Global trade credit insurer Euler Hermes recently announced the appointment of James Musters as managing director of excess of loss (XoL) for the Americas region.
XoL is less well known than the traditional trade credit insurance solutions, which Euler Hermes has been offering for nearly 130 years. Introduced by the insurer in 2012, XoL is a non-cancellable form of credit insurance, which provides flexible and innovative solutions to insulate companies from extraordinary and disruptive loss events.
Traditional trade credit insurance protects manufacturers, traders and service providers against losses from non-payment of a commercial trade debt. If a buyer does not pay (often due to bankruptcy or insolvency) or pays very late, the trade credit insurance policy will pay out a percentage of the outstanding debt. Trade credit insurance can prevent bankruptcies, help companies manage credit, and even present opportunities for business expansion.
“The value we see in that [traditional trade credit insurance] for our clients is that we’re helping them manage their credit, and we’re helping them identify trade and grow their business with new customers around the world,” said Musters. “We’re very much there to guide our customers, and so, we think of ourselves as more of a credit management solution than just insurance.
“We help our insureds identify new customers, we advise them on who they should be trading with, and we agree credit limits. If they face problems of payment, we get involved through our collections arm to help them collect the debt. And if all goes wrong, in the background, it’s insurance and we pay the claim. So, it’s very much a service we provide to our clients, where we’re helping them grow their business and helping them trade safely around the world. That’s regular credit insurance.”
XoL trade credit insurance is different in that it’s not necessarily suitable for all companies. It caters to larger companies with experienced credit management teams, who know their markets and the customers they’re dealing with.
“At Euler Hermes, we have a database of 80 million companies around the world that we actively monitor, but that’s not really of interest to our XoL customers because they know their business and they’re happy managing the risks themselves,” Musters told Insurance Business. “They don’t need the kind of support and backup that our traditional trade credit insurance customers get from us. They’re happy taking a certain level of bad debts and credit losses themselves every year, and they manage that as one of the risks to their business.
“What our XoL customers want is the comfort to know they’re not going to suffer any large, unexpected losses. The term XoL comes from the fact that the policies are usually structured so our customers would take the first [chunk] of losses themselves every year as a big annual deductible on the policy, and only once the losses exceed that level, that’s when the XoL insurance would step in. So, it’s more of a product that supports their credit procedures.”
Musters explained that the XoL customers maintain a high level of discretion over who they trade with and the credit limits they agree with customers. They also typically take collection actions themselves if their customers fail to make payments. Essentially, through strong internal credit risk management, XoL customers carry out the traditional trade credit services themselves, and they only want the insurance for when something goes drastically wrong and the losses exceed their expectations.
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Euler Hermes entered the XoL market in 2012 in the UK and 2013 in the Americas. While trade credit insurance is now very well-known in Europe, it is still an emerging solution in the US and Canada.
“We’ve had a big push over the last three or four years to grow the market in the US, in particular,” said Musters. “Obviously, we’d like to increase our market share, but more importantly, we’d like to grow the market as a whole. We estimate that in the US credit insurance market, there are about 20,000 companies insured across all the insurance carriers, and yet, we estimate there are 20 million companies who could be buying credit insurance. So, there’s huge market potential.
“That’s one of the reasons why we’re looking at developing XoL, because we have a lot of large uninsured US and Canadian companies (and lots of them are operating internationally as well) who already have these developed credit teams and credit processes that could support an XoL product. And mostly, they’re going uninsured at the moment, which means they’re used to taking a certain level of losses themselves, so they already have a tolerance and understanding of the risk. That’s where XoL comes in, and that’s why we’re looking to grow our team and really see where it can go.”