Understanding credit insurance

Dear Thea,

Do you have any experience with credit insurance? My boss was at a conference and heard a speaker talk about the benefits of credit insurance on accounts receivable and now he is convinced it is something we should seriously consider. I have never utilized it and don’t know much about it. If we have credit insurance on the accounts receivable is there any reason the company would still need me? Any insight you could give would be appreciated.

Signed, Unassured in Idaho Falls

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Dear Unassured,

I love when a colleague (or worse yet, a boss) goes to a conference and comes back with the “idea of the century” and very little else. No details, no other information. Just their helpful little nugget they heard and wanted to share. I equate it to someone dropping some LBS at my door and expecting me to deal with it, full report included. For those of you unacquainted with the phrase LBS = leaky bag of “stuff.”

Let’s get your most important question out of the way. Yes, your company would still need you. Don’t let fear be the driving factor in how you run your credit department. Whatever path your department takes, it will always need a talented professional driving it. With that question out of the way, let’s tackle the heart of your email.

Is credit insurance worth it? That depends. It depends on your customer base, credit philosophy, what your staffing is like, how you justify your numbers—and any other number of factors. I have some credit managing buddies who swear by credit insurance for their receivables. It also depends on how you have your policy set up, how well you understand the ins and outs of how your policy works. What is the “end cap” of what you would have to pay for each infraction? What are the timeframes involved? What can or can’t you do? What accounts are covered and who is not and why? Those are the main questions. If worked correctly, credit insurance can be a viable option for a company.

Personally, I have used it for international sales by choice and nationally by inheritance. I do hate a learn-as-I-go program, so the inheritance scenario was tough for me. Keep in mind, any insurance is still insurance. They are a business just like any other. Neither wholly evil, nor wholly angelic.

If you are seriously considering credit insurance for your accounts receivable, or just want to do some due diligence for your boss, start with an analysis. What has your bad debt been year over year for the past five years? Now compare that to the cost of the credit insurance policy. This is where the homework comes in and what is usually not addressed until you are using it for a claim and then the “unexamined” parts come up.

1.     Is there a cap or limit on the number of claims you can have?
2.     Does every account opened need to have their insurer’s approval?
3.     If so, what do they need EXACTLY to make a decision?
4.     What collection steps is your company required to take before your turn in a claim?
5.     Does the insurer have a period of time to try to collect before they pay out your claim?
6.     Is there a deductible? How much? Does it apply to each claim or once you hit the deductible amount you can process unlimited accounts with no further cost?

Those are a just a handful of questions to get you started. If you are truly going to compare, then gather all the data and take as objective a look as you can. Then get with your CFO and bounce the entire kit and caboodle off of her. What makes sense for your company?

Once you have all your ducks in a row, then you can circle back around with your boss and have the conversation, complete with your insight, analysis and recommendations. Try not to lose your mind when he says, “it was just an idea,” shrugs and moves on to another topic. No matter what the situation, never let your emotions overpower your intelligence.

Quietly back away from your random negative thoughts. I picture myself as the guy in the Dos Equis ad but instead of the brand of beer I am drinking, I think of it from my learning experience perspective. “I don’t always learn my lesson, but when I do you can bet I learned it the hard way.” It makes me feel a little like a rebel.

 

With more than 30 years of credit management experience in the LBM industry, Thea Dudley consults with companies on a wide range of credit and financial management issues. Contact Thea at theadudley@charter.net.

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