Accounts receivable (A/R) is a company’s largest uninsured asset, said James Stewart, Esq., partner with Lowenstein Sandler. Credit insurance is a great weapon in a creditor’s toolkit to reduce the risk of A/R loss. It’s a risk mitigation tool when dealing with financially distressed customers, said Bruce Nathan, Esq., partner with Lowenstein Sandler.
Stewart and Nathan led a webinar on the topic for FCIB to help credit professionals know where they stand when it comes time to get paid. Credit insurance is designed to protect against unexpected loss like any insurance would, said Stewart, yet it is not intended to make you whole should a customer default or become insolvent; there is a difference between the two.
Not all policies are alike, and it is important to customize them for the company’s unique risks. Some of the risks covered include insolvency and political/country instability. Insurance can cover a single debtor or a larger group and multiple accounts.
Within credit insurance are two approaches: cancelable and noncancelable coverage. Under the cancelable coverage the insurer acts as an extension of the policyholders’ credit management team, according to the webinar. The two work as a partnership in which the insurer measures customer creditworthiness and approves credit limits above the discretionary credit limit. If during the term of the policy the credit risks change, the insurer can reduce or cancel further credit extension. One of the major differences with noncancelable coverage includes the insurer not being able to cancel buyer limits during the policy period.
Some benefits of credit insurance include protecting against large accounts. “For most companies, 80% of business comes from 20% of customers,” said Stewart. Credit insurance also enhances credit management and improves access to financing, among other uses.
Credit insurance is not free—there are some costs involved to maintain the policy and relationship. Co-insurance is a percentage of the overall loss the policyholder must bear, according to the webinar. It is typically 10%, added Stewart. The deductible is the amount the policyholder pays before the insurance kicks in.
It is important to remember the initial policy language may favor the insurer, so it is best to work with a legal professional to help modify the policy. The policyholder must be proactive to understand the policy, and as Nathan said, not put it in a drawer like he does with his home and auto policies. Negotiating with the insurer can help avoid uncertainties. Nathan and Stewart both agree the policy should cover anticipated risks, and business should know what they want covered.
Chris Kuehl, Ph.D.
For 16 straight quarters, the Mexican economy has been growing. The latest numbers show that last quarter growth was 0.6%, 1.8% faster than it had been last year at this time. The annual growth rate at this point is 2.3%, right about where the analysts and the government thought it would be. This is impressive enough, but it comes at the same time that many assumed Mexico would be taking a nose dive due to the controversy over the future of its relationship with the U.S. The growth has also been taking place at the same time that industrial activity has been down, a development related to concerns over NAFTA talks. The good news for Mexico has been that employment has been rising, which has had a very positive impact on consumer spending. The service sector is carrying the economy right now—somewhat unusual for Mexico. The question at this point is how long the good news will last. There are many issues that threaten to compromise the economy’s growth in the months to come. Most of these are out of Mexico’s control.
At the top of the list of factors that could derail the growth seen thus far is the relationship with the U.S. The economy of Mexico remains very dependent on trade with the U.S. It has been concerned about a trade pattern that has dragged industrial production down in the last several months. Manufacturing has overtaken the energy sector, remittances from Mexicans working in the U.S. and tourism as drivers of foreign earnings. The percentage of the population working in manufacturing has been rising steadily, but still remains far below those in agriculture or the service sector. These are among the highest-paid jobs in the country, however, and much has been done to promote manufacturing as Mexico’s future. The view in the U.S. is that this is coming at the expense of manufacturing in the U.S., but this is no longer true and may never have been. The manufacturers setting up in Mexico have been coming from all over the world, and this includes China. It is now cheaper to hire workers in Mexico than in most of coastal China. If the target for that product is the U.S., transportation costs are far less. The outcome of the NAFTA talks will be a major factor as far as expansion of the Mexican manufacturing sector.
The energy sector was once dominant in Mexico. It does remain a vital part of the country’s GDP, but the same woes that have affected the other oil states affect Mexico. The price per barrel is not where it needs to be to keep the sector profitable—it is certainly too low to encourage a lot more development. The U.S. has traditionally been the main buyer of Mexican oil. Now that the U.S. is the world’s largest producer on any given day, there is not the demand there once was. The development of oil has stalled to some degree and it isn’t likely to come back until the global glut of oil is eliminated.
At one time, tourism was the second-largest income earner for Mexico. It still remains a very important factor as far as employment is concerned. This sector has seen a major decline as well. The main problem is that tourists from the U.S. have stopped coming in the numbers they used to. There are concerns about crime and there is a general antagonism between the two states that has affected tourism. The other factor has been that a slow economy in the U.S. has left people with less money to travel. Earlier in the year, the dollar’s strength made it attractive for U.S. tourists to go to Europe and Asia. Many who might have gone to Mexico opted for these destinations.
In addition, the drug wars continue to create major issues throughout the country. Over the last few years, communities that are not accustomed to being in the middle of this conflict have been dragged out of their sense of security. Major tourist cities are affected as is Mexico City. Even the industrial cities are being affected to varying degrees. The drug wars have once again become a focal point for the elections.
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News & Updates from Credit Risk Insurers & Banks
Atradius: Market Monitor on Steel and Metals 2017
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Strategic Global Intelligence Briefs
The United States widened sanctions against North Korea by going after companies in China and Russia that it accuses of aiding North Korea’s nuclear weapons program.
“It was the fifth set of U.S. sanctions related to North Korea this year, and the largest,” The Washington Post reported.
The new North Korea-related sanctions target “Chinese and Russian firms and individuals for supporting Pyongyang's weapons programs, but stopped short of an anticipated focus on Chinese banks,” Reuters reported.
“The hope is that these companies will pressure the governments in Beijing and Moscow to end the Pyongyang threat so that these limitations will be lifted,” said NACM Economist Chris Kuehl, Ph.D. “The response from China and Russia has been predictably angry, but there is also some evidence they are both trying to gain some control over Kim.”
Six Chinese-owned entities, one Russian, one North Korean and two based in Singapore were designated, including a Namibia-based subsidiary of a Chinese company and a North Korean entity operating in Namibia, the Reuters article states. Individuals included four Russians, one Chinese and one North Korean.
“The sanctions target third-country companies and individuals that assist already-designated persons who support North Korea’s nuclear and ballistic missile programs, deal in the North Korean energy trade, facilitate its exportation of workers, and enable sanctioned North Korean entities to access the U.S. and international financial systems,” according to a U.S. Department of the Treasury Aug. 22 press release. “Any property or interests in property of the designated persons in the possession or control of U.S. persons or within the United States must be blocked, and U.S. persons are generally prohibited from dealing with them.”
Russian Deputy Foreign Minister Sergey Ryabkov in a statement released on Aug. 21 accused the U.S. of systematically destroying bilateral relations, referred to sanctions as a hindrance to resolving real problems and acknowledged that there would be retaliatory measures.
Russia is one of five countries that the latest International Credit & Collections Survey is covering. Other countries include France, Germany, the Netherlands and Turkey. Any credit professional who participates in the survey, which just takes a few minutes to complete, will receive the full results, including a view of payment trends for these countries over the past few years.
Sep. 23 – New Zealand, New Zealand House of Representatives
Sep. 24 – Germany, German Federal Diet
Oct. 10 – Liberia, President
Oct. 10 – Liberia, Liberian House of Representatives
U.S. imposes first economic sanctions against Venezuela. The U.S. imposed its first economic penalties against Venezuela on Friday, hitting the South American country’s financial sector in an attempt to starve President Nicolás Maduro’s government of cash. The Trump administration banned trades of Venezuelan debt, prohibiting Maduro’s government and its state-run oil company, Petróleos de Venezuela SA, from selling new bonds to Americans or in U.S. financial institutions. (Miami Herald)
Egypt slams U.S. for withholding aid. Egypt ripped into the U.S. for withholding almost $300 million in military and economic aid, a decision that soured the atmosphere as Senior White House Adviser Jared Kushner met with Egyptian officials to discuss restarting Israeli-Palestinian peace efforts. (Bloomberg)
Brexit bill gets bigger as euro strengthens. As Britain’s pound declines against the euro, talk has begun to circulate about the potential for parity. Less noted, however, is the fact that the more the pound weakens and the euro strengthens, the more the eventual leaving bill Britain will pay the European Union may cost. The bill in pounds, if it came today, would have risen nearly 17% since the vote to leave the EU in June 2016. (Reuters)
NAFTA talks set to move forward after Trump suggests deal might be impossible. President Donald Trump said this week that the U.S. would “probably” withdraw from the North American Free Trade Agreement (NAFTA) at some point, issuing the remark just days after talks to renegotiate the trade deal began. Representatives for Canada, Mexico and the U.S. met in Washington for five days of negotiations last week, and talks are scheduled to resume in Mexico City Sept. 1. (Lexology)
Espenilla: Philippines not in midst of foreign exchange crisis. The Philippine central bank is in firm control of the peso and is confident that the country is not facing a foreign exchange crisis, its governor said on Aug. 25, as the currency hovered around 11-year lows. "We allowed the peso to adjust moderately and gradually, but I can assure you the [central bank] is in firm control of the exchange rate," Nestor Espenilla told a business forum. (Nasdaq.com)
Qatar restores diplomatic ties to Iran amid regional crisis. Qatar restored full diplomatic relations with Iran early on Aug. 24, disregarding the demands of Arab nations now locked in a regional dispute with the energy-rich country that it lessen its ties to Tehran. (Business Mirror)
Angola's ruling party handily wins election, provisional results show, but opposition cries foul. Angola’s ruling PALM party convincingly won the general election, the electoral commission said on Aug. 25 citing provisional results, but the main opposition rejected the outcome. The PALM took 61.1% of the votes counted compared with the opposition UNIT party’s 26.7%, results showed. (Reuters)
Turkey will never be EU member under Erdogan: Germany's Gabriel. Turkey will never be a member of the European Union as long as it is governed by Tayyip Erdogan, German Foreign Minister Sigmar Gabriel said on Aug. 24, accusing the Turkish president of failing to take accession talks with the bloc seriously. His remarks in an interview with mass-selling newspaper Bild are likely to further inflame relations between the two NATO allies. (Reuters)
Beyond Fintech: A pragmatic assessment of disruptive potential in financial services. For years Fintech has been the hottest topic of discussion in financial services, with incumbents, regulators and consumers all asking the same question: “Will small technology-enabled “fintech” start-ups redefine the way that banks and insurers operate and upend the competitive landscape of the industry?” (World Economic Forum)
Fitch: Global credit growth to stabilize in 2017; low macro-prudential risk in most markets. Global credit growth in 2017 is likely to stabilize following a slowdown in 2016, but remains at a record low since the global financial crisis of 2008, says Fitch Ratings in its latest Macro-Prudential Risk Monitor. (Fitch)
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations