U.S. credit insurance brokers say they are getting more inquiries from companies looking to insure their accounts receivable with retailers.
Vendors can purchase credit, or accounts receivable insurance, to eliminate the risk of not getting paid by retailers.
Popular in Europe, the policies have caught on slowly in the United States-at least until about two months ago. Thats when the sub prime mortgage crisis spilled from the business section onto the front page and vendors started calling insurance brokers for quotes. Many are motivated by the realization that banks will be scrutinizing their accounts receivable much more closely when it comes time to renew financing.
“Lets say Im a manufacturer of sporting goods and my bank line comes up for renewal right now,” said Jack Cowley a manager with Trade Risk Group of Yardley, PA.
“Ive now got to reach out to my banker, who may be looking at me in a whole other way than he did a year ago.”
The problem is that the market has shifted dramatically in the last year as suppliers to the residential construction and then the automotive industry sought coverage. A year ago, companies might have been able to secure insurance on 80% of their accounts, brokers said. Today approval rates are closer to 50% and premiums have crept up from 10 to 20 cents for $100 of A/R range.
“Between this time last year and now is 180 degrees,” Cowley said. “Prudent people who buy credit insurance buy it for two cycles down the road, or three cycles down the road, so you are sitting with coverage when the next cycle comes.”
Of course, even then there is no guarantee; your insurer wont drop you. Thats what happened to suppliers of British sports retailer JJB Sports a week after it reported a first-half loss, halted dividend payments and cut its profit forecast. News reports that carrier Coface had stopped underwriting JJBs accounts receivable sent JJBs stock down 27%.
“Credit insurance is designed for unforeseen losses, not expected losses,” said Parker Freedman, with ARI Global in Tampa, FL. “So people are showing up asking can you cover this? Its like a cancer patient showing up and saying cover me for life insurance. Its not a pretty sight.”
In the U.S., most vendors self insure against non-payment, but an executive with one sporting goods chain said it has been getting more calls from insurance carriers lately calling on behalf of suppliers seeking coverage.
“We are starting to see and hear it more,” they said.
