Burkhard Wittgen is a credit insurance specialist and member of the executive board at Aon Credit Solutions. In this interview with enomyc, he talks about the dissolution of the protective shield on June 30, 2021, and the consequences for companies. What should companies do now? Which consulting services are currently more in demand than ever? What does the “Haverie in the Suez Canal” case stand for and why should trade credit insurers definitely create the digital connection? Enomyc is one of the leading consultancies for medium-sized companies that are seeking to achieve their full potential in the digital age.
Mr. Wittgen, you have been a member of the management team at Aon Credit Solutions for two years, responsible for business development in Germany, strategic key account relationships and digitalization projects. What appeals to you about your job?
Burkhard Wittgen: I think it’s the mix. I started as an account manager at Aon. Many strategic customer relationships that I’ve had the pleasure of building since then now span the globe. From DAX-listed corporations to medium-sized family businesses, across a wide range of industries. That makes the work very varied and interesting.
What do you personally enjoy most?
BW: It’s a peoples business. Winning new customers. Building up trusting customer relationships over the years. For me, a project is never finished with the placement or renewal of an insurance policy. Quite the opposite. The personal contact with customers and the cooperation with colleagues all over the world is very appealing.
What does Aon Credit Solutions focus on as a trade credit insurance broker?
BW: On securing a company’s trade receivables. Based on this, the appropriate risk transfer solutions are selected on the market. The actual work therefore consists of analysis and consulting. The absolute prerequisite for this is always an understanding of the risks and the risk philosophy of the individual company.
What are these risks? Is there a typical one?
BW: Every company has trade receivables. A service is provided or goods are delivered, but they are not paid for immediately. The customers first receive an invoice and can then pay after 30, 60 or even 360 days, depending on the agreement. The company providing the service is then naturally exposed to a risk. If the customer cannot pay, the credit insurance kicks in.
How can companies avoid such default risks?
BW: It helps, of course, if companies know their business partners well. The credit insurer checks business partners to see whether they are liquid and trustworthy. Or not. That’s part of the job. If companies are in good shape, trade credit insurers draw so-called “credit insurance limits” on the individual buyers. This insures them. In traditional trade credit insurance, the insurer has the right at any time to cancel or reduce the limits for future deliveries and services in the event of a deterioration in creditworthiness. Therefore, alternative credit insurance concepts, such as excess-of-loss (XoL) with non-cancelable limits for twelve months, are increasingly coming into focus
You mentioned that trade credit insurers set limits and evaluate potential business partners or companies. How does that work?
BW: Via global databases in which all companies are recorded. Many things are digitized, so that the companies’ balance sheets are automatically recorded. And so are payment histories. Policyholders have to report when their customers don’t pay on time. That means the credit insurer has a super monitoring network worldwide, recognizes where credit difficulties occur and can react accordingly.
If you look at the last few years: What has changed fundamentally in the industry? Are there any interesting developments?
BW: In the past, credit insurance was often bought selectively by companies operating internationally. One country bought a policy from X, the other country from Y. There was nothing coordinated about it. This meant that companies could not use their purchasing power to get the best possible deal on the market. However, there are now international program solutions that allow credit insurance policies to be negotiated centrally and implemented locally at the same time. Furthermore, credit insurance programs enable daily analysis of a company’s accumulation risks vis-à-vis buyer groups and their coverage ratios.
Which specific insurance policies are currently in particular demand and how is Aon responding to them?
BW: Limit optimization is the order of the day for us. If limits are reduced, regular limit negotiations with the credit insurer and our clients or even additional capacity providers are in demand. And top-up policies. A second credit insurer facilitates risk management by spreading the risks over more partners and providing companies with the best possible coverage.
Is there a consulting service that has become even more important since the pandemic?
BW: Yes, the topic of financing. There are a lot of government aid programs going on right now, which is flooding an extremely large amount of money into the market. But even those are finite. To improve their liquidity situation in the future, companies can also sell their credit-insured receivables and generate immediate liquidity. After all, as soon as companies get back into growth mode, they will need to invest again. But if bank lines are rigid and lending becomes more restrictive, investment will not be possible to the desired extent. Therefore, a diversified financing mix is essential.
What is your advice?
BW: The higher a receivables portfolio, the higher the liquidity through the sale of receivables. Factoring and also surety insurance create financial leeway. In surety insurance, companies also take advantage of their own good credit rating to replace bank guarantees with sureties from the credit and surety insurance market. This means that the bank guarantees no longer block the financing lines with the financing banks and they are given more flexibility. This is of course important in order to emerge stronger from the crisis.
In order to stabilize supply chains and the flow of goods, the German government and commercial credit insurers set up a joint protective umbrella a good year ago. What has it brought?
BW: A great deal of security. When Corona broke out and the first lockdown came, there was a panic that the economy would collapse, business would stop and companies would go bankrupt by the dozen. Because of the protective umbrella, credit insurers were able to keep some of their limits at a high level. This has prevented a dreaded domino effect, because: If customers had their limits cut and were no longer insured, they might switch to prepayment. Or they might not deliver at all. The effect of this would have been fatal. Customers or buyers would have been even more likely to get into difficulties.
How did you experience this phase with your customers?
BW: It was challenging to talk to them about the limits. Together, we checked which customers had limits that were no longer needed in order to return coverage to the market. The risk dialog also consisted of reallocating capacity sensibly and really having it where it was needed.
Now the protective shield will be dissolved on June 30. Did you expect that?
BW: There was discussion between the federal government and credit insurers about extending it again. But the big wave of insolvencies has failed to materialize so far. The credit insurers expect it to be spread over the next few years. So extending the protective shield for another six months would no longer have made sense for the credit insurers in this form. They had to give up, I think, over 60 percent of their premium to the federal government. And they decided to go back to self-assessment and to financial communication with their own customers.
Have you already received panicky inquiries from companies that were expecting the protective shield to be extended?
BW: It is always bad if the customers get in touch first. In risk consulting, we prepare our customers for this early on. At the end of last year, we asked them to look at their customers, check their limits and work out with their sales department where cover is really needed. With insolvencies on the rise, it will be harder to get enough coverage. Companies should really look closely at where they can give something back to the credit insurer and where they might need more limits.
Can you give a concrete example of this, perhaps from the automotive industry?
BW: Sure, that’s an industry that is currently undergoing a lot of transformation. E-mobility will change many production processes. Automotive suppliers that were focused on parts for combustion engines will receive fewer orders and thus also a lower sales volume. On the other hand, other companies will come onto the market with new parts and services that are needed, and they will also have full order books and high limit requirements of their own.
What do you recommend in this case?
A reallocation of limits: return the limits that are no longer needed in the amount and use them in negotiations with credit insurers to obtain higher limits in the growth areas.
How can companies that have credit insurance still prepare for the period after July 1?
BW: I think companies that are insured will look at their relationship with their provider and also how they have behaved during the crisis. The market is an oligopoly, but if the partner doesn’t prove itself, it makes sense to be consistent and put the issue out to bid in the next renewal. This is important to send a signal to the insurance market: good performance in times of crisis is rewarded. Bad ones are not. This is the only way for trade credit insurers to improve as well. For larger companies, one can consider whether to continue to rely on one card or whether a syndication solution, i.e. a multi-insurer strategy with two or three insurers, makes more sense.
Which is the smarter way to go?
BW: There is no ‘one fits all’ solution. It always depends on how the company is positioned. Companies with strong in-house accounts receivable management, for example, only need credit insurance for defaults that threaten their balance sheet. This is a ‘kind of excess of loss’ credit insurance: here, the accounts receivable management is insured and most of the limits are defined based on the company’s own credit management guidelines.
What has to be in place by June 30 in any case – no matter what?
BW: If you want to emerge successfully from the crisis, communication and the exchange of information are the be-all and end-all. We advise our customers to join us in proactive dialog with credit insurers. Positive payment experience and well-filled order books with customers can convince credit insurers to issue even more difficult covers.
What other recommendations do you have for companies?
BW: Be prepared for the worst-case scenario and have a variety of possible solutions at the ready rather than being too dependent. That can become a danger. It can also make sense to have a second credit insurer on board or a top-up insurer. This insurer steps in if the primary insurer does not take over the entire risk. Syndication is also a good idea when companies have many large customers with large limits and the insurers find it difficult to underwrite the limits on their own.
You must have followed the case of the Suez Canal accident. What do you think it stands for and what do we learn from it?
BW: I think all companies have noticed: we do not live in a low-risk environment. Things can certainly go bang from one moment to the next. That companies like Lufthansa have to be rescued by the state. That a single tanker blocks one of the most important logistics lines in the global economy, deliveries stagnate, companies can neither finish nor sell their goods, wait longer for funds and thus get into difficulties: The Suez Canal accident represents how a single event can affect the situation in the entire global economy. And everything that influences the global economy also influences the creditworthiness of companies.
Which brings us right back to the topic of trade credit insurance.
BW: Exactly, because if the creditworthiness of companies deteriorates, there is a risk that others will get into difficulties as a result. That’s where credit insurance makes sense, of course.
Do you think the role of trade credit insurers will change in the future – especially because of the pandemic?
BW: Yes, digitalization is an important driver here. One example: in Germany alone, credit insurers have issued 420 billion euros in coverage volume. These limits or risks assumed must be backed by equity due to regulatory requirements. The problem is that only a portion of these 420 billion euros is actually used in day-to-day business. Experience shows that customers apply for many more limits on their customers than they actually need. Or they supply their customers only once a year and the limit is still in the system the whole time. But no one recognizes this because the systems are not linked. This is where digitization comes into play.
Meaning?
BW: Means that if the crisis lasts longer, the probabilities of default will continue to increase. Then the credit insurance market will have to reduce its exposure – the 420 billion in Germany alone – to keep an eye on the cost of equity. But a digital link would obviously indicate where reducing the limit makes sense. And where it doesn’t. That’s why we at Aon are deliberately investing in connecting policyholders’ ERP systems to credit insurers. The goal is to automate the entire handling of credit insurance.
Sounds exciting. Finally, a look into the future: What will credit insurance look like in five years?
Digitization will continue to gain momentum and of course also change payment processes in the B2B sector. On a small scale, we already know this from Klarna or PayPal: Here, we as customers can decide when we pay for goods or services. Large technology groups are using the resulting data to offer insurance solutions or payment terms. I am curious to see to what extent these large technology groups will move into the area of B2B payments and make one or the other trade credit insurer obsolete through digital solutions. They are easy to integrate into companies’ new types of business processes. It will be exciting to see how trade credit insurers themselves adapt to this digital challenge. And that’s exactly why it’s so important that they create the digital connection: to stay relevant!
Thank you very much for the insightful interview, Mr. Wittgen.
The origigial interview was published in German under:
#welcome 