Credit insurance was introduced in the United States just over 100 years ago (in 1896), and Jim Hawkins and his family have been in the business darned near that long. "My father sold credit insurance for 60 years, and I am getting close to 50 years of service myself," reports Hawkins a general agent with the Jim Hawkins Agency Corp. (Medina, Ohio), who started selling policies in 1952. The agency, which specializes in credit insurance, is now in the third-generation, with Hawkins' son currently president of the agency.

He replied that over the past half-century, he has seen ten trends that have been leading to the increased need for (and subsequent popularity of) insurance. He listed them as follows:

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

1. As receivables grew after World War II, no one paid much attention to them. "Inventories were the largest and most important assets that companies had," he says. "Fixed assets, such as equipment, were second in importance. Few people paid attention to receivables, and they were taken for granted, because, at the time, everyone wanted product, and everyone paid on time - 30 days or less.

2. In the 1960s, as competition began to heat up and as seasonal businesses realized the strategic benefits of selling year-round, companies began to offer credit terms (e.g., dating and extended terms). "It was at this time that accounts receivable began to grow as an asset," reports Hawkins.

   Credit insurance companies noted this trend, but had a difficult time selling policies to businesses. "Businesses just weren't experiencing enough losses to be interested in insurance on their accounts receivable," he continues.

3. Through the 1970s, United States tax law allowed companies to write off various amounts as reserves for bad debt on accounts receivable. "These reserves tended to be substitutes for credit insurance," he says. "Once the tax law changed to prevent these write-offs, however, there was no longer any tax advantage to create reserves." As such, companies began to find their accounts receivable being exposed to more risk.

4. Around the same time, companies began to notice an increasing trend in delayed payments from customers. It was (and still is) considered "good cash management practice" to hold cash as long as possible.

5. By the late 1970s, with the substantial liberalization of the bankruptcy laws, companies began to suffer substantial accounts receivable losses as bankruptcies began to skyrocket.

6. In the early 1980s, as business began to focus on becoming "lean and mean," many began to adopt just-in-time strategies as ways to make substantial reductions in their on-hand inventory levels. As inventory assets decreased, accounts receivable assets became a relatively larger percentage of total assets. "Now, for approximately 50% of commercial businesses in the U.S., accounts receivable is the largest asset," points out Hawkins.

7. The 1980s also saw an expansion of United States business, not only in terms of companies doing more business in their own industries, but expanding into new markets. "One problem these companies began to face was the fact that they did not have the same kind of financial information on their new customer bases as they did on their existing customer bases," continues Hawkins. Extending credit in these new markets became much more risky due the shortage of long-term financial data.

8. Another business strategy that had implications for accounts receivable was the trend among customers to begin to collapse their supplier bases--doing the majority of their business with 20% or less of the number of suppliers with which they had once done business. The reciprocal of this was that more and more suppliers found themselves doing more business with fewer customers.

   At this point, the Pareto Principle came into play. "Businesses found that they were doing 80% of their business with 20% of their accounts, opening themselves up to much higher accounts receivable exposures than they had previously had," says Hawkins. (In other words, if one customer out of 1,000 went bankrupt, it might not be a significant loss. However, if one customer out of 100 goes bankrupt, the losses can be significant--enough even to put a small company out of business completely.)

9. Fueling the need for accounts receivable protection even more was the export explosion that began in the l990s. While a large percentage of this business was done via letter of credit, the l990s saw a change in attitude among foreign customers: They no longer wanted to deal with letters of credit. They wanted open terms, and if they couldn't get them from one supplier, they would get them from another supplier. Result: More and more companies, in order to remain competitive, found themselves being forced to export on open terms. Again--substantial exposures to the accounts receivable portfolio.

10. Finally, more and more banks and other lending institutions are now beginning to require credit insurance when considering loan packages. "They are realizing that accounts receivable portfolios are liquid assets, much easier to collect on than equipment and inventory, which may only be able to be sold for ten or fifteen cents on the dollar."

Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.

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