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Why it matters
Asian firms look to credit insurance to protect revenue
Darryl Yu 1 Sep 2016

 
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Competition is changing the business landscape for many Asian companies. An increasing number of them are trading over open accounts than ever before. That means a large portion of companies’ receivables is likely unprotected from non-payment risks.

“The market has become competitive in Asia-Pacific. More and more companies are starting to offer credit terms on open account in order to stay competitive,” explains Victoria Ma, executive vice president and chief risk underwriting officer at trade credit insurer Coface. For Ma, the fact that most companies currently trade over an open account to attract business instead of the more secure letters of credit (LC) means risks of non-payments especially for small and medium enterprises (SMEs) are high.

Coface’s recent survey of its Asian customers in 2015 revealed that 84.6% of them trade on an open account structure. “Account receivables account for a good portion of company’s assets – around 40%. Their customers’ default in payment could be detrimental to their business,” says Ma. A trade credit insurer promises to pay a company’s receivables in the event that a customer or buyer is unable to fulfil its payment obligation. It essentially gives the supplier a safety net when transacting with their customers.

For Wilkie Wong, group chief financial officer at textile manufacturing Esquel Group, the gradual industry shift from LC documentation to open account made him realize about potential risks. “After the global financial crisis a lot of our customers have been asking to lengthen their payment terms. When a customer asks you to do these things it’s difficult to say no,” says Wong. Credit insurance adds a layer of comfort when working with open account customers, he adds.

“If you are a middle-sized company or an SME, one of the biggest assets on the balance sheet is receivables,” says Gordon Cessford, regional commercial director for Asia Pacific at Euler Hermes. “If you are an SME one loss can put you out of business. If you are a multinational it’s about corporate finance and risk management.” Apart from counterparty risk protection, trade credit insurers also act as a third party that gives an unbiased view on a company’s customers. “We give third party opinion of the credit worthiness of customers,” says Eric den Boogert, managing director Asia at credit insurer Atradius.

“Even if some businesses have a dedicated credit team, having a third party’s value-added advice will help the credit managers to better explain to their sales managers the level of risk and make sound sales decision,” adds Ma.

In addition, banks are willing to finance companies with a credit insurance policy, adds den Boogert. “Banks have become stricter in lending especially to private sector companies,” he adds.

In terms of evaluating buyer coverage, most trade credit insurers look at several factors when underwriting. “Obviously fundamental will be the financial statements of a company. We also look at the payment experience, years of relationship with the supplier, business environment, sector and country risk,” says Ma. Information is critical if you want to stay ahead of the game explains Cessford, “We spend a lot of money on information because that is what is driving the business,” he notes. “The person with the most information about the buyer is actually the supplier because they are seeing how much product they are taking and how much they are paying and when they pay. We tap into our clients to see how they are performing with their own clients.”

But is credit insurance the perfect solution to credit risk management?

It can be argued that credit insurance has its limitations. For one, credit insurance for high-risk accounts could be tough to obtain. Moreover, there are deductibles and minimum loss thresholds in insurance contracts that limit its usefulness.

In the region, cost is a major factor holding back many companies from obtaining insurance.

“Historically this is a low penetrated market (Asia-Pacific). It’s immature in many markets in Asia-Pacific and we have room to grow,” says Ma. “It’s really a matter of how we educate the market because many companies we talk to have never heard of trade credit insurance.”

In terms of expanding the market within Asia, credit insurers turn to external organizations for additional support. “Credit insurance normally starts with export credit insurance. You have the big government agencies like Sinosure and K-sure, which are very active in promoting this product for quite a long time,” notes den Boogert.

Cessford believes partnering with banks to offer this service to their clients is one way to promote credit insurance. “There is an increasing awareness of credit insurance drive by the banks and by companies’ appreciation of the increased risk environment,” says Cessford. “Of clients that took credit insurance, they were 25% less likely to fail themselves. Meaning that if you have robust procedures in place you don’t get surprised with the insolvency and non-payment.”

 

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