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Self-insurance: Is it worth the risk?

At first glance, setting aside money to cover the cost of any loss in receivables seems sensible.

Indeed, a growing number of companies in the region subscribe to this theory. Data from our latest annual Payment Practices Barometer shows the proportion of companies in Asia choosing self-insurance as a credit management tool has significantly picked up in recent years. Across the region an average of 62% of companies use self-insurance in 2020, up from 33% the previous year.

Yet it’s also important to consider the impact self-insurance is having on your cash flows and whether your company will have enough liquidity to get through a downturn and return to growth.

The data lends weight to this concern: At the same time that reliance on self-insurance is rising, businesses are facing more problems in collecting payments and managing bad debts, with late payments in Asia affecting an average 52% of the total value of B2B invoices, up from 29.8% in 2019.

Further, the recent global economic downturn has emphasised the need to preserve liquidity and adopt a more proactive approach to managing accounts receivables.

But even when market conditions are positive and default rates are low, using self-insurance can put a strain on your company’s resources and hurt growth. Because companies using self-insurance still need to:

  • Spend time and resources on developing and executing internal credit management procedures
  • Set aside working capital every year to cover potential losses - which prevents the use of that capital to grow and expand the business
  • Risk exposure to a large loss that could endanger the company
  • Rely on third-party data to make customer credit risk assessments

Trade credit insurance can help address these challenges by providing the following benefits:

  • Protection against unexpected losses such as insolvency, political risk, protracted default. This frees up working capital set aside to cover bad debts
  • Access to in-depth risk information to help you identify good potential customers and also understand the risks and opportunities of particular sectors and markets
  • The ability to safely and securely offer open credit terms to new and potential customers
  • Access to additional services including debt collection and regular market intelligence.

From tying up working capital to increasing exposure to bad debt losses, choosing to manage customer credit risk internally by self-insurance is a risky exercise. Using trade credit insurance reduces those risks, giving you the peace of mind to trade with confidence and actively grow your business.

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