Burkhard Wittgen is a credit insurance specialist and member of the Executive Board at Aon Credit Solutions. In this interview, he talks about the dissolution of the protective shield on June 30, 2021, and the consequences for companies. What should companies do now? Which consulting services are currently more in demand than ever? What does the "average in the Suez Canal" case stand for and why should trade credit insurers urgently create a digital connection to their clients? Learn more!
It's a people’s business. Gaining new customers. Building up trusting customer relationships over many years. For me, a project is never finished with the placement or renewal of an insurance policy. It’s quite the opposite. The personal contact with customers and the cooperation with colleagues all over the world is very appealing.
On the hedging of a company's trade receivables. Based on this, the appropriate solutions for risk transfer are selected. The actual work therefore consists of analysis and consulting. The absolute prerequisite for this is always an understanding of the risks and the risk philosophy of the individual company.
Every company has trade receivables. A service is provided or goods are delivered, but not paid for immediately. The customers first receive an invoice and can then pay after 30, 60 or even 360 days, depending on the agreement. The company providing the service is then naturally exposed to a risk. If the customer cannot pay, credit insurance kicks in.
Of course, it helps if companies know their business partners well. The credit insurer checks business partners to see whether they have liquidity and are trustworthy or not. That's part of the job. If companies are in good shape, trade credit insurers draw so-called "credit insurance limits" on the individual buyers. This insures them. In traditional trade credit insurance, the insurer has the right at any time to cancel or reduce the limits for future deliveries and services in the event of a deterioration in creditworthiness. For this reason, alternative credit insurance concepts such as Excess-of-Loss (XoL) with non-cancelable limits for twelve months are increasingly coming into focus.
Via global databases in which all companies are recorded. A lot is digitized, companies' balance sheets are automatically recorded. And so are payment histories. Policyholders have to report when their customers don't pay on time. This means that the credit insurer has a superb worldwide monitoring network, recognizes where creditworthiness difficulties occur and can react accordingly.
In the past, credit insurance was often bought selectively by companies operating internationally. One country would buy a policy from X, the other from Y. There was nothing coordinated about it. This meant that companies could not use their purchasing power to get the best possible deal on the market. However, there are now international program solutions that allow credit insurance policies to be negotiated centrally and implemented locally at the same time. Furthermore, credit insurance programs enable daily analysis of a company's accumulation of risks vis-à-vis groups of buyers and their coverage ratios.
Limit optimization is the order of the day for us. If limits are reduced, regular limit negotiations with the credit insurer and our customers or even additional capacity providers are required, as well as top-up policies. A second credit insurer facilitates risk management by spreading the risks over more partners and providing the best possible coverage for companies.
If you want to emerge successfully from the crisis, communication and the exchange of information are the be-all and end-all. We advise our customers to enter into proactive dialog with credit insurers together with us. Positive payment experience and well-filled order books with customers can convince credit insurers to issue even more difficult covers.
Being prepared for the 'worst case' and having different possible solutions at the ready is better than being too dependent. That can become a danger. It can also make sense to have a second credit insurer on board or a top-up insurer. This insurer steps in if the primary insurer does not take over the entire risk. Syndication is also a good idea when companies have many large customers with large limits and the insurers find it difficult to underwrite the limits on their own.
I think all companies have noticed that we do not live in a low-risk environment. Things can go bang from one moment to the next. That companies like Lufthansa have to be rescued by the state. That a single tanker blocks one of the most important logistics lines in the global economy, deliveries stagnate, companies can neither finish nor sell their goods, wait longer for funds and thus get into difficulties: The Suez Canal accident represents how a single event can affect the entire global economy. And everything that influences the global economy also influences the creditworthiness of companies.
Exactly, because if the creditworthiness of companies deteriorates, there is a risk that others will get into difficulties as a result. That's where credit insurance makes sense, of course.
Yes, digitization is an important driver here. For example, in Germany alone, credit insurers have issued 420 billion euros in cover. Due to regulatory requirements, these limits and risks must be backed by equity. The problem is that only a portion of these 420 billion euros is actually used in day-to-day business. Experience shows that customers apply for significantly higher limits on their customers than they actually need. Or they supply their customers only once a year and the limit is still in the system the whole time. But no one recognizes this because the systems are not linked. This is where digitization comes into play.
Meaning: If the crisis lasts longer, the probabilities of default will increase further. Then the credit insurance market will have to reduce its exposure - the 420 billion in Germany alone - to keep an eye on the cost of equity. A digital link would obviously indicate where reducing the limit makes sense and where it doesn't. That's why we at Aon are deliberately investing in connecting policyholders' ERP systems to credit insurers. The goal is to automate the entire handling of credit insurance.
Digitization will continue to gain momentum and of course also change payment processes in the B2B sector. On a small scale, we already know this from Klarna or PayPal: Here, we as customers can decide when we pay for goods or services. Large technology groups are using the resulting data to offer insurance solutions or payment terms. I am curious to see to what extent these large technology groups will move into the area of B2B payments and make one or the other trade credit insurer obsolete through digital solutions. They are easy to integrate into companies' new types of business processes. It will be exciting to see how trade credit insurers themselves adapt to this digital challenge. And that is precisely why it is so important that they create the digital connection: to stay relevant!