Policy change

IT distributors made their disdain for credit insurance providers quite clear last year, accusing them of hiking premiums and reducing cover at a time when the economic downturn had left them massively exposed to bad debts. But with concerns over the market liquidity situation finally beginning to cool, relations between both parties appear to be changing for the better.

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Policy change Leroy Almeida, Al Mulla Atradius Insurance Consultancy & Brokerage.
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By  Piers Ford Published  November 13, 2010

A year is not such a long time in credit insurance, it would seem. In 2009, credit insurers were markedly reluctant to deepen their relationship with the distribution channel, so badly burned were they by business failures during the economic downturn.

At the same time distributors, frustrated by rising premiums and plenty of anecdotal evidence of cover being pulled without warning, were wondering if credit insurance was simply an expense too far. Today, while there are signs of a cautious thawing in attitudes on both sides of the divide, and the imperative for credit insurance as a business-enabler for distributors who operate on single-digit gross margins has hardly diminished, there are still undercurrents of unease.

“As signs of a turnaround in IT spending slowly begin to emerge, more distributors in the Middle East are getting exposed financially and are finding out that credit insurance premiums have gone up and have become almost unaffordable,” says Khalil Khan, VP finance at Oracle distributor Tech Access.

Guy Whitcroft, consultant at Capital Steps, and a former COO of distributor Aptec in Dubai, says credit insurers were hit very hard by the downturn and the level of defaults on which they had to pay out. “It is rumoured that their payouts in the region typically represented five to 10 years’ worth of premium income,” he comments.

“Given that their job is to protect their clients — the distributors in this case — against potential bad debt, it was logical for them to dramatically reduce the cover they could provide on many accounts, particularly those with significant exposure to end-users that were showing an inability, or unwillingness, to pay their accounts.”

Whitcroft says that while this reduction in cover put strain on distributors’ ability to make vendors’ targets and so get the rebates on which they depend for their bottom line performance, the insurers had very little choice in the circumstances.

Credit insurers in the region report that in many respects, this situation remains unchanged across the Middle East, although there have recently been glimmers of improved prospects, according to some.

“Lack of liquidity in the market has been a major constraint last year due to the change in bank lending,” says Anil Berry, country CEO at Euler Hermes Credit Insurance in Dubai.

“As a result, payment morality changed dramatically. We have seen some small time traders being forced out of the market due to lack of liquidity and even some major players being unable to pay off their debts. Project delays set off a chain of ‘overdue’ in the market and some of the major solutions providers were held up, as they weren’t paid on time.

“However, the market has contained the crisis quite well, especially the SMBs where, at Euler Hermes, we had a considerable amount of exposure. We also saw the market being more transparent and willing in terms of financial disclosure in the past year.”

Euler’s strategy earns a nod from at least one distributor. Ali Baghdadi, CEO at Aptec, has noted an increase in staffing levels and customer visits: “They [Euler] have remained very conservative, but we have not seen the same reductions as last year. There are indications that they have started to increase their risk exposure, but very selectively.”

Part of this marginally more relaxed approach appears to stem from Euler’s patience in finding an alternative resolution to foreclosure for debtors. Berry concedes that losses have been incurred but says it is pleasing that distressed buyers have been willing to settle debts after Euler’s intervention as an alternative to exiting the market.

“We have successfully negotiated settlements for overdue debts from buyers, in particular in the UAE and Saudi Arabia, and in some cases enabled trade to continue,” he explains. “We have only made modest increases in premiums over the last two years — in the region of 10-20%. At the same time, we have made a significant investment in the Middle East to support the growth of our clients in the sector. In addition to expanding our office in Dubai, we have opened further offices in Saudi Arabia and Bahrain, and since the beginning of the year we have increased our risk exposure by over 20%,” he says.

At another credit insurer, Al Mulla Atradius Insurance Consultancy & Brokerage, business development manager Leroy Almeida says things have improved during 2010, although he suggests the IT market should still be approached with caution.

“In comparison with 2009, when granting credit was extremely difficult due to an uncertain trading environment and the impact of the global financial crisis, I believe that the first half of 2010 saw improved levels of credit risk appetite returning to the IT channel, which in turn improved trading conditions,” he says.

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