Phillip Krinker

Benefits that CEOs can gain through Credit Insurance

17th August 2018 Phillip Krinker 0 Comments

Did you know that thousands of companies worldwide guarantee their results through Credit Insurance? This type of insurance provides protection against default on credit sales, and indemnifies the insured companies (creditors) for non-repayment of credits extended to their clients (debtors).

The placement of credit Insurance can bring various benefits to your company, but two for CEOs stand out:

  1. Good Corporate Governance

With the introduction of the new IFRS 9 rules, which became effective on January 1st, 2018, CEOs must ensure compliance therewith by their companies as of this year.

IFRS 9 introduces new guidelines on provisioning for bad debts, which are more conservative than those of last year. These new rules may exert some stress on the operational results of most companies, especially those in the industrial and financial segments.

Old and familiar Credit Insurance is recognized in audits as an efficient tool to reduce the said effect on results, and avoid the need to increase the provision for bad debts in the balance sheet.

For a modest insurance premium, it is possible to reduce the mentioned provision, and thereby also minimize the impact on the operational results  of the company.  The provisions for this type of debt are not deductible for income tax purposes, differently from insurance premiums, which are deductible.

  1. Achieving objectives and projected results

At present, the Brazilian macroeconomy is extremely volatile, and it is difficult to make forecasts. Clients and suppliers are suffering the same pressure. Some of these companies will not endure this uncertainty and will apply for judicial reorganization and/or bankruptcy next year. It is not always easy for CEOs and their teams to perceive that their clients are in for a bad time.

Historically, one of the main reasons for companies to file for judicial reorganization and/or bankruptcy is exactly the insolvency of a major client and its consequent failure to meet its obligations to the company.

In these cases, Credit Insurance protects one of the largest and most important assets in the balance sheet, the Accounts Receivable.

Usually, CEOs do neither pay due attention to nor protect the Accounts Receivable asset, because they do not believe that it is exposed to any risk. They rely on their teams to anticipate this type of risk, and do not acquire adequate insurance to protect their companies against client insolvency.

They take out insurance for factories, in spite of the small loss incidence, but do not purchase insurance for their Accounts Receivable.  Both these risks have a similar severe effect on their companies’ financial results, and both these risks if left uncovered can drive the company to bankruptcy.

Do you want to know what would be the additional sales value that your company would require in order to restore its profit in the event of default?  Use our loss recovery simulator and find out: