The head of a specialist insurance firm has suggested that some brokers may be overlooking a key SME risk as coverage for the exposure remains woefully low.
Mark Hoppe, managing director of credit insurance firm Atradius, says SMEs tend to earn the bulk of their income from just a handful of customers – however, this exposes them to concentration risk if they don’t have protection in place for when things fall through.
“SMEs rely very heavily on one or two key customers and that is a big risk,” says Hoppe. “Brokers will go through the largest risks for an SME but don’t always discuss concentration risk when, quite often, non-payment by their biggest customer is the single largest risk they would have.”
Despite the significant exposure, Hoppe says market penetration for trade credit insurance in Australia currently sits at just around 6-8% – for SMEs, the figure is even lower. According to Hoppe, part of the problem is that SMEs often operate their business around relationships and many find it difficult to imagine trusted customers not settling a debt.
“They think that because they’ve been dealing with someone for years, or because that person helped them when they got started, that nothing is going to go wrong,” Hope tells Insurance Business. “Then when something does go wrong, and we see it happen all the time, they never expected it and don’t have a plan in place.”
Another barrier to SMEs taking out trade credit insurance, according to Hoppe, is that it comes at a significant cost.
“The tough thing for SMEs is that they look at the expense of trade credit insurance and it probably costs as much as all the other insurances put together,” he says. “However, that insurance protects the single largest risk they have and it also allows SMEs to grow.”
For brokers who do think their SME clients could benefit from trade credit insurance, Hoppe says a shift in mindset could help win them over.
“A lot of our strategy when we talk with SMEs is to discuss how they get to the next level without taking on too much risk,” he says. “If they see credit insurance as a way to help them grow, more as an investment rather than an expense, then that’s the biggest mental hurdle to get over.”
