Insights for CFOs, Treasurers, and Credit Managers
For multinational CFOs, Treasurers, and Credit Managers, evaluating whether to extend a credit insurance program early (my definition: 6 months or more prior renewal date, without market tender) involves weighing multiple strategic factors. Brokers and insurers frequently advocate for early multi-year extensions, but assessing the full context—from market dynamics to regulatory shifts and operational needs—is essential for making the best choice.
Why an Early Extension Might Make Strategic Sense
For companies with a high prior claims ratio and a well-established relationship with a credit insurer, extending a credit insurance program early can offer stability. Locking in favorable terms now provides protection against premium fluctuations and market volatility, which is especially valuable when claims exposure is high. Insurers, too, may view early extensions as favorable, reinforcing their underwriting stability and reducing uncertainties in pricing. For companies seeking continuity in cost planning and budgeting, an early extension in such cases can offer peace of mind and financial predictability.
Similarly, companies can take a page from other types of insurance programs, such as global property and cyber programs, where rollovers are often leveraged to maintain consistent coverage. By applying a similar rollover approach to their credit insurance programs, companies can maintain stable coverage while protecting themselves from shifts in the credit market.
Why Extending Early May Not Be the Best Option for Some Companies
However, for companies that have seen a strong, low claims ratio over recent years and may have improved or digitalized their credit management processes, early extension may limit strategic flexibility. Given that loss ratios remain low across the market, companies with robust credit profiles might find more cost-effective options by re-entering the market with an experienced broker. By actively benchmarking and adjusting their programs to reflect current, favorable conditions, these companies can optimize their costs and secure terms more in line with their low-risk profile.
Furthermore, considering market shifts such as the development of syndication and gap filler solutions is essential before committing to a single insurer relationship. These options allow companies to diversify coverage sources, giving them greater leverage to build tailored, resilient insurance programs. Extending a singular relationship prematurely could preclude these valuable opportunities for enhanced customization.
The Importance of Program Flexibility Amid Changing Market Conditions
Another critical consideration for multinational corporations (MNCs) is the structure of their credit insurance program. Many European credit insurance programs, for example, still operate with cancelable limits, which means that while terms may be locked in, coverage itself can still be adjusted or reduced by the insurer. For good reasons these MNCs value the insight these insurers have, however, this makes it essential for companies to include clauses that allow them the flexibility to amend or adapt their program in response to changing coverage terms.
Without these options, MNCs risk being unable to react swiftly to market adjustments, potentially exposing them to gaps in coverage. Ensuring the program has built-in flexibility enables companies to manage risks effectively while still benefiting from any early agreements in place.
Aligning Credit Insurance with Broader Financing Strategies
In recent years, banks have increasingly incorporated credit risk and collateral into financing decisions, influenced by Basel regulations that have tightened capital requirements. This shift underscores the need for companies to think of credit insurance not as a stand-alone tool but as part of a comprehensive capital strategy. Integrating credit insurance with overall financing considerations can help optimize capital efficiency, enhance liquidity, and reduce reliance on single insurance relationships, especially under more complex regulatory environments.
A strategic, well-rounded approach that combines credit insurance with financing allows companies to not only manage risk but also maximize their capital’s efficiency and flexibility. This is particularly relevant as European programs adopt more flexible structures, creating an opening for companies to align their insurance needs with broader financial objectives.
Strategic Takeaway: Weighing Long-Term Flexibility Against Immediate Stability
Ultimately, the decision to extend a credit insurance program early depends on the unique financial, risk, and strategic needs of each organization. For some, securing early stability through an extension may offer critical cost and coverage predictability. For others, maintaining flexibility in the face of favorable market conditions and regulatory changes presents an opportunity to adapt their program to the latest risk management standards, ensuring both cost efficiency and responsiveness.
In a rapidly evolving market, integrating credit insurance into a broader financing strategy and incorporating flexible, adaptable coverage terms positions organizations to make the most resilient, strategic choice for the future.
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