Why SMEs Don’t Insure their Most Important Asset – Receivables; A Discussion with James Daly

For a small business, today’s business world is all about survival. Securing top line revenue while managing expenses is enough to exhaust the most energetic of small business entrepreneurs. I run into them all the time, organic food companies, new sport or apparel companies, and  many are single product focused, oriented heavily into online sales, and struggling with large purchase orders (when they can get them).

So do they really have time to manage their credit limits, insure their receivable, worry about overdues, and other important receivable management functions that bigger companies can afford to at least pay someone part-time?

I recently spoke to James Daly, president and CEO of  Euler Hermes Americas. James and I started out our call by brainstorming why European businesses are more likely to insure their receivables than their North American counterparts.  James speaks from experience, having started with Euler Hermes 13 years ago in the UK, then joined the team running Northern Europe until he worked at the head office in Paris.

Now in the USA, he has the challenge to unlock the enigma as to why U.S. corporates don’t purchase trade credit insurance product like their European counterparts. In Europe, the product seems to be more institutional, the banks are familiar with the product, and use them inside their organizations as well as encourage their clients to use it. When CFOs are educated in Europe, it’s clearly a tool they are educated about.

So why don’t SMEs take up receivables management tools?

As James pointed out, receivables are typically 40% of a company’s assets, and the one most likely to be uninsured (we insure our building, our fleets, our equipment, but not our receivables he said). James notes that a study done by U.S. Bank showed that as many as 82% of business failures are due to poor cash management.  And a big part of that cash management issue was not being paid, often by one or two large clients. Most SMB do not have the functionality of credit management – a $3M company just does not have the expertise.

So I was impressed that Euler Hermes took this information and is actively trying to do something about it.

How to Make Trade Credit Insurance, Well , Simplicity

Euler Hermes decided to build something simple (the product is called Simplicity), more like a home insurance policy – easy documentation, transparent pricing, and  claims transparency. The policy document is a 4 page document.

Simplicity also covers export trade. Many companies’ trade state to state, but companies in California or Miami, for example, have opportunity and this form of credit insurance can help with Asia and Latam trade respectively.   If you are a SMB and get an order for cell phone covers or bike transport bags, and get an order for 35K, how do you manage?  EXIM will provide support, but its more on a transaction support (and to go through the time, education to get EXIM insurance is not easy for a small business).

The pricing is transparent, see the graph below.

Figure: Pricing based on Revenues

Simplicity pricing chart

They have had tremendous success in Europe, and have recently rolled out the product in North America, where there is a large and diversified small business market.  For more information on Simplicity, visit here

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Voices (2)

  1. Kevin Humphrey:

    Actually, I disagree with just about everything noted above. There are several known reassons why domestic US credit insurance lags its European and Asian counterparts. A lack of simplicity is not one of of them.

    I have a great deal of respect for Euler, they are one of the best run organizations in our space, and they should try to innovate. However, the above is good PR that does not address any of the genuine barriers to product uptake domestically. I have been in this business for a while and have given these issues a great deal of thought.

    Trade credit insurance should continue to grow in the US, but the “hockey stick” acceleration in growth that many people have predicted has always been hampered by a variety of issues that I group into a few clusters:

    1) Cultural
    2) Underwriting
    3) Claims (“Disputes”)

    With respect to culture, there are several issues. One is the ghost of Glass Steagal. European banks were never separate from insurance companies. They have 60 additional years of cross selling experience than their US counterparts. US bankers buttered their bread by selling LCs, not insurance. Secondly, every widget sold in Europe crosses several borders. The US has a giant open economy, with known bankruptcy rules. Additionally, trade creditors generally are treated well in a reoroganization (Chapter 11). Though, not so much in a wind down (Chapter 7). Chapter 11 is more common, so US companies are willing to roll the dice.

    We have a very open business culture. Most industries give terms to their clients on very little information, and have been doing so forever. Any insurer coming into that situation is correct to note the risk, but still has a lot of work to do to convince that prospect that they have been doing it wrong all these years. If the carriers want to penetrate that barrier, they need to take more risk. Which leads us to my next point.

    Secondly, a simplified structure doesn’t get at the most important part to any policy: the approved credit limits! Most companies that do take yiour call have some client of concern. They usually will not buy the product unless they get a limits from the carrier. This gets to the risk side of the equation: If they insurer is not willing to truly take risk off my balance sheet, why should I bother?

    Lastly, there are a number of CFOs, Credit Mgrs, etc in the US that are familiar with the product. And many have had poor claims experience. The most common feature is that the buyer claims some dispute and the carrier sits on its hands until the issue is resolved. We need to get to a place where, if they client can document that they did everything required, then that is not a dispute even if the buyer is claiming so. The claim gets adjusted and the insurer sues (or helps drive that buyer into involuntary) the buyer.

    The conclusion is that we need insurers that are willing to pay out more and faster. That will, in time, burnish the repution of the product, and contribute to an uptake in usage. Most of the active carriers in the US have combined ratios in the 65-80 range. Other lines have ratios in the mid 90s. Yes, the business is cyclical, but those numbers suggest that either the trade credit carriers are charging too much or not taking on enough risk…or both.

    Regards,

    Kevin Humphrey
    VP Trade Credit & Political Risk
    Arthur J. Gallagher & Co.

    1. David Gustin:

      Kevin

      These are valid points. Trade credit insurance only provides protection for bankruptcy of obligor. And becoming insolvent can be very different than “failure to pay”. Most trade credit claims are filed 90 days after an overdue date, but funding providers who provide some form of short term liquidity on average are funding invoice for 50 days or less. One of those peace of mind things until there is a problem. Thanks for sharing,

      David

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