Risk assessment
The trade credit underwriters’ approach
Whilst following credit risk best practice is a good starting point, insurance underwriters will conduct a wide assessment of insurance prospects. Below are some of the points that insurers may want to clarify before quoting a business. Beyond displaying poor financial health, gaps or lack of information for the issues below will also be potential red flags to a trade credit insurer.
The prospect’s financial stability
The underwriter will calculate the prospect’s historical average claims ratio (percentage of claims versus turnover). A high ratio may suggest that the prospect has weak credit controls in place.
Trade sector and markets supplied
Underwriters need to determine if the business’ risk is domestic or to what extent it involves exports, and the risk level of target markets.
The prospect’s market position
Being a key supplier of core components or ingredients is likely to represent a lower risk, than if the business is operating in a highly competitive market.
Debtor quality
Examining a debtor's balance sheet, income statement, and cash flow statement will provide insights into their financial health.
Spread of risk
Underwriters prefer to see a spread of risk across the sales ledger, as opposed to exposure being concentrated to a small number of customers.
Geographic spread
If the prospect’s customers are located in a singular region, this could reflect a higher risk than if they are dispersed over a large geographical area.
Payment terms versus days sales outstanding
The lower the amount of outstanding days in the historical data, the better the risk exposure.
Management experience
Underwriters will consider the C-suite's industry experience to assess the risk exposure of the prospect.
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