Paying the price of trade assurance
With escalating insolvencies and a delicate global economy, the risks of doing business have never been greater. However, the cost of managing that risk doesn’t need to be sky-high.
Jonathan Bruns, Senior Account Manager for Atradius, explains the five forces that influences Atradius’ pricing and provides an insight into the areas that determine what premium is eventually offered.
1. Understanding your business
Atradius reviews its customer’s policies annually and Jonathan says that the first thing Atradius looks at is the customer’s business and the risk management policy they have in place. A robust in-house risk assessment team is just as important as the terms of payment offered to buyers as well as the ability to collect outstanding debts. A company’s market position is also important because of the influence they may have over their buyers.
“It’s important that our customer has its own internal risk assessment procedures and demonstrates that they can routinely get money back from their buyers. The more alert customers are with their buyers, the more control they have over their book of receivables. The number of days payments are outstanding has an important influence on price.” says Jonathan.
A thorough understanding of the business is the one factor where customers can really influence their policy. “The more information our customers can provide us, the more information we have to feed into our pricing.” says Jonathan.
2. Understanding the market
Atradius continually assess different industries and markets to understand the risks of trade. Jonathan says that “internally we’ll look at our customer’s buyer and country portfolio, the number of claims paid over a 3-5 year period, information from other Atradius customers who trade in the same market and our risk underwriting team’s assessment of the market and industry.”
In addition, Atradius also looks at external factors such as insolvency trends as well as economic and financial data. If a customer is in a poor performing industry there is a higher possibility that they may experience payment issues and can expect higher premiums or a stronger policy structure.
3. Risk sharing
“The more ‘skin’ customers are willing to put in the game, the lower the premium,” says Jonathan. Rather than relying on credit insurance as their first and only line of defence customers should back their risk assessment teams and use their policy as part of their overall credit management tool to manage their cash flow. “Customers that are willing to take on more risk can expect lower premium rates,” explains Jonathan.
Other tools customers can use to reduce their premiums, especially those with risky portfolios, include establishing a claims threshold and aggregate first loss. The threshold relates to the loss value a customer is willing to accept before a claim is made. Atradius will review all losses above the agreed threshold.
The aggregate first loss refers to the value of losses that a customer will take on their own account in a given policy year before a claim can be paid. This is particularly useful for customers who are prepared to take a larger risk and keep their premiums relatively lower.
4. Buyer spread of risk
The buyers our customers trade with have an impact on price. We review our buyers consistently and base our decision on financial and non financial data received on that buyer. “We visit many buyers in order to better understand their operations and their ability to pay our customers”: says Jonathan.
The strength and size of a buyer has an important influence on price. We look at a customer’s spread of risk when we price. The better the spread and the stronger the buyers, the lower the price.
5. Loss history
Loss history plays a vital role in pricing. Just like other insurance policies such as for cars and homes, if a business claims for a number of losses, they will see an increase in insurance costs. “Outstanding debts are also reviewed. The longer the outstanding debts, the greater the chance of a claim coming through which then increases the price,” says Jonathan.
Jonathan explains that while each of the five factors are taken into account when pricing to determine an appropriate premium, there is also the flexibility to review our customers’ policy on a case by case basis. Jonathan says that “while a customer may trade in a riskier industry, if they are a long term customer, manage their risk well and haven’t had a high ratio of claims, this will positively influence the price.”
This highlights the importance of maintaining a close relationship with your credit insurer and treating the policy as a credit management tool. “There is a leniency towards the information that the customer provides and their history and amount of risk sharing on their policy.” concludes Jonathan.