Credit insurance one step ahead of rating agencies, Aon claims

26 February 2009

Business

Aon Trade Credit has said it is in a business's interest to work with credit insurers over and above ratings agencies in order to establish credit capacity.

The credit insurance broker said that following a shift in power, credit insurers have taken over the mantle in determining credit worthiness.

While ratings agencies play an important role, Aon said insurers are one step ahead as they use historical data and the latest payment and management information, while also taking a wider view from buyers' business models, future strategies, and assessment of companies of all sizes.

Aon account director James Bowker said the availability of credit insurance is a key factor in maintaining supply chains and extending credit facilities.

He said: "This is in a way that rating agencies cannot do as they do not take risk but provide their view of it.

"Credit insurers are exposed to the whole market, from sole trader to international business, whereas rating agencies tend to be more corporate focused."

Paper merchants have traditionally credit insured, and they are experiencing "unprecedented levels" of insurance cover removed on their debtors, according to Bowker.

"This is due to all underwriters taking risk adverse measures. It is important that all parties act to ensure the most up-to-date financial information is provided and a decent level of communication is maintained."

An increasing level of insolvencies in the print sector has meant that credit insurers are being much more stringent in assessing a company's creditworthiness. This has inevitably resulted in a reduction in cover in volatile sectors.

However, Bowker said that if underwriters' losses continue to rise, it is possible they will take a more stringent stance than at present.

Credit-checking organisation ICSM said it is no wonder that insurers are tightening up their game with tight margins, overcapacity and extended credit terms.

Rupert Rudd, director at ICSM, said: "Any information, over and above conventional credit reports, is vital when assessing and managing risk, whether the risk lies with the underwriter, or the uninsured supplier."

He added that credit insurance is becoming more of a necessity in today's marketplace but it is increasingly difficult to get hold of and limits are being reduced or withdrawn.

"Many smaller suppliers looking to insure have an unrealistic expectation of both the scope, and level of cover available.

"Some even see it as a licence to trade at somebody else's risk. Insurers are not prepared to write cover on dubious risks unless either secured, or as part of a spread of far lower risk."