Cover tactics

Credit insurance has grown in popularity since the financial problems of the channel two years ago, but distributors are still reluctant to pay to cover all risks

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By  Andrew Seymour Published  July 13, 2008

This time a little over two years ago the Dubai IT distribution channel was in pretty desperate shape. Facing severe financial issues, a handful of resellers packed up their belongings and fled the market, leaving affected suppliers to clean up the mess from the unpaid debts left behind.

That incident prompted a rethink among distributors, many of which were forced to concede that they were guilty of extending too much credit to the market without installing proper contingency measures. Part of that rethink led distributors to explore the feasibility of purchasing credit insurance - a move designed to provide protection in the painful event that a customer is made insolvent or defaults on a payment.

Since those disastrous summer months in question, the profile of credit insurers in the market has also, perhaps unsurprisingly, shot up considerably. The likes of Coface, Atradius, Euler Hermes and others - whether alone or through local partners - have ramped up their presence in the field and reinforced the flexibility and value of their services.

All of the names above continue to negotiate with the region's leading IT distributors that don't yet have credit insurance, promoting the advantages of holding adequate cover in a margin-sapped trading sector where one major hit can have fatal consequences. As these insurers deepen their engagement with the IT channel and broaden their knowledge of the regional landscape I'm sure the policies they offer to the distribution community will become even more compelling.

For now, however - and even after the events of two years ago - I still sense reluctance from distributors to take the plunge when it comes to investing in insuring their credit. At a meeting of Middle East distributors under the umbrella of the TDA last year, only a quarter of members in attendance had existing credit insurance policies in place. Discussions I've had with some of these wholesalers leave me in no doubt that they still need plenty of convincing before credit insurance is perceived as a necessary and worthwhile tool.

As it stands, many distributors would rather rely on their internal credit management policies than stump up for a service that could eat into their already delicate profit margins and yet still not entirely cover them for bad debt.

Despite the assuring tones of the credit insurers, certain factors still present monumental obstacles - not least the cost of policies and, more poignantly, limitations in geographic scope. With affordable coverage in markets such as Lebanon, Egypt and even Saudi Arabia difficult to come by, distributors with a regional business plan remain frustrated at the lack of viable options.

In addition to that, complaints that there is still no such thing as ‘fully fledged' credit insurance - such as the sort you might expect to obtain when insuring motors or vehicles - and doubts over the local decision-making authority of insurers, continue to be heard.

If the insurers are serious about securing more business from the Middle East IT channel then something must give. They might be in the business of calculating risks, but their success with distributors, in particular, is going to depend on their ability to package credit insurance as more of a straightforward and economical commodity. Even though the ramifications of the credit crisis are etched on everyone's minds two years down the line, it would seem many distributors in the Middle East are prepared to risk the same fate again than splash out on insurance cover. Credit insurers, over to you.

3720 days ago
Joel LeBendig

Mr. Seymour is right on in mentioning that Credit Insurance can help protect a company's largest asset, because on the most basic level Credit Insurance is designed to protect your Accounts Receivables. In a slow pay, no pay, bankruptcy/insolvency, or political risk loss, Credit Insurance will pay you for what you're owed. So many companies that are buying credit insurance today are doing it because of the losses they've already incurred, the shape of the world economy or because it's just smart business. As an example, a company earning 4% net profit margin, that takes a bad debt hit of just $50k in a year, must have new sales totaling $1.25M just to break even! With Credit Insurance in place, that bad debt is paid by the policy not out of company reserves or future sales. And in the event of a large catastrophic bad debt or bankruptcy, Credit Insurance makes that much more sense. Credit Insurance does much more than just protect your Account Receivables. If you're with the right Credit Insurance provider, the policy will also help you grow your business by expanding sales to new and existing customers and greatly improve your bank financing. In regard to pricing, here's the generalities regarding Euler Hermes. The cost of a policy will range in price depending upon the market the policy holder is in, who they sell to and what their terms of sales are. As a rule of thumb the cost range can be anywhere from .15 cents per $100 to .75 per $100 sold. Or $15 to $75 per $10,000 transaction as an example. So the question is, who wouldn't pay $15 to $75 to insure a $10,000 transaction? For more information on Credit Insurance, feel free to contact me at joel.lebendig@eulerhermes.com

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