Minimize Loss in a Sluggish Economy
By Marilyn Blake
It is generally agreed that when the U.S. economy is struggling, many U.S.-based businesses feel financial pain. Call it the trickle-down or trickle-up theory, but regardless of the direction of corrective flow, the overall economy and individual companies must take action. Businesses, for instance, can adjust operations in an effort by management to meet their budgeted profit expectation, and they often seek to balance out revenue and expense variances throughout the course of the year. They can potentially cut expenses by laying off staff because revenue isn’t as great as expected, or they can increase the price they charge for their products and services to try to cover expenses.
In the past 12 months, Telcom Insurance Group has seen companies reducing staff and increasing their prices. The reality of businesses taking corrective action in a struggling economy is alive and well. How can insurance providers respond with products that offer solutions to minimize financial loss for businesses that are triggered by a sluggish economy? Look to three solutions: credit insurance as a management product for bad accounts receivable debt; the need for employment practices liability insurance and a provider with human resources assistance; and a policy that addresses vacancies due to a business downturn.
Nix Nonpayment Vulnerability
The low-margin nature of the telecommunications industry and the fact that the transport of calls occurs through multiple companies means your business is particularly vulnerable to the financial consequences of nonpayment of receivables. Many of you may have dealt with this kind of bad debt. What can an insurance provider offer or do to prevent, or at least mitigate, bad debt losses? Isn’t credit risk just an unavoidable cost of doing business?
The simple answer is no. There has been, and remains, a market that will insure against the possibility of a receivable becoming uncollectable due to the failure of the payee. Credit insurance was born at the end of 19th century, but it was mostly developed in Western Europe, between the first and second World Wars. Several companies were founded in every country; some of them also managed the political risk to export on behalf of their state. So you can transfer the risk to a third-party insurance provider by paying a policy premium.
You may be surprised at how cost-effective credit insurance can be when compared with writing off bad debt. This type of insurance reduces balance-sheet and earnings volatility. It also alleviates a risk situation where you have a large credit extension to one company. As an estimate of cost, for only 10 to 30 basis points (1/10 to 3/10 of 1%) of revenue, you can insure your accounts receivable against credit loss.
For a firm with $5 million in annual revenue, the typical premium would be between $5,000 and $15,000. In addition to the insurance component, the credit insurance carriers include, at no additional cost, a variety of other tools and resources designed to reduce the incidence of nonpayment. These resources include access to expert evaluation and proprietary databases that allow ready evaluation by management of the creditworthiness of both existing and potential clients.
In the event that your company will need to eliminate part of your workforce to reduce expenses, you will be faced with many questions about whom to let go and for what reasons. If you act improperly, you could be questioned and potentially sued by the terminated party for employment practices liability (EPL), which is an exposure to legal liability caused by an employee, past employee or potential employee claiming their rights have been violated. Discrimination based upon race, national origin, sex, religion, physical disability or age could be used as examples of what the employee may claim.
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