Global Finance sat down with Jochen Dümler, president and chief executive officer of insurer Euler Hermes North America, to look at the global market for trade credit insurance.
Global Finance: The role of trade credit insurers has moved beyond simply underwriting credit risk and paying out claims. What tools and techniques does Euler Hermes use to help a company determine whether a potential customer is a good risk?
Jochen Dümler: We see ourselves as an adviser to help companies, whether they are moving into a new region or sector or selling to a new customer in the same market. We look at the political risk of a country or a region. We look at the risk of an industry at the specific point in time, and the risk of a particular company. We analyze all the financial data—such as the buyer’s finances, profits, liquidity, payment behavior and location—using people on the ground in the market being assessed, and put it into a mixer and assign a grade to that potential customer.
GF: Which markets are the most difficult for a credit risk insurer to assess?
Dümler: Markets in which transparency is an issue…where the quality of the information can be debatable. For example, Russia or China. In some countries, there are real balance sheets and fake balance sheets. We have to know the difference. We use credit analysts in the market and invest in staff with the expertise. We use every piece of information we can get. But we never join forces with shady operations.
GF: US companies are not significant purchasers of credit insurance, compared with European companies. Why is that?
Dümler: That is the golden question. If I knew the answer to that, I would push the button and business would explode. The US market is, at maximum, 10% of what we find in Europe. European companies know about trade credit insurance. In the US, many companies don’t know what it is. We think it’s [also] a cultural issue. US entrepreneurs are less willing to insure: They are bigger risk-takers.
GF: Are certain industries known for being big purchasers of the product?
Dümler: There is a good foothold in retail, food, the chemical industry. Energy has vast potential. We’re opening an office in Houston.
GF: What geographic markets are the most heavily penetrated?
Dümler: Spain, France, Italy, the United Kingdom and Germany. Poland has developed very quickly since 1995. Central Europe is strong. In general, Asia-Pacific is underpenetrated, [except for] Australia and Hong Kong. China, Russia and Brazil have the most potential. The Gulf region, including Saudi Arabia, is dynamic and growing. In India the market has faced heavy restrictions. We have well-established operations in Russia. We brought people into Brazil before there was the need, because we saw the opportunity for growth. We’re not in Iran, Afghanistan or Somalia.
GF: Is there a certain size of company that can benefit particularly from the services of a credit risk insurer?
Dümler: Any size company can benefit, from a potato grower in Iowa to a multinational. [When] we meet with chief financial officers of large companies and talk with them, they may have five ingredients that help them assess the risk of doing business with a potential customer. We add a sixth ingredient to the mix. We can also help large companies protect against catastrophic losses. We try to steer clients to areas where the reliable information means they will be successful. For example, several years ago we steered clear of efforts in the Spanish construction industry. It was not worth it, no matter how the risk was priced.
GF: How has the decline in oil prices affected the business?
Dümler: Any factor that makes goods cheaper is a good thing.
GF: What is the most sensitive part of your business?
Dümler: We head into sensitive territory when a company is in trouble and their numbers and results are deteriorating. We want to protect our clients, and we will tell them when the situation is too risky. On the other hand, we don’t want to create an insolvency. A company in trouble may be more reluctant to share data. It’s a bad sign if they start selling the family silver…their real estate. But we work with a company in trouble. We want to avoid a bankruptcy.