The Chairman of Financial Risk, Jardine Lloyd Thompson Limited (JLT), Nick Hedley, today discussed Credit Risk during the AIRMIC Live panel discussion on ‘Risk Management in the Recession’.

The Chairman of Financial Risk, Jardine Lloyd Thompson Limited (JLT), Nick Hedley, today discussed Credit Risk during the AIRMIC Live panel discussion on ‘Risk Management in the Recession’.

During the panel Nick Hedley highlighted how the severity of the economic downturn has created three key problems: 1) an inability experienced by many companies to cover their trade ledger in a satisfactory ‘contract certainty’ manner; 2) vulnerability to supply chain interruption (what happens if credit insurers cancel cover on policies issued to suppliers); and 3) disruption of working capital in the event the problems in the credit insurance market impact on financing facilities.

Nick Hedley discussed a number of solutions that companies could consider and discuss with brokers, “in terms of receivables risk, organisations could move towards an excess loss structure with appropriate risk sharing which should prove more attractive to underwriters, though there are some sectors like construction and retail where even this may prove difficult. Alternatively the use of Captives remains another option to be investigated as does the establishment of a receivable finance or co ownership facility with a trade finance bank. We are seeing growing interest in each of these areas”.

Nick Hedley went on to emphasise that dialogue and information remain key for insurers particularly in relation to credit insurance and supply chain interruption risk. “Establishing a Contingent Credit Insurance for a 12 month period if one of the larger insurers reduces cover on your organization (as we saw with Woolworths) is one solution, as is a Supply Chain Finance arrangement. This would mean invoices to suppliers are paid immediately, by the financing bank eliminating any credit risk that the suppliers had on the company. It also potentially allows for an improvement in the terms agreed with suppliers and the ability to negotiate pricing, whilst the insured may be able to agree a longer repayment period with the bank”.

Banking Facility Risk was perhaps the most difficult area discussed, where thinking ahead is paramount if there is the need to put a new programme in place if it is not possible to renew with the current insurer. “Reducing the dependence on a single insurer though a syndicated approach or reducing the sum insured would mean that finding alternative security in the event of an insurer failure or downgrade would be much easier as the headline sums involved would be less challenging” concluded Nick Hedley.

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