The Efficacy of Credit Insurance A Study of the Quantitative Impact on Trade Receivables and Receivables Turnover Ratio
Export Trade Credit Insurance is a financial service product that intends to cater to the risk management needs of a company. Its primary purpose is protecting a policy holding company against payment defaults, insolvencies and bankruptcies that their business partners (buyers) can face. This helps the company keep their Accounts/Trades Receivable and bad debt under check. The goal of this thesis is to study the impact of Credit Insurance coverage on a policy holding company's A/R levels, RT Ratio and overall financial health. The sample in the empirical section consists of 7 Finnish companies that were covered by EH Finland from 2012 till 2014, at least. Financial Statements of these 7 Finnish companies, covered by Euler Hermes, Finland have been analyzed. To understand the relative impact of Credit Insurance on these companies, they were compared with industry average values that correspond to a given company's industry type. To help the calculations reflect a fair assessment of this impact, RT ratio has been used to account for the changes in turnover relative to the change in A/R for a given period. The average difference in RT Ratios for these 7 companies between 2 time periods before insurance coverage and under insurance coverage was 4.25 Without 2 outlier sample subjects, the effect increases to 6.41 Notably, the average difference between the RT Ratio for the 7 companies was 0.24 whereas the industries they belonged to saw a reduction in their average by 4.38 Credit Insurance coverage could not make a quantifiable, and more importantly, significant difference on their policy holders' RT Ratio.