Insurers out to earn the credit

THOUSANDS of companies could have survived the recession if only they had taken out credit insurance, according to Mike Eve, UK chairman of Rollins Hudig Hall, now the fourth largest insurance broker in the world.

'More people go bust because a client goes bust than for any other single reason,' he says. 'Credit insurance is a very important risk management tool, yet four out of five organisations don't buy it.'

Of those four, just one will have actively decided against it, confident in its own credit control procedures. The others will either never have heard of it or will have assumed that they can't afford it. Premiums vary from industry to industry, but in construction, for example, the cost can be as little as a half per cent of the turnover.

'It's a hell of a lot cheaper than factoring, and you don't have to give away a share of your receivables,' Mr Eve says. In addition, since the underwriter looks at your client's financial status before committing himself, you get the benefit of a credit rating service as part of the deal.

'That information could be extremely useful if you were planning to extend credit of pounds 100,000 to a client who turns out to be worth less than pounds 10,000.'

Rollins Rudig Hall is part of Aon Corporation, the US insurance and financial services giant with assets of dollars 3bn ( pounds 2.01m), chaired by the Irishman Patrick Ryan. Despite its position in the league tables, RRH is hardly a household name, largely because it is the result of a series of acquisitions.

Today, the organisation has more than 270 offices around the world. Providing clients with a global service is not cheap. First, you have to have a big enough infrastructure to be credible. The entry costs are high, but that is why Ryan spent roughly dollars 1bn buying up all these brokers.

The overwhelming benefit of being a global player is the buying power that goes with it, enabling the broker to give better value to the client.

In addition, as a multinational the company has enormous potential for making money in the developing countries. Take personal cover, which accounts for around 65 per cent of the market.

While Switzerland has the highest expenditure on insurance anywhere in the world, at around dollars 2,000 a head per annum, the average in Pakistan is just 20 cents. 'As these countries get richer, the opportunities are endless,' Mr Eve says.

This is just as well, for brokers are having to change radically the way they operate, in order to respond to a significant shift in the attitude of their multinational corporate clients, who are increasingly choosing to insure themselves.

'Many corporate clients are very much aware that for every pound of insurance they buy, around 40p is going on expenses and brokerage. Why should they hand over their cash for an insurance company to invest until they have a c1aim, when they could be investing it themselves and getting a better return?' Mr Eve says.

The tendency is to set up their own insurance captives in, say, Bermuda or Guernsey, to take care of the first pounds 5m of claims, before handing over the rest of the risk.

'What they're saying is: 'We can afford to be more precise about where we throw our money. We can take the first pounds 5m a year of losses without upsetting our balance sheet, but what insurance can we buy above that?' '

The traditional concept of the losses of the few being carried by the many is, in the main, a myth, Mr Eve says. The reality is that you not only pay for your own claims, but make a loss.

'Take Employer's Liability; it's pointless to insure 50,000 employees for the little accidents. You only really need to insure for the occasional major incident in which somebody might be seriously hurt.

'When you take into account the amount of disruption caused, the cost to industry of accidents is far greater than the amount the employees get back from the insurers anyway. The cheapest solution is to increase your safety precautions so that you don't have any accidents, and to pay for the minor ones out of your own money.'

Of course, accidents will happen and there will always be a need for cover. But ultimately, Mr Eve's argument is that you have to take back control of your losses.

'As with any risk, if your people think: 'Oh, it's insured, don't worry about it', in the long term you will suffer more, because you won't worry about the losses in the same way that you will if you self-insure,' Mr Eve says.

'Our attitude is, why waste your money on insurance if you don't need to? What we're trying to say is, if you've got pounds 1m how can we help you to make better use of it?

'Too often in our business, the existing client doesn't get as good a deal as the new business prospect. If someone comes along and asks the broker to pitch for pounds 1m of new business, he will put every possible resource his company has into that report, because he wants it. But he's not necessarily giving that same level of skill to the clients he already has.

'The real challenge for us is to keep refreshing our organisation with better people and better ideas in order to create a culture that welcomes change.'