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January 25, 2005

Demand For Key Account and Single Buyer Business Credit Insurance On Rise

Demand for key account and single buyer business credit insurance coverage is on the rise according to industry experts.  This trend was brought to light during a recent roundtable discussion of business credit insurance brokers facilitated by Atradius Trade Credit Insurance.

"Across most industries and companies of all sizes, it is generally true that the top 20 percent of accounts represent approximately 80 percent of company revenues," says Atradius Vice President Arjan van de Wall, whose firm is the U.S. arm of Atradius Group, the second leading credit insurer in the world.  "In some cases, the concentration of credit exposure among a few key customers is even greater."

"Key account coverage allows policyholders to move credit concentration risk off their balance sheet and cap company exposure," states van de Wall. "Key account policies cover a company's largest accounts as pre-approved by a trade credit insurer's buyer underwriters."

Single-buyer policies cover single or multiple shipments to one buyer and protect the seller from the date of the contract until the date of payment.  A credit manager specifies the shipments to be covered and the length of time needed for the shipments to occur.  The maximum policy period during which shipments can be made is generally one year.

"An excellent example of the benefits a key accounts policy can bring to the table is the case of a large energy trading company that wanted to establish working relationships with local suppliers of gas and electric power," says van de Wall.  "The company's bank agreed to fund  $25 million at the beginning of the program, which was not enough based on first-year growth projections.

"The funding potential for the program was limited by the fact that the three largest obligors were all single 'A' rated by Standard & Poor's and had concentration limits imposed on them by the rating agency's methodology.  The energy company asked Atradius to insure the excess concentration, the amount of receivables over and above the concentration limits of the three largest obligors.  The resulting credit enhancement enabled the bank to increase the advance rate from 65% to 85% and provide an additional $15 million in funding, while greatly reducing the energy company's exposure to credit risk."

While a typical premium rate for a whole turnover trade credit policy is approximately 0.1 to 0.5 percent of insured sales for domestic sales and about 0.2 to 0.7 percent of insured international transactions, key account policies can be tailored to fit any portfolio of risk, often resulting in more targeted coverage with lower premium payments.  Single-buyer transactions must carry an S&P investment grade rating or equivalent and require a minimum premium of $100,000.

Posted by Tom Troceen