km Entrepreneur Day 2014
On September 24, 2014, km credit consulting GmbH welcomed guests to its third annual “km Entrepreneur Day”. The event was held at Margarethenhof in the town of Königswinter. Traditionally, this event has been intended to provide km credit consulting GmbH and its business partners and clients with a platform with which they can exchange ideas and critically discuss current issues in the area of credit management.
The agenda of this year’s event included the following subject areas:
- Credit management processes in banks – can these processes be transferred to industrial corporations?
- Podium discussion “credit insurance”: Discussion with the leading business managers from the top three German loan insurers and industry representatives on current topics.
- International factoring solutions – possibilities and limitations of international factoring.
Since the global financial crisis in 2008 and 2009, companies are spending more time on the implementation of their own credit management solutions in order to be prepared for any similar events.
Dr. Segbers’ speech gave a detailed description of how the rating process is set up and structured in the banking industry so that banks can meet the stringent requirements set forth by the bank supervisory authority. In doing so, it was shown how processes were influenced by statutory and regulatory requirements and which internal and external factors are incorporated into the credit rating process.
The speech was centered on analyzing which of the credit approval processes were actively transferable – or made sense to transfer or incorporate – from banks to industrial corporations.
The speech went on to outline the initial phase of conceptualization, in which the company makes a fundamental decision for the systematic assessment of rating information, develops a system of expertise, and then implements this in a procedural manner through the selection of suitable instruments. Ultimately, the human factor must be considered, whereby, if possible, many different functions must be integrated into the risk management process.
Ultimately, there is recognition that in order to professionalize and objectify the assessment process of supplier credits, in many ways it can certainly make sense to transfer banking processes and experiences to the credit management function of industrial companies. However, the instruments and procedures have to be adjusted to match the in the individual circumstances in the industrial companies.
Discussion with the leading business managers from the top three German loan insurers and industry representatives on current topics
The credit insurers were represented by:
- Dr. Thomas Langen, Senior Regional Director Germany, Central & Eastern Europe at Atradius N.V.
- Michael Verhasselt, Head of Distribution at Euler Hermes Deutschland AG
- Dr. Thomas Götting, Regional Commercial Director Northern Europe Region at Coface S.A.
Industrial companies were represented by:
- Roland Mauss, CFO of KMR Stainless AG
- Guido Prüssing, Credit Risk Manager at Peter Cremer Holding GmbH & Co. KG
In addition, the following main discussion topics were chosen based on a prior survey of the participants at the Entrepreneur Day.
1. How credit insurers deal with current, political, and commercial uncertainties
The first discussion was related to the effect that the political crisis in the Ukraine was having on the local credit insuring activities. The effects on the commercial development are clearly reflected by the growing number of bankruptcies and insurance claims.
It is becoming clear that the insurers have learned their lessons from the financial crisis and are now using far more prudence in the face of economic or political crises. Instead of generally excluding entire countries, more value is placed on the individual risk assessment and risk management.
In this regard, another topic of discussion was the development of the BRICS countries (Brazil, Russia, India, China, and South Africa, incl. Turkey), which were known for their rapid growth rates. The enormous growth rates of past years have significantly decreased in some of these countries and the economic development has cooled off in a major way in the last few months, which more often than not has been accompanied by politically questionable developments.
Aside from the regions mentioned above, the current developments taking place in Greece, Italy, Spain, and Portugal were discussed as well as the underwriting policy of the credit insurers.
In this regard, the credit insurers also depicted the manner in which information is compiled. All providers access the local markets and the available sources of information as well as their local employees.
2. Product design and innovation
A major point of discussion included the sustainability of credit decisions. Here we must particularly highlight the development of additional requirements such as subsequent coverage, which only results in a binding negative lending decision once a corresponding time delay has taken effect. It became clear that in this area it cannot be expected that the credit insurance industry will further soften the product. In fact, the providers have the intention of designing the product to be more comfortable. In doing so, the focus will particularly be on online tools and interface solutions.
For decades, syndications have represented a reasonable and economically well thought-out standard. The participants were interested in learning how the credit insurers would be positioning themselves on this issue in future. Based on the discussion, it is clear that in future this point will also not be a part of day-to-day business of the insurance providers. However, the providers have shown a willingness to be open towards looking at selective individual solutions that have, in part, been successfully implemented.
In the German market, top-up solutions provide – through a risk premium – the ability of depicting risks that are not offered within the “normal” credit verification process. This solution is viewed critically by many participants representing the industrial corporations, since the credit check should lead to a fundamental decision whether or not a risk can be carried or not; this shouldn’t be assessed dependent on the individual premium that needs to be achieved.
The credit insurers’ representatives show that the implementations of the products have not changed the internal validation routines of the risk underwriters, which is verifiable through the high level of underwriting ratios. For this reason as well, the demand for the top-up products is currently relatively moderate.
3. Service and performance of the insurance companies in all areas of service provision
Currently there is a trend of the global harmonization of the internal processes in the area of policy and customer service. On the customer side, this leads to insurance customers being required to deal with change requirements that partially lead to a significant worsening of their scope of liability and the range of services they receive. From the perspective of the insurance company, the trend is being interpreted as a clear professionalization in which the customer can participate in the form of increased flexibility and customer-specific individualization.
Also discussed was the question regarding the credit insurers’ reduced range of services as a result of the separation of risk underwriting from the on-site acquisition of information. In particular, the question was posed if the industrial sector would be willing to accept an additional fee for carrying out a local, on-site risk assessment. This request was clearly shot down with the reasoning that local, on-site risk assessment must be an elementary component of the service package offered by every credit insurance company.
Furthermore, questions pertaining to special risk management were debated and discussed, including how important it is to include special risk areas in the communication with the policyholders in order to reduce losses. Unfortunately, practice often shows that not all market participants actively include the credit insurers in their processes and therefore solely limit the requirements made of the insurance industry to the retention or increase of the supplier credits. However, this barely scratches the surface of the overall role and responsibility of the credit insurers. For this reason, the credit insurance industry wants to rethink its position and actively include all parties involved in this process.
In his speech, Mr. Stumpf first went into great detail regarding the structures and possible constellations within the framework of international, cross-border factoring solutions. In particular, the legal framework conditions and requirements that receivables have to meet so that they can be sold within the scope of international business transactions were hotly debated.
In doing so, it became very clear that even the structure of the contract with the policyholders as well as the factoring company could have a significant influence on the successful implementation of international factoring processes. The audience was also given more insight into how a contract must be structured in order for a receivable to be transferable and which effect the possible choice of law could have on the legal relationship to the acquiring factoring company as well as to third parties.
Furthermore, the discussion made clear what kind of considerations are important in the structuring of the contract between the seller and acquirer of the receivable in order to ensure a smooth purchase process.
Whereas in the first part of the speech, the theoretical and legal fundamentals were the focus, in the practice-related part of the discussion Mr. Stumpf also listed several examples for the transfer of receivables into Germany’s ten most important exporting countries. He went into specific details concerning the local requirements in each country, the legal limitations, and the practical implementation of factoring.
The fantastic participant turnout – some of whom were visiting us for the third time – as well as the level of information and the excellent quality of the contributions made by the speakers and participants, further confirms our belief in the idea we originally had with the Entrepreneur Day. For this reason, next year we will also offer our clients and business partners the opportunity to discuss credit management issues outside of the realm of their daily business operations.
Based on the positive feedback received from the participants, in 2015 we will be holding the fourth annual km Entrepreneur Day. The content and agenda of the event will again be closely coordinated with the participants.