Credit Insurance - Wilfried Verstraete, Atradius

Facing up to the obligations laid down in risk governance legislation can be a heavy burden, but credit insurers believe they have products to lighten the load, Atradius’ Wilfried Verstraete tells Jim Banks.

Senior managers in major companies have been made starkly aware in recent years of the need to have their finger on the pulse of their firms’ risk profiles. Greater awareness of risk exposure and mitigating factors has become crucial to effective management, with corporate governance and regulatory compliance rapidly climbing the agenda.

‘In the past few years, risk governance has become a major subject at board level, whereas it was previously the risk manager or someone lower down in the finance department who was dealing with the issue,’ notes Wilfried Verstraete, CEO and chairman of the management board of Atradius, a credit insurance and credit management company that currently protects around €300 billion of world trade against the risk of non-payment.

CREDIT IS A STRUCTURAL RISK

‘People tend to think of the risks in their business and their sector when building their risk map,’ states Verstraete. ‘Credit risk is now coming up as one of the more structural risks. In the past, people saw it as something inherent to the business and used internal credit management controls. Now, big multinationals no longer see this as sufficient.’

When looking externally for tools to manage credit risk, firms have a number of options, among them credit insurance or the credit derivatives market. For Verstraete, however, the choice is clearer than it might seem. He views the credit derivatives market as useful in some ways, but not for precise management of a firm’s own credit exposure.

LIMITATIONS OF DERIVATIVES

‘They have limitations,’ he observes. ‘The market is quite small and is limited to listed companies. You can buy cover on GM, for instance, but not on an emerging prospect in Russia. The credit derivatives market represents a fraction of the world’s trade market, and you can only buy fixed amounts of cover for a fixed period.

LIMITING CREDIT RISK EXPOSURE

The solution put forward by credit insurers like Atradius is more flexible and more closely aligned to the unique exposures a firm faces. Credit limits for exposures to specific trading buyers of a firm’s products or services are established on the basis of detailed research on individual companies and in-depth market knowledge covering a wide spread of jurisdictions.

As well as providing what is essentially high-quality, independent research to set credit limits, credit insurers also put their capital up in support of their evaluations.

INCREASED RISK MITIGATION

‘We put our money where our mouth is,’ says Verstraete. ‘With an insurance policy, risk mitigation is increased and this adds to the credibility of our opinions. Now, the large companies that have been front-runners in responding to risk governance regulations have set the benchmark and it is standard practice for them not to trade beyond the limits set by the credit insurer.’

COMPLEMENTING INTERNAL CONTROLS

Used alongside internal credit controls, the more extensive external research available from credit insurers significantly adds to a firm’s risk control measures, and the synergy between the two gives a much clearer picture of potential exposures. Furthermore, the cost of credit insurance changes as these exposures change, so cost is in line with the level of credit risk a company is happy to bear.

CAPACITY TO PROVIDE GLOBAL RISK COVERAGE

‘Our aim is to ensure that we have the capacity to provide cover on risk concentration anywhere around the globe and keep our knowledge up to date’ notes Verstraete. ‘Vendors are more willing to take on exposures to Chinese companies, for instance, so we need to improve the data flow from there.

As the appetite for credit insurance grows and the capabilities of providers improve, the market will no doubt play a key role in ensuring firms remain compliant with risk governance requirements, no matter how the stringency of such legislation increases.