There was a time when the risks faced by risk managers werepretty straightforward—property, casualty, liability and workers'comp, but times are changing. Today, the principal threat to businesses is no longer fire,flood or theft. Now the greatest risk facing companies is creditrisk—the risk that a customer will go bankrupt owing a lot ofmoney. Credit risk, a financial risk rather than a physical risk,used to be handled by the credit department. But now, because ofthe magnitude of the threat, chief executive officers and chieffinancial officers are looking to their risk managers to take onthis risk as well. According to the American Bankruptcy Institute, more than160,000 U.S.-based businesses have filed for bankruptcy since 2008.Reuters reports there will be 50,000 more in 2011. Bankruptcylawyers as well are predicting 2012 will be “busy” and 2013 and2014 will be “very busy.” The sad truth is that many companies that fail are financiallysound; it's their customers that are not. Most American companiesderive 80 percent of their business from just 20 percent of theircustomers. When one of those big customers fails, they often taketheir suppliers down with them. There are four ways companies can address credit risk:• Demand that customers pay cash on the barrelhead. But that'sa non-starter. Customers will just go elsewhere.• Debt reserving – setting aside enough cash in case acustomer can't or won't pay bills. But that ties up working capitalat a time when banks are not lending.• Factoring—selling invoices at a discount, leaving theheadache of collecting to the factor. However, this cuts intoprofit margins and is potentially harmful to customerrelationships.• Credit insurance. Although it's very common elsewhere in theworld, many American risk managers have never even heard ofit. What is credit insurance? It's a way for businesses to protecttheir accounts receivables. For an affordable premium an insurancecompany will assume the risk in case a customer defaults. If acustomer goes bankrupt or is unable to pay, the company still getspaid. What's more, premiums are based on the customer's credithistory. HOW DO THEY DO IT? Credit insurers maintain extensive credit histories forliterally millions of companies around the world. They use thisvast amount of data to underwrite risks posed by customers to abusiness. Most often they will insure an entire portfolio ofcustomers. But if it's preferred, they can insure the cash flowfrom just a segment. While more than half of European companies use creditinsurance, only about one out of 10 American companies do. Butlately interest among American risk managers is way up. Inquiriesfor credit insurance have increased 25 percent over the past twoquarters. Why the sudden interest? There are two main reasons:Continued unease about the economy. Not too many months ago,the business community watched as thousands of otherwise healthycompanies went out of business. Of those that remain, many realizethat they could have been one of those dominoes falling in anunforeseen chain of bankruptcies. Since then, from a regulatorystandpoint, very little has changed. And now, the European debtcrisis offers the potential of yet another global recession. From“part of doing business,” credit risk has escalated to anexistential risk. The second and more optimistic reason for the growth of creditinsurance is the strong increase in U.S. exports. Especially amongsmall and medium-sized American companies, exports are up 29percent over the past two years. Credit insurance, also known astrade credit insurance, is by far the most cost-effective way toensure payment from overseas customers; no export-import bank, noletters of credit, no bankers, no foreign courts. FINANCIAL ADVANTAGES Foreign or domestic, companies using credit insurance quicklydiscover additional benefits. Perhaps the most pleasing tomanagement is a significantly improved financial profile. When acompany's accounts receivables are insured, banks are more willingto extend credit and at lower rates. In short, companies can borrowmore for less. Many companies also have found that credit insurance can helpthem increase their working capital. Because it does not have toreserve for bad debts, a company with credit insurance can use thatcash for working capital. Moreover, insurance is tax deductible,debt reserving is not. Credit insurance also enables companies to leverage theirworking capital. Most banks will advance a maximum 80 percentagainst an account receivable. But if the assets are insured for 90percent, the bank can loan more without increasing its ownexposure. An additional 10 percent working capital could be veryuseful, especially in an economy that is still critically creditconstrained. Credit insurance can also build-in some breathing room. Forexample, when accounts receivable fall behind and go past due,banks typically reduce a borrower's working capital. Creditinsurance can provide protracted default protection and keep thoseoverdue accounts on the plus side of the ledger book. With theknowledge that an outstanding invoice will ultimately be paid,either by the customer or a credit insurer, many banks are willingto view an unpaid, overdue bill as an asset. In addition to financial benefits, users of credit insurancehave also found it can help with sales. Because their accounts receivables are insured, companies canbe more aggressive with the credit terms they offer—better termsusually mean larger sales. Credit insurance enables companies totake larger orders than they normally would, or seek out newcustomers. It also gives the sales force a competitive advantage.For overseas sales, credit insurance is replacing the letters ofcredit which are slow, one-time instruments that tie up customers'credit. If something goes wrong, it's the credit insurer'sheadache, not the risk manager's. There is also an added benefit. Between reduced credit risk,improved financial position and increased sales, many risk managerswho have bought credit insurance find themselves in an unusualposition. Rather than being associated with a cost, they'reincreasingly seen on the revenue side. Rather than merely buyinginsurance products to transfer physical risks, risk managers areusing insurance tools to advance their company's overall businessstrategy. As we know all too well, the financial crisis has made doingbusiness much more complicated. Risks are much more complex,requiring risk managers to cross over from purely physical risks toinclude some elements of financial risk. While risk managers were not called on to provide thoseprotections in the past, they certainly are now.