Trade credit is an essential tool for facilitating trade and capturing new business. After World War II, a lot of trade occurred in order to rebuild national economies. The war gave birth to trade credit and trade credit insurance and the US is one of the oldest trade credit insurance markets in the world.
Although the US was the birthplace of trade credit insurance, currently, only 3% of the market is utilized compared to 15% in Europe. Reasons the product is not popular in the US are:
- Americans are natural risk takers.
- Companies prefer tools like factoring that facilitate cash flow.
- Businesses rely on trade ratings from multiple agencies for evaluating trade credit.
In today’s global trade, there are commercial and political risks that are beyond the control of both supplier and customer. Such unforeseen risk, or unexpected insolvencies, not only hit the bottom line of a business, but they can also jeopardize its financial health. With its unique credit insurance solutions, Euler Hermes provides a channel for hedging a supplier’s bet on a customer. By insuring client receivables, the company enables businesses in securing future cash flow and also helps leverage protected receivables with a bank or lending company.
Euler Hermes’ Unique Selling Point
Euler Hermes has an in-house rating mechanism that assesses the risk grade of an organization. With an extensive database of around 55 million companies rated on a scale from 1 to 10 with 1 being outstanding and 10 being in administration, they assess industry risk, market insights, and a company’s ability to pay bills on a 12-month basis.
Insuring receivables is much cheaper than factoring. The average premium is 35 basis points on sales versus 2% per month for factoring. That is a huge difference and a competitive advantage, which many businesses fail to utilize. Moreover, most companies price the cost into their sales to insured customers.
The Euler Hermes Model
Euler Hermes doesn’t safeguard loan payments. Rather, they provide security against the non-payment of outstanding receivables. This ensures that the supplier can focus on its core job of sales rather than assessing the creditworthiness of every new client.
The company also works with US factoring companies who insure their books with Euler Hermes. The company acts as an arbitrage and a credit insurance policy for such lenders.
The Underwriting Process
Over the years, Euler Hermes has mastered the art of underwriting. They follow an uncomplicated approach by grading the buyer on the scale from 1 to 10 and evaluating each business’s default probability. It also looks factors like the usage limits of the business’s credit facility and traditional data such as balance sheets and income statements.
The company has leveraged social media data and open data sources for creating a more comprehensive model while hiring multiple data scientists and collaborating with tech partners to incorporate databases for enhanced insight.
The benchmark in this industry is a percentage of insurance ledger approval. If a competitor is offering insurance of 80% versus 75% offered by Euler, the competitor will win the contract. Thus, to ensure extensive coverage, they have integrated artificial intelligence and machine learning into their algorithms for higher approval rates.
Nowadays, the nerve center of companies has shifted from brick-and-mortar offices to the virtual world, so it makes sense for the company to include the social activities businesses such as Twitter, Yelp, Facebook reviews.
Euler Hermes have partnered with URICA, a fintech SME lender, for its invoice funding product in the UK and France. The salient points of this partnership are the ability to offer single invoice cover, real-time credit decisions, and real-time price adjustments on the basis of the debt quality.
The prospective client can now send ledger data via spreadsheet and the company evaluates it against their database. They’ve also developed an API, which links into client systems to directly assess accounts receivable data. The API automatically calculates the finance or insurance premium for the selected invoices and helps during instantaneous decision making for management.
Euler Hermes are in partnership discussions with multiple US fintech lenders to become their insurance provider. These partnerships hedge lender books and allows the lender to provide the customer a different product.
Euler Hermes have a 125-year history that includes multiple reorganizations. In the last 20 years, the company has been the world´s leading provider of innovative solutions in the credit insurance space. It is backed by Alliance Group, a financial services provider, and has been rated AA- by Standard & Poor.
James Daly is leading the push into the American fintech industry for Euler Hermes. He has been associated with the Euler Group for over 13 years and started his career in the UK. For the last three years, he has headed the Euler office in North America.
Written by Heena Dhir.