Who says there are no new frontiers in insurance? The economic crisis, coupled with a greater emphasis on exporting, has rekindled interest in an underutilized insurance product which also presents an exciting new opportunity for agents: credit insurance.
Although most companies' largest assets are their accounts receivables—the money owed them by customers—few bother to protect themselves against the risk of customer default or insolvency. Yet for many companies, if just one major customer was to default or go bankrupt, it could spell their own doom. Indeed, the risk of a serious or even ruinous default by a customer is more likely than theft, fire or flood.
Despite this very real peril, only about 1 in 10 American companies buys credit insurance, compared with more than 50 percent of European companies. But since the beginning of the economic crisis, interest in credit insurance has reached an all-time high.
The product itself is relatively straightforward. If a customer defaults, your client still gets paid. The task of collecting is left to the insurer. Typically, credit insurance is written to cover all of a company's customers over the course of a year. Premiums are based on the number and creditworthiness of the company's customers. Customers with a checkered credit history are riskier and cost more. Certain industry segments may also constitute more risk and are priced accordingly.
But even businesses with a good distribution of customers with strong credit histories still buy credit insurance. Mitigating the risk of a bad debt is just one of the benefits. There are many more.
Many companies use credit insurance as a financial tool to improve their own credit profile. With their accounts receivables insured, banks are willing to offer them much better terms for financing. In fact, some banks even require companies to obtain credit insurance as a condition of lending. Indeed, bankers frequently refer customers to knowledgeable insurance agents so they can buy credit insurance.
Many companies are now finding that credit insurance serves yet another important function. With domestic markets saturated, American companies are increasing exports. Foreign sales by small and medium-sized companies are up 20 percent this year alone. Many of them are finding that credit insurance is a must. First, it protects the exporter from non-payment or customer insolvency. It also is much faster and easier to use than old-fashioned credit risk mitigation tools like letters of credit, which can tie up customers' bank accounts. But the unexpected dividend is the ability to compete head-to-head with foreign competitors.
Even when they offer a superior product at a lower cost, many American companies are losing out to foreign competitors because the competition is offering customers better credit terms.
In today's global economy, it's a buyer's market. And for foreign buyers, credit terms are a very important part of the sales process, much more so that in the U.S.
Those competitors can offer better terms because they have credit insurance. With their accounts receivables insured, they can negotiate much more aggressively knowing those insured accounts will get paid one way or the other.
Most of the larger credit insurance companies maintain credit histories on literally millions of companies. They can help your clients decide who they should and should not extend credit to. Some can even assume responsibility for collections.
For the client, the benefits of credit insurance are impressive: protection against non-payment, better financing terms, the ability to bargain aggressively. Once customers understand the advantages, selling credit insurance is pretty easy. Most of the larger credit insurance carriers provide coverage through agent networks.
Credit insurance is a good way to increase agency revenue while costing the client relatively little or nothing. Some clients, when they take into account the savings and opportunity credit insurance generates in more favorable financing and increased sales, come to think of the product as a profit center.
For a smart and aggressive insurance agent, the benefits of credit insurance are a compelling way to get a foot in the door of a new client—maybe even your client. That's why it's important to make your client aware of credit insurance before your competitor does.
Despite the benefits and increased interest in credit insurance, many agents are reluctant to sell what they consider a non-traditional product. If you consider credit insurance a sophisticated financial product, you're right—but that shouldn't stop you.
Most larger credit insurers have easy-to-understand sales guides and sponsor frequent sales seminars. Their specialist agents are happy to visit with your clients while respecting the relationship you have built with them over the years. And the underwriting process is quick and efficient. In many cases, the information can be taken over the phone.
Like it or not, the economy has changed for good. Market conditions are much more volatile. Credit will remain tight for the foreseeable future. Clients will need better solutions to protect their businesses.
For agents, credit insurance represents a great opportunity for growth while serving the best interests of your customers. Ignoring credit insurance and sticking with the traditional products is like leaving the door wide open to the competition.
Your clients are learning more and more about the advantages of credit insurance and they're surprised at how little it costs. If you can't provide it, they'll find somebody who can.
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