By DAN REYNOLDS, senior editor of Risk and Insurance®
Amid our recent discussions with automobile manufacturers and insurance brokers, the one issue that came up time and time again was that of trade credit risk.
With all of the uncertainty affecting not only what are referred to as Detroit's Big Three--Chrysler, General Motors and Ford--but their myriad suppliers as well, coverage for the failure of a manufacturer or supplier to pay for goods they've already ordered and received is becoming a hot item in the insurance world, so hot you can't get it in some cases, according to members of Marsh's automotive brokering segment.
"I wouldn't say it is impossible to get but it is very challenging," said Marshann Varley, a former risk manager for General Motors who is now a senior vice president for Marsh based in Los Angeles.
"There are still some companies with cash. It kind of gets to the strongest will survive," she said.
"We have capacity. It is just very challenging for the automotive sector, and that really started last summer," Varley said.
Members of Marsh's New York-based trade credit insurance practice said such products as receivable purchase agreements, in which banks or other financial institutions can contractually agree to step in and purchase outstanding receivables in the event of a default, have been one way to bridge the gaps when trade credit risk insurance is hard to come by.
"We see it as a hybrid between a credit default swap and credit insurance," said Donnie DiCarlo, a vice president in Marsh's trade credit insurance practice.
DiCarlo said he and his colleagues are keeping a sharp eye on the $5 billion trade credit insurance program offered by the government to the Big Three's tier-one suppliers.
"That is something that we have actually been consulting our clients on," DiCarlo said.
"I think one of the things that they need to consider is that, while risk mitigation is obviously extremely important, what it comes down to for a lot of them is it's a matter of cash flows," he said.
Trade credit issues affect not only the ability of manufacturers and suppliers to do business without fear of a revenue implosion brought about by a failure to pay on the part of a vendor. They also affect the ability of dealers that rely on credit from manufacturers to bring product onto the showroom floor and keep it there until such time as they can make a sale.
"Because the credit issue is also affecting the product getting to market," Varley continued.
It might not be readily apparent to the average car buyer, but all those shining automobiles that line dealer's lots are there under the same auspices of many of the glittering sedans and SUVs we see cruising down our highways. The only way they can wind up on those lots is if they've been financed.
"My clients that are dealers are struggling with that. Dealer floor plan insurance is being affected," Varley said.
DiCarlo said by all appearances such showroom floor protection is not a part of the government's $5 billion trade credit program.
That news may be a death knell to some dealers.
"You are even going to see that the dealers are closing right now," Varley said.
So what would it take for trade credit risk coverage to come back to the market in amounts that could do automobile manufacturers and suppliers, not to mention dealers, some good?
"I think consumer confidence has got to come back first," Varley said.
"I think the press has done a really good job since last April when we first had the gas crisis in scaring Americans, and people stopped spending. And when people stopped spending, retail was impacted and people's jobs were impacted and unemployment just skyrocketed."
And what of the future of the automotive sector itself?
"I do see a world where it can come back, but I don't see it coming back to the capacity in the automotive market that we have currently enjoyed. I still think there is a place for domestic auto manufacturers such as Ford, GM and Chrysler. I don't know if there is enough capacity for all three."
April 1, 2009
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