Insurance is a great way to help manage your export risk. David Huey looks at options that can make the difference between success and catastrophe.
Growing your international client base is an exciting and potentially lucrative opportunity, but with increased growth comes increased risk. Are you covered? Transporting and delivering goods, currency fluctuations, language barriers, different business regulations, political and economic instability in dealing with unknown customers, and debt defaults are some of the issues exporters face.
These risks shouldn’t stop Australian businesses from capitalising on opportunities in the global marketplace, particularly those in the emerging second-tier markets, as long as these risks are managed and minimised.
The first step in risk mitigation is to get to know your target market and customers. Exporters can access general information on political, legal, and regulatory conditions from local government 5agencies. In addition, these agencies can introduce you to potential business partners and local professional services at no charge so you can explore the competitive market before making any commitment to that country.
As a more detailed and tailored information gathering process, business intelligence experts with on-the-ground resources can provide more specific information on the high-level economic drivers in each market, as well as gathering intelligence on individual buyers and their credit history.
In many cases, these agencies can visit your potential customer to add personal knowledge and interaction to publicly available data.
Next on the list for aspiring exporters is to decide whether or not to take out insurance. Insurance is one of those business tools you generally buy grudgingly and hope you never have to use. Many companies tend to think of insurance as a consolation prize if things go wrong, but insurance actually means much more than this. It is a business decision that not only protects your profits but can also guide you to new and profitable markets, guarantee and improve your cash flow, increase your chance of external funding, and allow you to offer more attractive payment terms than your competition.
Exporters can insure their business in various ways, starting with insuring their goods. Companies supplying goods overseas may choose cargo or marine insurance that covers potential damage or loss of goods while in transit. However, this doesn’t insure companies against loss of business if a client chooses another supplier due to damage or loss incurred in transit.
You can also look at insuring payments. Credit insurance, or trade insurance, insures your business against customer insolvency and payment default. Businesses may choose to protect themselves for insolvency of the buyer and non-payment or payment default for both domestic and export trade. This protection can be very important if a large customer becomes insolvent and threatens the viability of your business.
Global competition means many exporters now have to provide open accounts or 30-day terms and, in fact, recent research we have conducted shows overseas buyers may take from 27 to 80 days to pay for goods and services supplied. So, protection against payment defaults can remove the worry from this waiting period.
Knowing your cash flow is protected means you can focus on revenue goals, margin targets and competitive pressures, while the insurance companies look after the receivables risk.
In addition, credit insurance can protect business against political risks. This covers a number of issues from foreign government interference including prevention or delay of payment, disruption of work-in-progress, and repudiation of a contract. These may be important issues when dealing with countries with recent or current political instability.
In addition to their market intelligence, many global credit insurance companies also offer local debt collection services through their on-the-ground resources. This can be valuable for exporters dealing with a large number of countries and separate political, legal, and commercial risks in each market.
Typically, insurance costs less than half a percent of a company’s total insured sales (either products or services), which is a small price to pay for peace of mind.
Research from the Department of Foreign Affairs and Trade (DFAT) suggests only 10 to 15 percent of Australian exporters use credit insurance compared with a much larger figure in Europe, where it is seen as the first line of defence.
Still in its infancy in the US, Australia and New Zealand, credit insurance is growing in popularity, especially with companies seeking to set the pace in the emerging second-tier markets across Asia and Eastern Europe. This is also relevant for companies who trade over the internet, another rapidly increasing marketplace.
Insurance can also provide additional benefits to the bottom line by giving you the ability to extend more credit to customers and expand sales without expanding risk. And it can allow you to use insured accounts receivable as collateral when negotiating better costs in financing your business.
Whether you are exporting domestically and internationally, and whether you export goods or services, insurance is relevant to you. There’s a wide range of products on offer providing varying levels of cover depending on your particular needs.
Every business consults its lawyers and accountants about risk mitigation, we recommend you involve your insurance company too, and be fully prepared. It’s important to protect what you have worked so hard to build.
Large or small, every exporter needs a risk mitigation strategy of which insurance is a critical component. Start with a simple matrix of potential risks. In addition to credit, financing and goods insurance, you might need to consider political risks, legal risks, graft and corruption, and quarantine compliance.
This is a good way to identify the probability of risks occurring and what their likely impact would be on your business.
Creating the matrix will help identify and prioritise your major exposures, particularly insurance-related risks, and it will assist you to determine which insurance products are needed to protect your business against catastrophe.
Most importantly, keep your risk management plan clear, concise, and current, and make sure it is a priority for everyone in the company.
Brian Kelly, general manager of Mt Erin Pacific (a New Zealand-based manufacturer and exporter of premium fruits and vegetables) can attest that at times of payment default, no matter how well organised and established your business is, having the right kind of insurance can save your business.
"Insurance ensures that if a customer defaults, the business remains viable," says Kelly. "The number of defaults is low, but it is like insuring your car against damage. One hopes never to have to claim on a house fire, but the security and comfort factor is the reason for insurance."
Mt Erin Pacific has only had to make a handful of claims in the 20 years it has been carrying credit insurance, but at these times their preparation was key in keeping their business viable. In one instance, a large default arose from a trading partner in an export market. The loss was covered by the company’s credit insurance, and so instead of suffering a major loss the claim was paid and business continued as usual.
"Over my 20 years with this business, credit insurance has been called on to cover five defaults, three locally and two internationally," says Kelly.
He has a general rule of thumb when it comes to credit insurance: "Like all insurance, from buildings to car and life insurance, the question you must assess is: in the worst-case scenario, can you afford the loss and carry on as if the loss was of no real consequence? If the answer is yes, then you don’t need to insure. If the loss could be a pr
oblem, then the natural answer is to insure. This applies to all business types."
* David Huey is managing director for Atradius, Australia and New Zealand, a leading credit insurance and credit management company (www.atradius.com/au).