In shaky economic times, companies look to insurers to give them protection and minimize their credit risk so top executives can sleep at night.
By Kate Gibson
There's been a lot of justified hand wringing about the economic fallout from a slew of negative events this past yearranging from the September 11 terrorists attacks in New York and Washington, D.C., nearly eight months ago, to the collapse of Enron and a series of accounting-related scandals that called into question the health of a number of publicly traded companies, along with heightened violence in the Middle Eastall contributing to weakening the recovery of an ailing economy.
But for at least one business sector, the credit insurance industry, there's a silver lining. Those same events, along with an upswing in corporate bankruptcy filings, have served to spark an increased sense of unease in executive suites and bolstered business. Indeed, credit insurers are seeing a growing interest in their products, even as premiums rise and they become more cautious about the risk they take on. And the best, in terms of more business, may be to come.
It seems that the momentum behind the 9-11 effect on credit insurance may not have shown itself completely even to this day, says Gerald L. Mize, a partner at Alston & Bird LLP, an Atlanta-based law firm handling claims from the attacks for insurers. He sees the rash of recent events prompting corporate America to focus on whether and to what extent it makes sense to transfer credit risk through credit insurance products.
Arjan van de Wall agrees. Because of the terrorist attacks, and the losses resulting from this event, the re-insurance capacity has been reduced considerably, says van de Wall, vice president, marketing and sales, at Gerling NCM Credit and Finance AG, Baltimore, one of the world's leading trade credit insurers. As with everything else, if the supply is reduced, the price goes up. In general, credit insurance industry rates have increased by 10% to 30% on average, he says, adding that he expects the trend to continue for some time.
Credit managers' faith in the usual methods of protecting their companies from extraordinary loss has been shaken. Kmart is the first real demonstration that no one can predict who will go belly up next, van de Wall says, referring to the company's bankruptcy filing in February, which caught many creditors by surprise. In the past, prospective credit insurance customers often felt confident they could judge for themselves whether customers would pay or not. Not anymore, he notes.
But all is not rosy. Joseph A. Ketzner, executive vice president of Baltimore-based Euler American Credit Indemnity, another leading global credit insurer, says new business and retention have been hindered by across-the-board rate increases all types of insurers have been forced to implement. Still, all told, Euler saw application rates increase 22% in 2001 compared to the previous yeara growth rate many would envy
The uncertain economic climate does appear to have a wide array of companies and their financial officers considering risk management in a more serious fashion, according to the results of an industry-sponsored survey conducted in the fall. Of the more than 400 finance directors from the U.S. and Europe who responded, 12% reported having fully integrated risk management across their organizations, according to the report released March 27 by Aon Corp. However, that number is expected to rise to 39% within the next three years, the Chicago-based insurance underwriter and brokerage says. That should further bolster interest in credit insurance, experts say.
The use of credit insurance will increase among U.S. firms looking to protect sales abroad and domestically, says Nick Pearson, a partner who heads the insurance and reinsurance practice at Edwards & Angell LLP, a New York law firm. The failure of Enron, and perhaps more importantly companies like Kmart, will drive the use of credit insurance as risk managers turn to it as part of an integrated program of enterprise risk management, he says. The future also promises an upswing in availability of product as the big European players expand their U.S. operations and bring a very sophisticated underwriting discipline to the party, he adds.
Behind the scenes, a number of business factors are driving the heightened concern about credit risk. High leverage, domestic and foreign competition, excess capacity, major technology investments, challenges integrating mergers and acquisitions, managing the accumulation of years of growth, and 'creative' financing and complex investing, are among the risks jeopardizing corporate futures, according to Carter Pate, managing partner of PricewaterhouseCoopers' Financial Advisory Services practice in the U.S.
The ongoing risky climate will have 200 public companies filing for bankruptcy in 2002, 22% under the 2001 tally but above the 1986 to 2000 average of 113 public company files, predicts Pate in a Pricewaterhouse-Coopers report released in March. The report also forecasts that another 10,800 private companies will file for Chapter 11 protection this year, for a total of 11,000 private and public Chapter 11 filings.
Rising premiums are already boosting the bottom line of trade credit insurers, including Warren, N.J.-based Chubb Corp., which reports further acceleration of the upward trend in premiums enjoyed in the fourth quarter of 2001. Chubb is culling its book of under-performing accounts and securing large rate increases, as well as better terms and conditions, on the business it keeps and the new business it writes.
Like fellow credit insurers, relative newcomer Chubb sees more business ahead. Enron, the recession, Argentina, and a slew of business failures have heightened everyone's sensitivity to credit risk, says Peter L. Aitken, vice president of trade credit, Chubb Group of Insurance Cos.
A note of caution: As might be expected, says Alston & Bird's Mize, the hardening insurance markets are prompting risk managers to re-examine risk retention, captive arrangements, and alternative risk financing as an alternative to risk transfer through insurance.