is after- sales service and some small additional orders. However, the

high initial credit limit is maintained.

❱ Seasonal activities, for example the delivery of textiles to retail

clients: delivery mainly occurs twice a year and there are a few small

deliveries afterwards, but the same (high) credit limit still is maintained

for the full year.


“Suppliers of credit management services should assess the future requirements and risks in the market, know how to react to this, and also know perfectly what the consequences of their choices are. Only then can those players ensure stability.”Ludo Theunissen, Professor Finance & Accountancy, University of GhentChairman IVKM, Institute for Credit Management

Today credit limits are static: insurers set an unchangeable amount for an unlimited time (until withdrawn by the insurer) and with a fixed coverage rate. Why not grant dynamic credit limits? What should we think of credit limits that are indexed automatically? How about projected and seasonal limits, or advisory limits without cover?

5.2.1. Premium in accordance with the credit limit

An option is that the insured pays a premium on the insured credit limit instead of on the realized turnover. The insured pays a premium on the nominal limit. The higher the limit, the higher the actual premium. Therefore the insured will personally take the initiative to reduce or cancel the credit limit if he no longer needs it.

This principle was also applied in 2009 to the Belgacap. Belgacap was a complementary credit insurance, offered by the credit insurer but on behalf of the Belgian state. The premium of the Belgacap was charged on the granted complementary cover, meaning on the nominal amount of the additional credit limit. That percentage was charged quarterly on all credit limits granted.

However, the system should still be refined. As credit insurance costs are no longer directly linked to the customer’s risk (turnover), a (lot) more could be paid on large (solvent) companies and (a lot) less on small (risky) companies.

Therefore a mixed system seems more ideal: a premium on the turnover and an additional premium on the height of the credit limits. Example: 0.20% premium on the monthly turnover and 0.05% on the monthly cumulation of the (unused) limits.


“We expect stability from the insurer. And stability is equal to a flexible approach. In other words, if certain changes occur in the debtor’s com-pany, in the economic cycle, in our needs, etc. we expect a constructive approach from a partner in credit management.”Marie-Claire Bosmans, Credit Management Specialist

5.2.2. Commitment fee

Another option consists in paying a type of ‘commitment fee’ on unused credit limits, as is already the case in banks.How can the proposal work practically? The overall mass of nominal credit limits per supplier is cumulated and checked against the actual declared turnover.

If the real use of the nominal credit limits is for example lower than 70% the supplier needs to pay a commitment fee, based on the difference between the actual use (e.g. 50%) and the 70% mentioned above.Such a procedure will motivate the insured to use the credit limits or to lower them in order to avoid paying an additional commitment fee.

This system would work perfectly in all sectors with the exception of sectors that experience seasonal peaks or that deal with big projects.

“There should be greater stability. What’s the process of change? Ontex knows credit insurance mainly from the buyer's viewpoint. Euler Hermes has a huge amount of risk, but it doesn’t know how the credit limits are used. Euler Hermes can’t disclose with whom they’re working. There should be a better way of dealing with this process. Credit insurance should be able to manage the ‘real’ risk better.”Chris Parratt, CFO, Ontex

5.2.3. deposit according to the credit limit

A deposit is a small sum levied at the time of the purchase of a product (e.g. milk) and refunded when the buyer returns the packaging of the product.


The credit insurer supplies a product: credit insurance. A credit limit is a 'packaging' which makes it possible for the insured to use the insurance.Once the service (credit insurance) is no longer (completely) used the packaging (credit limit) is released by the insured, after which the insurer needs to refund a part (deposit minus costs for credit limit analysis).

“We ask from our insured to communicate their turnover by debtor each month. That enables us to identify exactly where there is ‘air’ in the limits. And as that process can be completely automated in the insured company, it is a win-win for both parties.”Dirk Terweduwe, CEO, Ducroire Delcredere

“Granting credit limits on A-debtors or refusing credit limits on C- rated debtors is easy. However, usually 30 to 40% of the debtors are not clear-cut. To give those customers credit, two aspects are important: recent payment behaviour and profit margin. These are two things insurers have no access to. However, we can provide payment behaviour to the insurer and if we have a 18% margin on a customer we are also willing to pay more risk premium for that debtor.”Steven Ponnet, Group Credit Manager, AGC Glass Europe

Concrete exampleThe insured applies for a limit of 300.000€ and pays a 50€ research

cost and a 300€ deposit. After some time a credit limit of 100.000€ is

enough for the insured, so he has it lowered by 200.000€ and receives

a 200€ refund on his deposit.

If on the contrary he wishes to increase the limit to 500.000€, he will

pay a 50€ research cost again, as well as an additional 200€ deposit.

If the insurer then withdraws the 500.000€ limit, he will have to refund

500€ to the insured.

The deposits must be sufficiently high to motivate the insured to update

them regularly.


5.2.4. Advisory limits

Many insured parties request 'sufficiently high credit limits' on prospects in a pre-sales phase. Sales often have high expectations for future sales, but the turnover is frequently a lot lower than expected. However, the original high credit limit is not decreased afterwards. This immediately generates a lot of ‘air’ in the credit limits.

One solution would be to work with 'advisory limits': the customer requests ‘advisory credit limits' on his prospects but does not obtain cover.Once the prospect has become a customer the insured can activate the advisory limit so that it becomes a real credit limit.

With this instrument a company can match its prospection file with the insurer’s opinion. Advisory credit limits can also be used in a broader context. Maybe a company only wants to know what the credit insurer’s opinion of a certain debtor is. This could expand the credit insurer’s field of activity (see also chapter on Financial Security).

“To me stability means opening oneself to change and opportunities. We expect our partners to evolve according to the expectations of their customers. I would like to recommend the book 'Who moved my cheese?' by Spencer Johnson.”Dominique Hugelier, Director Administration, Van Marcke

5.2.5. Guaranteed limits for seasonal sales

Often insured companies do not cancel or decrease their credit limits if they do not need them temporarily or if they need peak limits for a short period but can do with 1/3rd of the peak limit for the rest of the year. The reasons are twofold: on the one hand it is an additional administrative task to increase and decrease credit limits; on the other hand the insured is absolutely not sure that the insurer - even if the insurer has similar financial data of the debtor - will again grant the same credit limit.Therefore, a clause could be included in the policy with regard to seasonal


limits, giving the insured certainty - if no actual individual financial changes have occurred in the debtor’s company - that he will receive the same credit limit as in the previous season.Of course, the whole process must be automated. The different season peaks per product segment should be specified in the policy.

5.2.6. Credit limits with end and starting date

A lot of credit insurers offer the insured the possibility to indicate an expiry date when requesting a credit limit. Projects can thus be well managed.

For the insured this entails an additional workload. The insured could actually be motivated for this system by giving him the (99% sure) 'promise' that higher amounts will be granted when requesting a temporary (short term – a few months) credit limit. Indeed, the insurer knows his risk very well on the date of request.For an 'eternal' limit the credit insurer needs to carefully and continuously monitor the risk.

One step further would be that the insured not only requests a credit limit for 1 period but for 2, e.g. a credit limit of 100.000€ from 1 January to 28 February and from 1 September to 30 November. This again will remove ‘the air’ from the credit limits, and enable the credit insurer to have an insight in the real risk.

5.2.7. Credit limits linked to a price index

To avoid that an insured company takes into account an extra credit limit amount in case raw materials or currencies fluctuate, an insurer can plan that the granted credit limits automatically fluctuate together with prices of raw materials. In this case, the credit limit must be linked to a price index and it would evolve together with a specific raw material price, for example steel, cacao beans etc.

This can be provided in the credit limit system of the insurer, or in the policy terms. Example: a credit limit of 100.000€ granted on 1 January 2013 with a


price index based on the price of copper. Index of 100 is interpreted – in case of claim – as 120,000€ on 1 June 2014 if in the meantime the copper index has risen to 120.

“I don’t know any insurance branch where there is an insurance of the risk at the beginning, and somebody can take it away suddenly. Why can’t it be done the other way, based on non-cancellable limits?”Mike Holley, CEO, Equinox

5.2.8. Right of access to the insured’s accounts receivable

Would this be the ideal system to remove ‘air’ from credit limits on the one hand, and have the limits increased for the 'healthy' receivables on the other hand? The insured could allow the insurer to keep a complete mirror accounting (a/r) of the insured. In this case the credit insurer might even expand his products to the financing of receivables or factoring.

Should the insured allow it, a lot of agreements can be made. After how many months of inactivity can a credit limit be automatically decreased or cancelled? Exceeding a credit limit automatically generates an increase of a credit limit by x percent. 'Prospecting requests' are automatically translated into real credit limits as soon as an order is entered.

Furthermore, the insurer will obtain a wealth of information on payment behaviour. Thus, the largest problem (too little recent information) would also be resolved.

A more restricted type of solution would be to grant the insurer a right of access into the insured’s accounts only when there are doubts on a certain debtor.

“The ideal partnerschip between the insured and the insurer is to work in full transparency: the insurers obtain full insight in the database of the insured and must define credit limits on that basis.”Vincent-Bruno Larger, Secrétaire Général, AFDCC


5.2.9. Zero credit limit

This relates to the possibility for the insured company to request a 'zero credit limit' in case of a lower acceptance.

This procedure is already being applied for some large insured companies if they request it, but it is not standardly included in credit insurance contracts. SMEs are usually left in the cold. If the acceptance of the credit limit request by the insurer is lower than thirty percent, the insured will have the option to ask for a zero limit. This can be standardly provided in the policy.

This proposal will not remove ‘air’ from credit limits. However, it will remove many frustrations.The partially granted credit limit refused by the insured, can be given to another insured company. This procedure also has the advantage that the insured needn’t pay premium on the turnover with this debtor, who is only partially covered.

5.3. Non cancellable credit limits

The economic environment changes increasingly faster. Therefore the insured wishes more stability in a more volatile market. Rudi Thomaes (VBO) said in the 'Tijdschrift voor Verzekeringen' in June 2010, that the credit insurance should be 'a tool for stabilisation and consolidation of the economic tissue'.

A lot of insured companies are willing to pay more to have non-cancellable limits. On the other hand, we must point out that some insured are against this principle. To them, the credit limit must always reflect the actual creditworthiness of the customer.In addition, there is the responsibility of the insurer: to which extent can the insurer evoke an illusion of creditworthiness of a debtor? In this context we would like to draw a parallel with the liability of bankers.

We must also point out that many of the solutions indicated here are already being applied by some insurers, to a greater or lesser extent.(See also chapter on Financial Security)


“The financial institutions have to take their responsibility: no illusion of credit-worthiness. This means they can’t support companies with a low credit-worthiness.”Paul Becue, author of 'Manual of credit insurance. The invisible bank'

“The term 'non-cancellable limits' sounds nice. In many cases, however, an insured is better off with a ‘classic’ policy, because a policy with 'non-cancellable limits' often obliges the insured to stop deliveries from one (!) day overdue. Whereas in most policies, the insured can still deliver up to 60 days after exceeding the due date.”Isidoro Unda, Group CEO, Atradius

5.3.1. differentiated validity duration of credit limits

This system implies that, at the start of the policy or policy year, all or large credit limits are evaluated by the credit insurer. Based on that analysis the credit limits are, for example, maintained for one year. Because the insurer cannot intervene during the policy year, the policy usually implies a higher own risk for the insured (lower coverage rate).

As an alternative the insurer could shorten the 'non-cancellable' period to 6 or 3 months. Another possibility would be to make large risks cancellable and all the small and medium risks non-cancellable. By only monitoring 20% of the debtors (the largest), the insurer can closely monitor 80% of his risks and avoid important losses.

Another way to deal with risks is defining in the policy the criteria when credit limits can be withdrawn. Mike Holley, CEO, Equinox: 'We will only have the right to review or withdraw a credit limit if the buyer's externally produced credit rating deteriorates past a pre-agreed benchmark'.

“To increase stability it should be possible to buy credit limits for a long period, for example for the length of a project.”Dominique Hugelier, Director Administration, Van Marcke


5.3.2. Notice period for withdrawal of credit limits

The current system enables the credit insurer to reduce or withdraw existing credit limits. This means the insured and the debtor are sometimes faced with problems. Stability can increase considerably by planning a notice period for withdrawal or reduction of credit limits. Some speak of a 'lead time' in case of withdrawal of limits or a 'grace period'. Some credit insurers already apply a notice period in particular cases, but it is not a generally accepted practice yet.However, this practice is usually considered a favour and is often not contractually confirmed.

In view of the influence of credit insurance on the market and on a company’s liquidity, the credit insurerance industry should apply a notice period of, for example, two weeks to one month. If in the meantime the debtor has not provided favourable information, the negative decision will be confirmed.

“Dealing with risks well is more than applying mathematic models. One of the main points in the Code of Conduct deals with the necessity to exchange information effectively and efficiently between insured, insurer, debtor and specialised broker. This will also re-establish the necessary trust.”Ludo Theunissen, Professor Finance & Accountancy, University of GhentChairman IVKM, Institute for Credit Management


Interview with Steven PonnetGroup Credit Manager, AGC Glass Europe

Which important challenges do you see in credit management in your company in the next 5 years?Many industries struggle with structural overcapacity that cannot immediately be absorbed. Ultimately some of the companies will go bankrupt but every company will fight to the end. If the demand does not keep on increasing, tension between the sales and the credit department will grow. The existing (mutual) strategy will therefore have to be regularly checked and adapted to reality, obviously with the approval of top management. In addition, a further drop in bank loans will increase the importance of supplier credit. Credit control will therefore increasingly have to invest more time and resources in risk analysis of the customers, especially because we now know that credit insurers too can be risk-averse. Obviously no company department will escape cost reduction plans. More will have to be done with fewer people without negative impact on the quality of the process. How did your company deal with the difficulties during the financial crisis? Were specific actions planned?We are an industrial company with continuous production. Our glass furnaces cannot be stopped just like that. During the financial crisis we adapted two parameters. Following the decreasing credit insurance limits we increased our own acceptance levels. On the other hand we lowered tolerance of overdue debts.


How do you think the collection of trade information will develop in the near future? Which influence do you expect the internet to have?Trade information companies mainly work with officially published figures. These figures, if at least they are published, come much too late. I have noticed that many companies now request financial statements from their customers themselves, usually a long time before these are officially published. Since the crisis started in 2008, the customers have thought this is more and more normal. The internet has only a small impact on the problem, i.e. obtaining financial information or not. However, the internet can give indications on so-called soft company data, although this information is usually biased. How should a multinational be serviced? In a centralised or decentralised way?We make a distinction between defining credit limits and the reminder process.Our large global production units with many common customers are followed centrally. Our (smaller) distribution units with mostly local customers deal with the reminder process whose parameters are set by central management themselves. These distribution units have their own local salespersons, and dispute management is done locally too. The credit limit definition, and supervision on the reminder process in these units, are done centrally All units do use the same ERP Finance package, which makes the central follow-up and supervision much easier. Does credit insurance contribute to a company’s stability and sustainability?In theory it should. A company can go bankrupt through a lack of liquidity and/or accumulated losses. A solid risk prevention


increases the chance of payments coming in smoothly and protects the insured against strong fluctuations in the net results due to possible write-offs on bad debts. Of course, we assume that the credit insurer provides sufficient cover in the up-and-down movements in the business cycles. If this is not the case, and if the insured strictly complies with the credit limits, he might still fail due too low turnover and consequently low profitability. If the insured takes a higher risk, unpaid invoices may lead him to fail. Do you agree with the notion that it is possible to fully automate your credit risk assessment, which will cause the role of the credit manager to disappear in the future?I have never seen a quite perfect failure prediction model. Therefore it is unlikely the role of the credit manager will disappear, unless a company is willing to accept considerable write-offs. Models can automate part of the portfolio, but another part (the grey area) will still have to be analysed by humans, whether or not after having received information from the customer. The model should make a first selection, and indicate where intervention and further analysis by the credit manager is required. In case of a credit limit reduction or withdrawal, the insured today only receives a limited explanation. Which information would you like to receive from your insurer?In case of a credit limit refusal or withdrawal, the insurer should provide the exact reason in full transparency, so that the insured can decide whether he will follow the insurer’s decision or not.For example, it is important to know that a customer has non-payments to other suppliers (who and which amounts?), and that he has not sent his most recent annual report to the insurer yet.


Proposal for product innovation in credit insurance: the insured communicates the outstanding customer balances to the credit insurer on a monthly basis to provide him with a better insight in the outstanding risks. Thus the insurer will be able to make better decisions and withdraw credit limits less quickly/frequently. Are you willing to do that?Of course. Just like an insurer needs to be fully transparent on credit limit decisions, the insured must be fully transparent on outstanding risks. What could an insured have to hide for the insurer?

Stability and security in the credit limit can promote sales (e.g. seasonal peaks). Credit insurers should guarantee a credit limit for a specific period (e.g. 6 or 12 months) and can charge an extra fee for this. What is your opinion about this?This seems attractive for credit limits on customers whose creditworthiness is in the grey area: not good, not bad, but no clear negative event anywhere. Yet, I can’t see the use in keeping a credit limit for 12 months on companies where a sudden negative event occurs. That does not correspond with 'good management'.

Would you like price differentiation to be independent of the risk that is inherent to a credit limit/debtor?Prices should be standardised as much as possible. However, price differentiation can be useful with regard to risk. In the world of investments the higher a risk, the higher the return required. In that case, insurers should not systematically overestimate the risks so as to be able to charge higher premium rates.


Interview with Peter van den BroeckeCFO, Daikin Europe

How is the cooperation between the credit management department and the sales department in your company and how should it ideally be?At Daikin’s it is very clearly stated that the final responsible for payment of invoices is the sales department. This strong statement of top management enables credit control to work together with the sales department in a constructive way. By means of transparent and frequent communication, there is usually a broad support for the decisions taken. In case of an exceptional discussion the ultimate decision is taken by top management.

How can you segment your customers?Just like the sales department segments the customers, credit control does the same, but from another perspective based on risk evaluation. Criteria differ from country to country, but the principles remain the same. Maybe, insufficient attention is still given to external elements or assessments, such as grades received from insurers or information providers. Dealing with disputes has always been a weak link in the credit management process. What about your company?In an internal analysis of our overdues, we noticed that a complaint is the reason for payment delay in more than 60% of the cases. We have since increased our efforts to detect and resolve complaints more quickly. Currently an SAP-module related to dispute management is being installed in all sales units. This module will enable us to take quickers actions, to keep track of the complaints history, and at company level, to quantify the cause of those complaints and deal with them from the beginning.


Do CFOs look at credit insurance as a good way to control the company’s working capital?It is obvious that credit control supervises an important part of working capital. The success of this supervision depends on a number of elements that are not necessarily under the authority of credit control. For example, if the sales department can decide independently on payment terms, or if the proposed credit limits are continuously overruled, credit control will not be able to monitor the working capital. In this context as well, a frequent and transparent communication between both departments is the 'key to success'. Are there specific attention points for the management of an international debtor portfolio?The basic principles of credit management are approximately the same across countries and cultures. Local laws and certain customs must be considered, but in my opinion that is not the essence. How should a multinational be serviced? In a centralised or decentralised way?Difficult question. The decision can differ by multinational, and slightly depends on company culture.

Personally, I think that the relationship between the credit control team and the customer is very important. That relationship can be created both at central and decentralised level. I quite believe in the central model that, thanks to economics of scale, should enable to service the customer in a more professional way.Working at a central level also makes it easier to process and monitor 'international' accounts in a way required by them.


What added value will credit insurance have in 2015/2020 ?In a Japanese environment it is not obvious to convince top management of the advantages of credit management. Payment ethics and customs in Japan are completely different and 'bad debts' are more an exception than a common practice. Japanese management therefore does not understand the reactions of credit insurers to pull the belt tight(er), and decrease or even withdraw credit limits, as happened a few years ago.If we would now again experience such reactions from insurers, I am convinced that we wouldn’t need credit insurance any longer.We are looking for a stable cover of our risk, and are not helped at all by fluctuating credit limits (although these may sometimes be justified).However, if the insurers succeed in marketing products like 'non-cancellable limits', I think the product will have an added value anyway. Insurers have the future in their own hands and can decide for themselves if they still want to be that added value in 2015/2020.

6. GLoBALISATIoN


6.1. Introduction

Companies increasingly operate on an international level. Borders are opened, trade barriers disappear, ensuring that goods and services can be easily moved. This results in a globalised world, and also in offshore production and sales.As a consequence, 'supply chains' tend to become longer and increasingly complex. As a result of this some important flows have increased in size: people/employment, goods, money and information.We notice more international cooperation between companies and an increase in mergers and acquisitions. These 'M & As' are now more numerous in other regions than in the ‘old continents’, Europe and the United States. Currently, Asia and Latin-America are important with respect to the 'M & As'.As a consequence of the increased international competition, companies experience more pressure on sales conditions. Additionally more regulation occurs which makes trade more difficult for the international business world.

All these developments have led to an increased need for a more global approach of financing the worldwide 'supply chain'. At the same time, there is an increased need for better data management on a global level.The new model of the 'supply chain finance' provides new opportunities for banks, but also insurers to meet the liquidity needs of buyers and suppliers. Companies are searching for innovative proposals for cash management services.

Globalisation therefore requires a global approach of credit insurance. The industry must provide a global solution for the problems of the exporting company. This can be combined with modernisation of the product.

PART 2 Themes — 6. GLOBALISATION 205


In the context of changing raw material prices and the threat of rising inflation, it is very important to organise an integrated approach of the commercial risk. In this way commercial objectives will coincide with purchasing and financing. This will continuously improve cross-functional opportunities.

6.2.1. Global policy

Some insurers are still not working with a globally integrated database. This makes reporting and uniform policies impossible. It is necessary to develop a global policy: one central policy with translations into local languages, considering possible local legal obligations.

Of course the global policy must be completed with good, local service. The regional representatives of the insurer should not only have an overview of the policy conditions and claim files, but also be familiar with the method


Figure 34: A global and centralised credit management adds value compared to a local and decentralised approach

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of cooperation. In short, there should be a well functioning and international customer service team.

6.2.2. Credit limit assessment not only based on trade information

At this moment, credit insurance is still mainly a European topic: 80% of the premium income is realised in Europe.As far as speed is concerned, credit limit requests on OECD-countries and all EU-countries (therefore also Central and Eastern Europe) should be answered within 24 hours.

Today a lot of non-OECD-countries are included in the policy, but in practice credit limits are only granted on large companies or branches of Western companies. Credit limits are rarely approved on local medium-sized companies. Credit limits are almost never granted on small local companies.


Figure 35: In a multinational C.I. programme, an insurer should make sure the modalities of cover provided:

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1. are the same in each and every country

2. are adapted to local needs

3. both, i.e. adapted to local needs with an option to overrule by group modalities


The reasons for this are: too little trade information and stricter assessment, without even taking into account the political risk.

The commercial insurers cannot expect to receive recent financial statements from non-OECD-countries. However, they can approve credit limits based on market information obtained from their local ‘risk offices’. In non-OECD countries other information is important to grant a credit limit. How long has a company existed? Does it still belong to the same owner or family, or has it recently been sold? How many people work there? Is the company growing in a healty way? Are there any complaints in the industry about this company, heard from other customers or competitors? Does the owner belong to a well-known family? Etc.

In 'more difficult' countries the payment experience of the insured is crucial. Yet, most policies exclude the possibility of self-assessment based on payment experience precisely for these non-OECD-countries.The payment information could be exchanged automatically, which means a limit can be automatically generated based on a few parameters.

We also notice a contradiction between credit management in Europe and the US. Whereas the emphasis in Europe is made on trade information, credit management in the US is focused on payment experience. Therefore, it is striking that in the US no higher losses on debtors occur than in Europe.

“In many countries trade information on SMEs is limited. A short balance sheet, profit and loss account and payment behaviour would be welcome for the analysis of a credit limit request. If the plans of the European Commission are carried out, we will lose a lot of information on SMEs in future. This offers opportunities to players in the market.”Dominique Hugelier, Director of Administration, Van Marcke

6.2.3. Global credit limit rates and multiple use of credit limits

In a globalised world it is difficult for a multinational to still speak of ‘domestic’ or ‘export’. Due to the internationalisation of the business and flexibility of


delivery (delivery is done from one country and then from another) there is more need for a worldwide approach (across continents) of credit management and credit insurance.

Therefore it is peculiar that credit limit costs can strongly vary depending on the country the credit limit was made from. Let us give an example: a Belgian branch of a multinational requests a limit on a certain debtor in the US and pays e.g. 50€ for this request. The sister company in the US requests a credit limit on the same debtor and pays 20€. The credit insurer gives the following arguments: ‘domestic’ credit analyses are easier to carry out (cheaper trade reports, easier to analyse locally, better additional information on the debtor, etc.). In a globalised environment these arguments cannot be maintained any longer: it costs just as much to make an analysis of an American debtor for a Belgian supplier as for a ‘domestic’ American supplier.Therefore the prices of credit limits must be reviewed and a global tarification for multinationals should replace the current system.

In addition, branches must be able to easily use credit limits of other branches, possibly by dividing the credit limits or on the other hand by cumulating the credit limits for large deliveries of one branch.

6.2.4. Global reporting

In the past years, certain credit insurers created good reporting for multinatio-nals.

Let us give a few examples of necessary reporting and reporting requirements. All reports:❱ should be created easily and quickly both at group and individual branch level;❱ contain all information on credit limits: limits granted both in € and in numbers, refused, partially accepted, reduced, withdrawn limits, including the reasons for these partially accepted, reduced or withdrawn limits;❱ provide all information on indemnified and rejected claims;❱ provide an insight in ongoing and closed collection files.


In addition, the customer gains an insight into the structure of his portfolio:❱ what are the double credit limits (when two or more branches supply the same debtor);❱ spread in the group portfolio by size, sector, countries, risks etc.;❱ comparison of branches with each other (losses, collections, risk categories).

Furthermore, the benchmarking of the portfolio with regard to sector colleagues would represent a great added value in future.

6.2.5. International collection

Until 2000 – 2002 it was customary that the insured himself carried out the collection or that the insured transferred collection to third parties, for example his solicitor.The advantage of this system for the insured was that he could largely manage things himself. It also had quite a few disadvantages: the insured had to obtain prior approval from the insurer for important decisions such as rescheduling debt.In addition, the collection costs (as mostly imposed by local law) are usually borne by the insurers.Therefore the insurers decided to take charge of collection since they also bear the risk.

This decision resulted in a huge work load with respect to collection files for the insurer or a direct linked company. This has several advantages: the insurer thus can act as the representative of a group of suppliers towards the debtor, which enables him to put pressure on the latter. In addition the insurer can start specialising in countries, sectors, debtors. However, there is one big disadvantage. Although collection agencies are independent of the insurer, they still work closely together (same systems, same IT-responsibilities, same building, exchange of personnel, etc.).Consequently, the interests of the collection company are identical to the insurers’, but those interests can be opposed to the interests of the insured.Let us illustrate with an example: an insured has many small invoices of 5,000€. The collection agency traditionally focuses on the 20% largest receivables


that represent 80% of the amount to collect (Pareto rule: usually those are receivables above 200.000€). In that case, the insured will only see a moderate collection effort. Automatic reminders are usually sent out and then payment in the framework of the insurance is made. A 'small' sum for the insurer can represent a large amount for the insured.Therefore the insurance company and the collection company must be completely separated. Should that entail too many disadvantages, a Service Level Agreement must be concluded between the insured and the collection company. This will stipulate what the insured can expect: how quickly will a collection file be processed, which actions will be carried out, which reporting will the insured receive, etc.

difficult points in international collection

Other difficult points in international collection are: language, local

follow-up and reporting.

An example: the supplier is Spanish. The head office of the Spanish

supplier is German. The debtor is Portuguese.

Many collection departments of credit insurers are well organised and

have an integrated system, but still it does not always run smoothly:

❱ has the collection department got a local office in Portugal to have

dialogue with the debtor in the language and customs of the country?

❱ are the different actions taken in the collection entered in a central

system in English? What about Portuguese correspondence?

❱ has the supplier got direct and complete access - electronically - to the

collection actions?

❱ can the German head office monitor the case in the central reporting

system?

❱ etc.

The example is limited to the EU but the tower of Babel only becomes

higher for international collection files outside the EU. The insurers, as well

as all international collection agencies, still have a lot of work ahead.


“Insurers know (or should know) what the good techniques are to collect money in the most diverse countries. They might share this knowledge with the insured. All parties would benefit from it.”Elsje Verdoodt, Group Credit Manager, Umicore

6.2.6. Excess of Loss-variants for multinationals

Excess of Loss policies have been on the market for decades. There really is nothing new under the sun. Variants or mixed forms of traditional credit insurance and Excess of Loss can still be developed. Furthermore, large companies show more attention for the product because they have good credit management procedures, and also because traditional credit insurers have been careless with the withdrawal of credit limits in the past years.

To qualify for Excess of Loss the insured must display well documented credit management processes/procedures. The insurer will audit the credit management procedures at the policy start. In case of bad debts, the insurer will check whether the company actually strictly followed its procedures. The Excess of Loss policy is characterised by a high annual first loss. The premium depends on the height of the AFL, and on the maximum annual liability.

The traditional credit insurer can evolve to certain types of mixed policies: e.g. the insured might quarterly send his customer balance sheet or 'aging’ to the insurer. On that basis the insurer grants a general cover.Starting from that 'picture' of the customer portfolio, a full cover of the own balance sheet is achieved. An additional condition could be that no changes higher than e.g. 15% can occur in the portfolio; otherwise they must be submitted to the credit insurer.(see also chapter on Financial Security)

“The most important advantage of an Excess of Loss is that, as a company, you completely decide yourself about credit lines of your customers.”Pierre Shils, CFO, Prayon


6.2.7. Certification for multinationals

Both SME and large companies need a objective certification of their credit management. Just like an ISO or Q-FOR certificate is an unique selling proposition, the credit management certificate can be used towards third par-ties: banks, shareholders, suppliers, credit insurers, etc.The principle is clear: an external company checks the credit management procedures, evaluates the customer portfolio, assesses the qualities of the credit managers and as a result the company obtains a certificate.

With this certificate the insured can ask for better premium rates or conditions (higher self-assessment, more authorities with respect to collection files, etc.). The certificate can also be used as a condition to conclude an Excess of Loss insurance.Furthermore, a multinational makes sufficient turnover to possibly divide the portfolio in different parts (countries, segments, business units, sectors, etc.), have the various segments certified and afterwards presents them individually to the insurers so as to negotiate the best conditions.

The opposite is possible as well: certificates of various companies can be bundled and offered to the market as a whole to have this portfolio covered for 1 year. Principle of the Lloyds market – cfr. 'structured finance'.(See also chapter Professionalisation)

6.2.8. Rent-a-captive

The transfer of normal debtors to the category of bad debts can only be implemented when problems are expected to occur in the collection of certain receivables. Therefore a company cannot make large provisions against possible future (and yet unknown) important losses.

A possible solution could be that the insurer acts as ‘fronter’ and simultaneously proposes a ‘rent-a-captive’-formula which represents the risk share of the insured. The risks are divided between the insurer and the ‘rent-a-captive’, by means of e.g.


50/50% division, but other ratios are possible too. The principle is clear: the insured takes a large part of the risk and benefits from the services of the credit insurer. The credit insurer can grant higher credit limits because he bears less risk. Yet, he still keeps part of the risk, which ensures he will not be tempted to take unjustified risks.The turnover of the insurer is therefore a fee/premium:❱ for the administration of the rent-a-captive;❱ for the analysis of the credit limits;❱ as risk premium;❱ the claims handling.

All parties benefit from this. The insurer provides one global solution to the customer. The customer does not have to create a captive himself. There are much more possibilities to make agreements as to the division of the risk between insurer and insured. For example, the insurer provides cover for new export markets at a percentage of 80, whereas the cover for existing customers is limited to 20% only. Certain branches will receive a higher or lower cover, etc. A tax-free provision can be included in the captive to cover excesses.

“International groups want crossborder integrated credit management solutions.”Elsje Verdoodt, Group Credit Manager, Umicore

6.2.9. Attention to the debtor in a globalised world

The debtor is usually ignored. In fact, he is ‘only’ the object of insurance for the credit insurer, or an object of analysis for a trade information agency. Still, he can play an important part in the globalised world.

Currently, the insurers and trade information agencies pay too little attention to the debtor’s position. The first insurer who knows how to gather correct information from the debtor will clearly benefit greatly from this: insuring fewer bad risks and granting higher credit limits for good risks, resulting in a higher turnover for the insured and the insurer.


Let us give a few examples:How do you inform the debtor that certain credit limits were refused on his company? That would indeed enable him to appeal against this decision.Currently, this procedure of appeal is being carefully avoided: it requires a lot of time, the debtor may only be frustrated and does not contribute anything new to the discussion… However, in this way a lot of opportunities are lost. Maybe the debtor has better and recent figures, or the company may be in a final stage of being taken over and refinanced, or the debtor may be willing to provide a guarantee, etc.

The question will also be how a branch of a multinational can negotiate with a local credit insurer’s branch, especially when this local affiliate has bad financials, whereas the group is healthy. What should prevail in the analysis: the negative situation of the branch (e.g. as a result of profit drains to the mother company for reasons of fiscal optimisation), or the group’s strong financial situation?The contrary is possible as well: the local affiliate has a good balance sheet, whereas the financials of the mother company are bad.

6.2.10. Extension of services

Let us list a few suggestions made during the meetings without elaborating on them:

Credit insurance must be combined with export support. Indeed, most credit insurers have local branches that are familiar with the market and can advise on: legislation, import duties, local networks, local advertising opportunities, local trade fairs, habits, prospects, etc. At least the credit insurer should help by giving practical support in credit management: reminders in all languages, guarantees and conditions in local language and local legal conditions, 'special' payment resources in certain countries etc. (See also chapter on Prospection and Sales)

Ideally credit insurers can provide the help to find new markets: they can guide


the insured, from prospection to payment.

The credit insurer should cooperate in global transfer solutions and financing of projects. Therefore, the insurer must also be a financing expert in export and larger transactions.

In addition the credit insurer could give investment advice for acquisitions, e.g. by concretely analysing debtor portfolios of acquisition candidates. He may also help to start joint ventures in far away countries, e.g. the BRIC-countries.

Credit risks and transport risks go hand in hand. The credit insurer could include transport risks in the cover. By doing so, goods will be completely insured, ideally as in ex-works.

“Credit insurers should also focus on knowledge of debtors in more difficult countries such as the BRIC-countries. This is where they can provide high added value to European exporters.”Pierre Schils, CFO, Prayon


Conditions for a credit insurer to function well in a global economy:

❱ Necessity of local presence in more than 150 countries with different

departments: sales, underwriting, claims, collection, etc.

❱ Centralising all information in one system. All information needs to be

available in each country.

❱ Much information must also be immediately and directly available

to the customer.

❱ Debtor databases must be complete (> 90% of all companies in

a country must be known), and updated (possibly through associated

external suppliers – latest information always automatically available).

❱ Data must be (made) uniform to ensure global scoring systems can

be implemented.

❱ Collection should be done locally as much as possible, but needs to

be translated into global standards.

❱ One policy and reporting system, to ensure all mothers & daughters

can be reported to in a centralised and/or decentralised way.

❱ Development of additional services to multinationals.

❱ SME solutions that entail few administrative obligations.

❱ Newcomers in the market can start in niches and develop through

innovative solutions.


Interview with Eric verbeekBroking Director, Aon Trade Credit Netherlands

Some CFOs doubt credit insurance is a good tool to improve working capital. What is your opinion?I don't agree. Other CFOs see credit insurance as a tool to improve working capital as credit insurance improves discipline on credit management. Especially for the protracted default and political cover a company doesn't have to wait until the end of times to receive money and that improves working capital. The credit insurers have to communicate better and share more and better information with the insured. Can you agree with this?Yes, I can. Firstly, a more proactive approach and better explanation of partial or zero decisions will improve the understanding by the insured of the insurer's decision. Very often the insured has to ask for more detailed information. Some insurers provide information to explain their decisions, but often this is too basic. The insured needs detailed information proactively. Secondly, sector reports concentrating on the trade sector the insured trades with, can help him to manage risks better.

How can a credit insurer contribute to higher sales/higher turnover for a credit insured?By granting higher credit limits and proactively pinpointing important buyers for whom more cover is possible. The insured can then focus on those buyers and increase sales with them instead of concentrating on clients that have problems already.Product development is needed as well. The current credit insurance products haven't changed during the last decades and lately there have been more requests for special policies, single or multi buyer policies, vendor credit insurance, etc.


Is paying premium based on outstandings instead of on turnover a better system?In some aspects this is more transparent than paying premium on insured turnover. A disadvantage of the turnover policy is that, in case of trade exceeding the credit limit, the insured has to pay premium on the total turnover with the buyer. This is not the case in an outstanding balance policy: in this type of policy the insured only has to report outstandings up to the credit limit. However, many policies based on outstandings are loss occurring policies, while most insured companies prefer risk attaching policies. Companies that focus on innovation have always survived crises better than others. Some even came out stronger. Do you now see now opportunities in credit management in general and credit in particular?I think that credit management is more important than ever. Looking at the current crisis, especially in some industries, managing the buyer risks is very important. For large companies, streamlining and improving internal processes is important to reduce costs, and credit management software can contribute to this process.

Some risk federations believe that credit insurers should be obliged to develop anti-cyclical buffers e.g. by law or through Solvency II, can you agree?Yes, I can. Unfortunately we see that credit insurers are as volatile as the economy when underwriting is concerned. When they are afraid of claims they reduce cover while the economy needs more flexibility. Taking away the umbrella when it starts to rain is a common saying here and this is exactly what the insurers do. An insured needs the umbrella, especially when it starts to rain.


Interview with Marie-Gemma dequaeSenior Advisor, FERMA (Federation of European Risk Management Associations)

Which important challenges do you expect with regard to credit management in your company in the next 5 years?As my company is currently dealing with a merger, I mainly consider the optimisation of a good overall approach to be an important challenge. It will be a challenge to combine good credit management and maintain the customers. The environment will not become easier: increasing raw material prices, difficult financial markets, dropping economy, etc.

How do you see the ideal credit scoring system? A credit scoring system should ideally meet a lot of factors: not only quantitative aspects such as speed of payment, financial ratios, sector, country, but also qualitative aspects like ethical entrepreneurship, integrity, competence, etc. must be included.

It is important to collect all that information in a structured database that can be used well for the management of debtor's risks, both internally and externally, for top management as well as for salespersons, etc.

How should a multinational be serviced? In my opinion a global, centralised approach of the credit insurance is the best approach due to 'economies of scale' that can be achieved. The global approach of the insurance is negotiated centrally, with respect to type of cover, price, indemnification, etc. This approach would best be complemented by a decentralised service provided to the local credit managers.


How can you 'punish' the badly performing branches in a credit insurance programme and 'reward' those that perform well?The average cost of the programme is redivided by the company’s risk manager: the branches performing well are charged lower costs and the ones performing badly are charged a higher cost. This works very well in practice, at least if it is supported by top management, and if it is explained well to all branches and credit managers.

Do you agree with the statement that it is possible to fully automate your credit risk assessment, which will make the credit manager’s role disappear in future?In my opinion a personal assessment of the environmental factors and temporary situations, besides information obtained automatically, will be necessary in credit risk assessment.

Do we need a comprehensive Bachelor programme or a Master programme in Credit Management?It is important to set up an extensive training on 'credit' risk management, risk insurance and credit management. I think this would be appropriate in the context of a bachelor in financial management, not separately.After a master training an additional 'master in credit management' will definitely provide added value to the profession of credit manager.

Should several credit insurers cooperate to cover large risks ('syndication')?This reminds me of the insurance of other risks, for example 'property', in which cooperation with coinsurers is common. Cooperation between credit insurers can be positive to provide more capacity in certain projects, or for certain large debtors and risks.


Do you think that the European Commission should authorise a tax-free reserve of e.g. 1% of the turnover for bad debts?Tax-free provisions could be considered as an alternative to insurance. But taxation still is a national matter and not a European one. In Belgium BELRIM attempted to discuss this with the Ministry of Finances a few years ago, although without success.


Credits

A lot of people helped to create this White Paper. We thank them for their support, commitment and trust.The insight of the Members of the Think Tank, of the active participants in the credit management convention 'Credit or Crisis' and of the participants in the brainstorming sessions, represented an explicit added value.

We thank the members of the Think Tank Credit management 2015:

Rudy AernoudtProfessor European Economics, Ghent University Association and University of Nancy

Paul BecueAuthor 'Manual of credit insurance. The invisible bank'

Johan BlauwblommeTax, Risk & Credit Control Manager, Balta Industries

Marie-Claire BosmansCredit Management Specialist

dirk BraetGroup Credit Manager, USG People

Luc ChalmetProfessor Economy, University of Ghent & University of Antwerp

Jean-Louis CoppersCEO, CRiON

Els de SmetSenior Consultant, CRiON

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Marie-Gemma dequaeSenior Advisor, FERMA (Federation of European Risk Management Associations)

Greta GoosensAdvisor

Geert JanssensChief Economist, VKW Metena

katrien MatthysGroup Credit Manager, Resilux

Steven PonnetGroup Credit Manager, AGC Glass Europe

Jean-Pierre SmitDeputy Director, Agoria

Peter van den BroeckeCFO, Daikin Europe

kurt vanwinghCredit Control Director, Amcor Flexibles Europe & Americas

Caroline venDirector, VKW Metena

Elsje verdoodtGroup Credit Manager, Umicore

ortwin volckeMarketing & Business Intelligence Manager, CRiON

Frédéric WittemansSenior Director EU Credit, Ingram Micro


We thank the experts who contributed to this project

Jan Adriaanse Professor Turnaround Management, University of Leiden

olivier Bernard Sales and Market Development Director, Zinc Chemicals Umicore

Marc dedry Sales & Marketing Director, Eurofactor

Marc de GraaffOwner, MDG Consult – Teacher, VVCM

Michel haesendonckx Senior Manager, Delaware Consulting

Marijke haeltermanSenior Account Manager, CRiON

Mike holleyCEO, Equinox

dominique hugelier Director of Administration, Van Marcke

karel Lannoo Chief Executive, CEPS (Centre for European Policy Studies)Administrator, Lannoo EditionsIndependent Director, BME (Bolsas Y Mercados Espanoles)

vincent-Bruno Larger Secrétaire Général, AFDCC (L'Association des Credit Managers, France)

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ulf Linder Deputy Head of Insurance and Pensions, European Commission

Arjan Stigter General Manager, BurlinQGeneral Director, Ultimoo and Lecturer credit management, VVCM

Prof. Ludo Theunissen Professor Finance & Accountancy, University of GhentChairman, IVKM (Instituut Voor Krediet Management)

koen van der veer Economist, The Nederlandsche BankPhD candidate (research on the role of trade credit insurers in the world economy)

Tom vantyghem Group Credit Manager, Sioen Industries

Eric verbeek Broking Director, Aon Trade Credit Netherlands

Philippe verschueren CEO, Govi Former Director, Euler Cobac Belgium


Research method

The research method is partly quantitative and partly qualitative. For the quantitative part of the study, we carried out the following surveys:

1) A survey among the members of the Belgian Risk Management Association BELRIM (www.belrim.be).

2) During the 'Credit or Crisis' congress on March 15, 2012 with 200 participants, six different surveys on the same number of aspects of credit insurance were carried out (www.codeofconductcreditinsurance.com/en/612).

3) Surveys were also carried out among the 70 members of Credit Management Cyclus (www.creditmanagementcyclus.be).

The following research activities were organized to give the study qualitative depth:

1) Group discussions and brainstorming sessions with the 22 members of the Credit Management Think Tank 2015 (www.codeofconductcreditinsurance.com/en/598), under the chairmanship of Prof. Luc Chalmet (University of Ghent and University of Antwerp).

2) Interviews with members of AGORIA, the Belgian federation for the technology industry, which, with its 1,600 members is the largest federation in Belgium (www.agoria.be).

3) An interview with a representative of VKW METENA, a professional association with 4,000 members (www.vkw.be).

4) Interviews with members of the AON Trade Credit Group, of which the most important members are AON Trade Credit Germany, UK, The Netherlands, France, Spain and Italy (www.aon.com).

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5) Interviews with CFOs and CEOs of international companies, some of which are cited in this White book.

6) Workshop debates at the 'Credit or Crisis' congress on March 15, 2012.

7) A plenary debate during the 'Credit or Management Crisis' congress on March 15, 2012, including the following participants: Isidoro Unda, Group CEO of Atradius; xavier Denecker, Executive Committee Member of Coface Group; Dirk Terweduwe, CEO of Delcredere-Ducroire; Paul Overeem, Managing Board Member of Euler Hermes Europe; Mike Holley, CEO of Equinox; Vic Verbist, CEO of TCRe; Jan Adriaanse, Professor at the University of Leiden; Jean-Louis Coppers, CEO of CRiON; Vincent-Bruno Larger, Secretary General of AFDCC; Arjan Stigter, General Director of BurlinQ Academy. The debate was moderated by Rudy Aernoudt, Professor European Economics at the University of Ghent.

Maaltemeers 84, 9051 Ghent, BelgiumT +32 (0)9 244 62 62 • F +32 (0)9 244 62 63 • [email protected]

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