Risky Business: AMM’s Readers Rate the Pros and Cons of Credit Insurance
By Josephine Mason
It's expensive, limits and coverage can change virtually overnight and more than a few subscribers are convinced that if you can get insurance on a certain customer you likely didn't need it in the first place. AMM surveyed its readers to get a real-world fix on the state of play between insurers and the metals supply chain. The results may surprise you.
The relationship between the metals industry and credit insurers remains fraught amid perceptions that coverage is still being pulled without justification and that the reinstatement of coverage is taking longer than necessary, the results of an AMM survey in April show.
Asked how they would characterize credit insurers, some 46 percent of survey respondents believe the industry is still pulling coverage on customers without sufficient discussion or notification.
"You have folks who've not used credit insurance for long and then they see the cover being pulled. We had entire sectors blacked out. There was an overreaction," said a risk manager at a U.S. service center who has used credit insurance for 15 years.
The dramatic withdrawal of coverage marked the height of the economic crisis, with one market participant describing it as a "blanket withdrawal" from the automotive sector.
Many companies blamed part of their problems on the withdrawal of credit insurance on their customers—exposure to the stricken automotive sector meant they were treated with unnecessarily heightened caution. The reduction or removal of coverage was considered particularly detrimental to the scrap metals industry.
"For anything that smacked of automotive, forget it. They went in the opposite direction. For anything with automotive in the name, you were blacklisted," the risk manager said.
That left the relationship between the two sides in tatters.
Atradius NV, one of the world's largest credit insurers, was forced to overhaul its strategy towards providing trade credit insurance to the metals industry and had to reclassify the sector to improve the level of cover. The Netherlands-based company even appointed a new senior underwriter with specific expertise in metals and the automotive industry to lead its metals team.
For all the caution and suspicion about credit insurers, there are signs that conditions have improved somewhat in the past year, albeit at a distinctly slower pace than the withdrawals during the economic crisis.
The availability of credit insurance has improved slightly since April 2009, according to some 41 percent of survey respondents, although 29 percent have still not seen any improvement and 21 percent say that conditions have even deteriorated sharply since April last year.
More surprising is the lack of improvement in the past six months. Some 45 percent of those who took part in the survey said there has not been any change in coverage since December, while only 34 percent have seen conditions improve. That said, only 9 percent said availability has fallen sharply since December 2009.
Credit insurers are starting to reinstate coverage on some accounts, market participants told AMM, although the limit of the coverage is significantly less than before the economic crisis.
The service center risk manager said he saw a pickup in the reinstatement of coverage of some of his customers in May. "I was surprised and pleased. They've come through, not with everyone they canceled but maybe 40 percent," he said.
Several hundred accounts were reinstated to up to $200,000, which is about half the amount before the crisis. But at least it is progress after the swathes of insurance withdrawals last year, when the risk manager's company had 25 to 30 percent of its customers' insurance pulled. "About 2,000 insured accounts were lost," he said. "We had about 1,400 left."
It may be a while before more widespread coverage and a higher limit are restored, though. "Everyone knows Ford (Motor Co.) is in better shape than a few years ago, but I would probably say we need to wait another quarter," he said.
It has taken time for the insurers to return, albeit tentatively, because they have been waiting for concrete financial data over several quarters before returning.
"(Cancellation of coverage) rates are improving a little, but any improvement takes place after (financial) results have been published, so there's a lag," the risk manager told AMM. "The whole economy will improve before credit insurance is returned."
While the insurers have had to work hard to understand the metals business, their customers in turn have learned to cooperate with them by increasing communication and sometimes providing up-to-date information to allay any concerns they have about their financial health, the survey showed.
Asked how they make certain they are still covered by insurance, an equal portion among respondents say they now spend more time discussing their business with their insurer, give them more up-to-date financial information or try to go some way to meet their demands for information. A smaller percentage—just 9 percent—give the insurers whatever they ask for and do so immediately.
While 46 percent have had no trouble providing the required information, 18 percent of respondents said they were unwilling or unable to supply the level of information required. Nine percent were reluctant to hand out sensitive information but said they have had to adjust to the changing business conditions, and 28 percent said they have not been asked for any more information than normal.
U.S. companies have shown themselves to be adept at finding alternatives to credit insurance, such as asking for tighter contract terms, shorter payment terms, good-faith agreements or securing letters of credit (LCs).
Some 31 percent have concluded that credit insurance is of no use to them, while 33 percent said it is still central to their decisions about who they will do business with.
In the U.S. steel industry, there is less of a tradition for credit insurance than in the scrap or distribution sectors, market participants said.
But there are regional differences, too, with European companies more likely to rely on insurance than their American counterparts. Some 46 percent of the international respondents to the survey said credit insurance is still central to their decision making, with only 15 percent deeming insurance unnecessary, the survey showed.
"There's a cultural difference between companies in Europe and the U.S. and their appetite for credit risk," a senior finance executive at a steelmaker told AMM. "American companies tend to be more entrepreneurial and more willing to manage their risk."
The service center risk manager agreed. "In the U.S., a lot of companies have credit departments and insurance doesn't play a key role in decisions," he said.
The steel executive said his company does not use credit insurance even when supplying the troubled domestic construction and auto sectors, instead relying on what he described as "creative solutions" to protect his company or not supplying companies whose credit risk is too high. For exports, he relies on LCs. After all, he said, insurance is expensive.
His company managed to come up with a deal with General Motors Co. to continue to supply steel and in turn buy scrap from the automaker throughout its bankruptcy without incurring a loss. His company is a secured creditor when it delivers materials into a construction site by lien rights.
For those that do use insurance, though, there is always the dilemma that plagues any decision to pay for the protection—some 21 percent of respondents noted that if they do get cover on a customer, it shows the customer is healthy and they don't in fact need it.
The comfort from the return of insurance, however small, may be short-lived, though, if the financial crises in Greece, Spain and Ireland spread across Europe. "If things get nasty in Europe, I can imagine they may pull cover just as quickly as they're handing it out again," a risk manager at a U.S. metals producer told AMM.
The weakness of the euro and the strength of the dollar will hurt U.S. exports, which could in turn derail the U.S. economic recovery, hurt companies' financials and dent their ability to get insurance, market participants said.
"What's going to happen to exporters? Auto sales have picked up, which is encouraging, but I don't think this will be a strong recovery," the service center risk manager said.