INSOLVENCY is one of the biggest nightmares in any business relationship. However, insiders say the risk of a business partner not being able to pay for goods received is becoming more and more acute in the EU. Credit insurance is one of the financial tools that can protect against such an eventuality and ease the risk of unpaid goods and services.
If a business partner becomes insolvent you have a much greater chance of seeing your money again from insured receivables than by waiting for possible bankruptcy proceedings to reimburse you.
Today, however, Slovak businesses are still largely unaware that they can insure receivables and of the advantages that this form of insurance provides. Credit risk companies therefore see great potential for this type of insurance on the Slovak market.
"It is also a receivable management tool that helps companies to manage insolvency risk even in a case when a business partner suggests its clients defer payments," said Vladimír Ščasnár, senior sales manager of Atradius Credit Insurance.
Helena Múdra, executive officer and Andrej Račko, sales manager, both from Euler Hermes Service added: "It is possible to summarize the advantages of this type of insurance in one phrase: peaceful sleep for businesspeople."
They continued: "It is not only avoiding damages and paying financial compensation in case of insured risk but also stabilizing cash-flow, debt collection and lowering risk when looking for other business partners."
In order to evaluate insurance risk a credit insurance company checks the customers of an insured company. Based on its evaluation, an insurance company decides whether it can approve a credit limit for the individual customers of their clients.
"Refusing to set a credit limit due weak financial position or negative information about a customer of our client can help our client decide whether to do business with such a company at all. And if yes, under what conditions," Ščasnár of Atradius said.
Insured receivables can ease a business risk when looking for new customers or a new market. It can also make a business's life easier when asking for a loan from financial institutions.
According to Atradius, credit insurance is suitable for a firm of any size but much depends on the actual products an insurance house provides.
"I cannot say there are any branches where I would recommend or not recommend [credit] insurance. But in order to ensure its effective risk management an insurance company can determine which branches it wants to avoid because of the high risk level," Ščasnár explained.
Euler Hermes Servis focuses its products mainly on medium and large companies with a minimum annual turnover of Sk20 million (€520,000). Múdra and Račko think receivable insurance is suitable for each branch where businesses have a receivable portfolio of various types of customers. Euler has experience mainly in the consumer goods and machinery fields.
Firms in Slovakia most often insure their receivables against non-payment and customer insolvency. Only rarely are companies interested in insuring against political and production risks. However, an insurance company can ask its client to insure a political risk when it exports goods to certain countries, though this has practically no relevance within the EU.
The insurance premium is set individually for each client. It depends on its expected insured turnover, volume of open receivables, business branch, invoice payment period, countries to which a client exports, as well the client company's history with unpaid receivables.
Múdra and Račko of Euler added: "Insurance premiums are on the level of a small percentage (thousandths) of an insured turnover. Insured turnover is the base for the calculation because the turnover of a firm also consists of uninsurable turnover (receivables from the state, state buyers, own branches and daughter companies) and these factors do not enter into the insurance."
It is only possible to insure future receivables. Businesses cannot take out insurance on existing receivables or those that are overdue.
"According to common practice we do not insure receivables that arose before signing an insurance contract. However, in some cases it is possible to arrange insurance of existing receivables but only within an exactly specified period before signing the contract," Ščasnár from Atradius explained to the Spectator.
Credit insurance companies do not insure individual receivables but the whole turnover of a client. According to Ščasnár it means a client cannot only insure risky receivables.
Insurance usually covers from 80 to 90 percent of the original value of a receivable. The coverage from credit insurance is several times higher than compensation from a bankruptcy procedure, Múdra and Račko concluded.
24. Oct 2005 at 0:00 | Marta Ďurianová