Failure to insure debtors’ book a costly omission

Companies are missing out on insuring their debtors’ book, leaving an insurance gap which could prove very costly for them, according to brokers and risk solutions providers, Aon South Africa. Correctly scoped business credit risk insurance has moved to centre stage in challenging business environments, Maria Teixeira, Aon’s manager of trade credit, surety and political risks, told FTW. “Companies naturally insure their assets,” she added. “But remarkably, even in today’s difficult economic climate, they can overlook or choose not to insure one of their biggest assets – namely their debtors’ book,” “The fact is that credit risk cannot be overlooked given the heightened threat of financial failures. Factors such as a lower-than-expected gross domestic product (GDP) of 3.7%, lower factory/ manufacturing output in the first quarter of 1.9%, rising energy costs, and government’s inability to carry through infrastructure spending, are all indicators that businesses in general are facing huge challenges in SA.” She noted that sales of many businesses were falling while costs were increasing, and they would ask for extended payment terms – or simply stretch payment dates with suppliers. “The best and currently most cost-effective protection against potential defaulting customers is credit insurance,” Teixeira added. Credit risk arises the moment goods or services are supplied to a third party. And, she told FTW, it’s a truism that until payment is actually received, the exposure remains. Her advice is that there are two essential covers. There is domestic credit cover – which protects against liquidation and non-payment by debtors within SA borders. Added to this is export credit insurance, which – in addition to commercial cover – has short-term political cover that protects the exporter against default because of the interference of a foreign government. “In addition,” Teixeira said, “a major benefit to be derived from this kind of protection, both locally and in foreign markets, is that it allows the insured to explore new markets and consider transactions with debtors whose credit standing is unknown and untested.”