Every CFO of large and multinational organizations feels the pressure to reduce waste and cut cost. In this period of uncertainty and volatility, efficiency is critical to drive agility and sustain profitability. But amid the frenzied conversation about how technologies such as automation and artificial intelligence (AI) might unlock value, a major opportunity is hiding in plain sight: there is now huge potential to rethink trade credit insurance arrangements in a way that delivers valuable savings.
CFOs rightly see trade credit insurance as a vital risk mitigation tool, protecting the enterprise when customers don’t pay what they owe. But many multinationals now operate hugely complex portfolios of trade credit policies, built up through local or regional subsidiaries in an era when a lack of shared data and technological innovation required a decentralized approach. Few have questioned that structure, despite its significant cost footprint.
At first sight, CFOs may not recognize trade credit insurance as a significant line item. The organization’s central finance function may approve budgets for the rest of the business – based on guidance around the cost of premiums – but it typically then leaves local teams to get on with actually arranging and managing the cover.
What finance doesn’t see is how much work those processes involve. Local teams deal with a series of often cumbersome tasks, from making credit limit applications and administering renewals to managing customer compliance and handling claims. The workload is repeated over and again in every business unit managing trade credit insurance at a local level.
Critically, it’s not the cost of premiums that really drives trade credit insurance expense in multinational organizations. Rather, it’s the back-office work required to underpin trade credit agreements; multiple business units around the world are driving inefficiency through manual exception handling, IT conflicts and administrative overload.
Fragmentation inevitably leads to more process and complexity. Yet CFOs don’t see this – the cost is spread across local finance teams, often embedded in individual workloads and not visible in consolidated workloads.
The good news is that it doesn’t have to be this way, particularly now that so many multinational organizations are migrating local myriad enterprise resource planning (ERP) systems onto a single cloud-based platform. This provides the central finance function with far better access to data than ever before, enabling it to take control.
In practice, CFOs have several options for securing savings from their trade credit insurance arrangements.
One option is to focus on the structure of the insurance itself, redesigning cover from the center. For example, some CFOs are exploring high excess-of-loss group structures; these retain more predictable risks on the balance sheet to significantly reduce claims frequency, administrative effort and premium levels. Others are moving toward a high degree of standardization, aiming to minimize operational touchpoints in the local business unit and to improve transparency at group level.
An alternative could be to maintain local policies under a master agreement, preserving local claims payment and regulatory alignment while strengthening central governance. CFOs are also making more use of shared service centers, giving regional or global specialists responsibility for operational tasks such as credit limit administration, monitoring and claims handling, even when local policies remain in place.
Each approach comes with distinct trade-offs. Retaining more risk will deliver greater cost efficiency. Taking more central control will reduce local room for maneuver. Simplified governance may need to be weighed against local regulatory and tax considerations. There is no single right answer – the best approach will depend on factors including the business’s structure, geographical footprint and the CFO’s appetite for risk. Still, there’s real potential for a redesign of the business’s trade credit insurance to generate significant cost benefits.
Alongside this redesign, emerging technologies provide additional opportunities, enabling CFOs to net even greater efficiencies.
Already, advances in AI and automation provide finance with opportunities to significantly improve credit risk management processes. The possibilities include automated credit decisioning and customer credit limit monitoring, as well as intelligent exception and objection handling. New tools can help finance to streamline claims triage and compliance checks. And the technology enables a major upgrade in terms of transparency, providing real-time visibility at group level.
Technology is an enabler, not a silver bullet. It should help CFOs to capitalize on the benefits of redesigning trade credit insurance structures, but that work needs to be done first to get optimal results. AI tools require high-quality data; automation reduces effort but only if the underlying operating and insurance model is designed for efficiency.
Indeed, simply implementing automation on top of fragmented structures often increases IT costs and complexity – and fails to address the root causes of inefficiency.
The debate around trade credit insurance will prompt CFOs to think about broader strategic questions:
The answers will vary by business – and by CFO. However, the broader point is that to overlook trade credit insurance any longer is to pass up the potential to secure significant new efficiencies. There will be many options for realizing such benefits – and every CFO should be informed by their organization’s data – but the opportunity is too big to miss.
To find out more about how you can optimize efficiency and unlock the full potential of your trade credit insurance program, get in touch.
