Risky business: paper merchants and insurance – Magazine article

The word insurance can hold different meanings, depending on what a particular individual or business hopes to gain from it. 'Asset' insurance is what most of us will be familiar with, and entails the payment of a premium in exchange for the protection of property, premises or whatever else - a business protecting its offices in the case of robbery, for example.

'Credit' insurance counts as a whole different story. It describes the protection purchased for a different kind of asset: - the credit a company provides to its clients to allow them a certain amount of time to pay for what is purchased. Any company that offers credit always runs the risk of non-payment from the buyer, and the insurance agency provides a guarantee that if a debtor fails to pay, then the company that purchased the insurance will not be left out of pocket.

For paper merchants, credit insurance offers protection from the bad debts, shoddy credit and unreliable trading practices of its customers in the printing industry.

Print's poor credit rating

The printing industry has earnt itself a bad credit rating, with many paper merchants suffering a whopping number of bad debts over the past few years. We've all heard stories of what seemed like rock-solid printing operations falling into the hands of administrators, with Mercury Print, Kalamazoo and Teldon Print some of the most recent examples. While it might take a little while for these stories to surface in the trade press, paper merchants are always the first to find out.

With technological change moving at such a fast rate and price competition as fierce as it is, many commercial printers are finding it increasingly difficult to pay off their debts in time. This obviously leaves paper merchants in a very vulnerable position.

Meanwhile, the merchants have their own woes to deal with. Paper prices are at their lowest point in 15 years and while the beginning of the year saw price rises, they have found it near impossible to make such hikes stick in the past. Bernard Cassell, managing director at CPI, classes the current environment as containing, “some of the most difficult conditions the industry has seen.”

Covering your asset

Credit insurance offers merchants a certain degree of peace of mind when dealing with printing companies - but at a huge cost. Following the payment of a hefty premium, the insurance agency agrees to cover the merchant's debtors if thet are not able to pay. This does not mean the merchant will necessarily get all of its money back - as with car insurance, there is an 'excess.'

While the merchants are hesitant to reveal exactly how much they are paying, the general consensus is that insurance comes at a high cost to the industry. Premiums are calculated as a percentage of the merchant's annual turnover, with the figure depending on a number of different elements. The credit history of the merchant is the most important factor, followed by the history and reputation of its clients, and indeed the actual sector the merchant is providing to.

To assess the merchant's clients, the insurer draws primarily on what it terms 'mercantile info.' This can come from public institutions like the Stock Exchange and ASIC, but insurance agencies also conduct their own research. This may be from contracted credit bureaux, or it is not uncommon for insurance companies themselves to pay a visit to check out how printers are running their businesses.

Greg Street, general manager for Spicers Paper, claims credit insurance is a relatively new development for the paper industry, called forth in urgency late in the 90's when the amount of bad debts was at an unacceptable level.

“It was a very difficult period for the printing industry, and a lot of companies were going under,” says Street. “Printers are obviously continuing to do it tough, but at least now we are offered some protection.”

According to Street, the economic conditions make credit insurance a necessity for any paper merchant. “It's hard times for printers, and we obviously want to do as much as we can to support them. But we also have to look after ourselves.”

The high cost of protection

Simon Doggett, director of Australian paper merchant K.W. Doggett, confirms his company pays a six-figure sum every year to purchase this kind of credit protection. “It's a huge expense, but it allows us to have some degree of comfort in dealing with customers we know nothing about. It provides merchants with an understanding of who the strong companies are, while also giving them an excuse not to deal with the companies likely to skip out on their debts.”

For K.W. Doggett, credit insurance is seen as somewhat of a last-resort option in dealing with its clients. “When we open up new accounts, we seek either a director's guarantee or to have a look at financial accounts, to get security over our debts and understand who we are dealing with. If that information is provided then you can make an informed risk decision on the company. But as not many companies are prepared to do that these days, it leaves us no choice but to seek insurance to protect our credit exposure.”

Doggett claims there have been some bad debts in recent years, and the fact that so few insurance companies will go anywhere near the printing industry is a bad sign. While K.W. Doggett delivers a tender out to the marketplace on an annual basis, it always comes back to the same two companies - QBE and Coface. The others simply price themselves out of the ballpark, which is a pretty clear indication they are not interested in credit coverage to companies in the printing industry.

Carousing the carousel

The so-called 'merchant merry-go-round' is a situation where a printer exhausts his line of credit with one merchant before moving onto the next to purchase even more stock, without paying his initial debts. Credit insurance restricts this dubious practice: the insurers keep a database of the debtors and the different merchants they buy from, and the second they go running to another supplier they are flagged.

Doggett says it has also forced the paper suppliers to run a tighter ship in dealing with their clients, emphasising the need for effective processes in all business dealings. “After all, if a printer cannot pay its debts within 90 days then what sort of company are they running, and should a merchant feel comfortable dealing with them? Credit insurance enforces business discipline, so it has definitely been a good thing for the industry.”

When coverage is declined, it comes down to a judgement call on the part of the merchant. Will they sell to them regardless, or will they live and die by the whims of their insurers? “We might have a really good relationship with some of our clients that get knocked back, and in some instances we know the companies better than our insurers do,” says Doggett. “So we make our decisions on a case-by-case basis.”

Risk management players

Along with QBE, Coface is one of the only two companies prepared to offer credit insurance to the paper industry at reasonable rates. An AAA rated company with operations in 93 countries around the world; Coface holds an 18 per cent share of the global credit insurance market. It covers several merchants in the Australian market, two of which boast an annual turnover of over $100 million.

James Melrose, general manager of Coface in Australia, argues credit insurance is essential for any merchant operating in the paper industry. “Debtors are a major asset to the company. If a business is prepared to insure its fixed assets, then it should also be insuring the credit that it provides to its clients. This forms a major part of any merchant's cash flow.”

Melrose is a firm believer that the high premiums are in line with the security offered. “When you consider it is an asset that is being insured, and there is a much bigger risk if you do not have cover, then the cost is in line with that.”

He confirms the printing industry can indeed be a shaky sector to play in. When the company first began covering paper merchant debts six years ago it experienced a high incidence of fallout, failing to make any profit. Coface has since found a niche providing insurance to a selection of the larger paper suppliers already backed up with their own credit management - which lowers the dangers substantially.

“It's always going to be a risky industry to play in,” says Melrose. “There are a lot of commercial printers in the marketplace, and it's a very competitive environment. You can see many businesses that have remained the same for a good number of years, but the reality of a changing marketplace is that if they don't refocus on providing better service, then they could find themselves getting caught out.”

For Coface to cover its own risk, it restricts its insurance to the merchants already proficient in managing the credit of their printing clients, and in some cases declining to provide coverage for printers that do not meet its standards. “Merchants obviously want all of their debtors secured, so we do our utmost,” says Melrose. “But there will always be some debtors who don't meet our criteria, to whom we have no choice but to deny coverage.”

The high price of risk

Melrose attributes a good deal of Coface's success to the existing credit management of his clients, and their knowledge of the printing sector. “If they have good credit management behind them then that's half an insurer's job done.”

With the economy chugging along at a steady rate, the premiums the merchants are paying are holding steady. “After a few teething problems, the printing industry provides a steady and acceptable risk,” says Melrose.

This does not make credit insurance any less important. As Print 21 goes to press, the fate of Melbourne's Mercury Print rests in the hands of the administrators, while the remains of Sydney icon Kalamazoo were stripped away by a print management company in Perth following the printer's liquidation late last year. If paper merchants want protection from such business tragedies, they will continue having to pay through the nose for it.

QBE Insurance, which holds the lion's share of merchant insurance coverage, declined a request to participate in this article citing issues of confidentiality.