As insolvencies rise, are broker driven TCIs the antidote?

As insolvencies rise, are broker driven TCIs the antidote? | Insurance Business Australia

As insolvencies rise, are broker driven TCIs the antidote?

The number of insolvencies in Australia is going up. During the COVID-19 pandemic, the Australian Tax Office (ATO) stopped pursuing debts and government assistance like JobKeeper and stimulus to the tune of billions of dollars helped keep businesses afloat.

Now, much of the government help is over and the ATO is collecting again.

“During the pandemic so much cash went into the economy from governments and a lot of businesses were uncomfortable about putting the pressure on their customers to chase up overdue debts,” said Adelaide based Kirk Cheesman (pictured above), group managing director of National Credit Insurance (NCI), a specialist trade credit insurance (TCI) brokerage.

Cheesman said that since February, he’s seen an uptick in collection actions and overdue reporting.

“At the end of 2021, Australia experienced a couple of large insolvencies in the construction space, which meant at NCI we received our highest level of claims for two years in March,” he said.

Cheesman also noted the cost increases in materials, supply chain pressures, ongoing COVID interruptions, interest rates increasing and higher employment costs. Not to mention the record floods across the east coast that destroyed many businesses and produced another record number of claims.

Read next: Trade credit insurance an “opportunity” for SMEs

“We're starting to see those indicators and some pressure on the economy coming back in," said Cheesman.

TCI is a common product across Europe but not in Australia. Cheesman said it can save a business and he’s looking to educate more general brokers about it.

He agreed when Insurance Business suggested that this hands-on insurance product is well suited to brokers, partly because it’s not something that can be spat out by an algorithm. Cheesman said some technology and assessment tools are involved but automated TCI quotes are rare.

“The broker is really intensely involved in the negotiation of a trade credit insurance policy,” he said.

Cheesman ran through what a broker needs to do when they are organizing TCI for a client.

“The broker has to sit down, typically with the CFO or the credit manager of the business, and go through the whole process of how they onboard a new customer and assess that customer,” he said.

Cheesman added that this discussion would need to cover what potential legal actions the client would take against customers who owed them a debt. 

“There are a lot of processes, from filling out a credit application form to onboarding that customer, to assessing their credit capabilities, to then working out what their terms of payment are and what TCI products they are suited to,” he said.

Then the broker would need to educate their client about what happens when one of their customers fails to pay them. 

“That's where a specialist broker will assist the insured via a collections team on how to follow up an overdue debt and still be compliant with their insurance policy,” said Cheesman. “If the client still can’t get paid, the broker’s role is to help the client wind up their customer and get paid from the insurer,” he added.

Cheesman said this involves a lot more than just assessing a customer list and negotiating insurance coverage.

“You're not just dealing with an Allianz or a QBE. Many of the insurers of this product are specialist insurers, so you have to know who they are. A number are European, so they have offices in Australia, but they have head offices back in Europe,” he said.

There are no standard wordings for TCI policies, Cheesman said, which also has a bearing on the coverage.

“You really need to know five or six different insurers’ wordings and you need to know the whole process of how to onboard a client and how the legal system works for chasing an overdue debt,” said Cheesman. 

When NCI is preparing a TCI policy for a client, they check the client’s customers against their database.

“We've got over a million entities or companies on our database, and within seconds, we can wash that and say who's good and who's not,” said Cheesman.

In this TCI context, ‘wash’ means to check.

“Usually, 95 customers out of a 100 are fantastic, but if we've got adverse on five of them, that indicates a potential problem,” he said.

Having an ‘adverse’ on a business means having an unfavourable credit history.

“Our system will highlight any concerning credit factors linked to individual companies,” said Cheesman.

“We take their debtors aged trial balance and we wash that against our database, and within seconds, it will give us a grading and tell us if there is an adverse on those customers, or if they’re good, or if they’ve got insurance coverage, so they’re not a problem,” he explained. 

If there is an adverse on one of their customers, the client would need to put risk management measures in place or have them excluded from the TCI coverage.

“For us, from a debtor perspective, we’d go and obtain their financials and speak to their financiers and find out more about their cash flow or [if they’re] about to receive an injection of more capital,” said Cheesman.

The broker would also take this a step further, he said, and investigate how this customer of the client is behaving with their own customers. 

“Maybe they can't pay the broker’s client because they've got overdue debts themselves, or maybe the floods impacted them,” said Cheesman.

The NCI group managing director said they go “very in depth into the risk” when they are preparing a TCI policy.

“Premium is only paid if the insurers cover that risk, so we do everything we can to try and make sure the client is insurable,” he said.

In some cases, a client’s customer will be uninsurable.

“The insurers exclude that risk, but we'll be able to tell that client prior, and then they might still want to continue to trade with that customer uninsured,” he said. “It might be that they trade at a credit limit of a million dollars and we can get $500,000 of that insured but not all of that amount,” he added.

Cheesman said this intelligence is a big benefit of TCI.

“It's going to tell you who the good customers are but also who the potentially bad customers are,” he said.

Read next: 'Huge opportunity' in widely undiscovered trade credit insurance market

Cheesman said brokers who partner with NCI have access to their database of businesses and help when they need it.

“Absolutely. We would work with them [other brokers] using our database and knowledge pool to help them get the deal over the line,” he said.

This contrasts, Cheesman said, with general brokers who rely solely on insurers. Those brokers would normally send a proposal to the insurer and then be at the mercy of the insurer’s feedback without such a thorough knowledge of the business reasons for the insurer’s decision.

“With over three thousand trade credit insurance clients if an insurer came back to us and said they’re not going to cover that customer we could use our system and perhaps find out that they are covering it for 20 of our other clients. So we’ve got that intel to benchmark,” he explained.

Cheesman said NCI is looking to educate more general brokers about the benefits of TCI.

“Our whole rationale at NCI is to educate and spread the word on trade credit insurance and help general brokers to understand this product,” he said.