Risky business may be good business for insurance carriers in the construction industry, provided they make proper use of the tools available to them.
While limiting credit extensions was conventionally seen to be the first line of defence against such risk, new approaches to mitigate and manage risk are emerging.
Specifically, the law provides protection against credit extension, which could benefit insurers and brokers by reducing their financial exposure.
Proper and thorough use of the mechanics lien, which spreads credit extension risk throughout the constructing value chain, up to the point of encumbering the property itself, thus bringing down risk to almost zero. The credit-worthiness of an account then becomes a small factor in determining their viability as a client. Even high risk customers can become a potential market because the extension of credit is secured by an interest in the property.
There are also other measures that could mitigate risk in dealing with such accounts, including personal guarantees, joint cheque agreements, letters of credit and credit insurance.
To address growth in this market segment, a carrier must maximise the use of two departments.
These are the sales and credit departments. Sales and marketing brings in new customers, while credit manages financial risk and collects unpaid debts.
While their functions may seem to contradict each other, they are actually complementary. With business from sales coming in, the credit department makes sure that carriers get what is due to them by making sure accounts are paid on time.
