NITEEN JOSHI: Well, I believe it's been over 20 years actually in the current employment. It's been more than 12 years in the previous employment, probably 8 to 10 years. So I've used insurance in both of my companies that I've worked for the last 20 plus years.
SCOTT PALES: OK. So today we have a guy with two decades of experience going to talk to us about using credit insurance. So that's fantastic. Thank you, Niteen, and I appreciate you sharing your knowledge with us today. I imagine in that 20-year span you've used trade credit both on a domestic as well as an international basis.
NITEEN JOSHI: Absolutely. All along, the companies that I worked for had both domestic and international divisions. And I have used credit insurance in almost every conceivable way.
SCOTT PALES: So you're going to be the perfect person to talk about the reasons why companies purchase trade credit insurance. I mean, after all, it's a discretionary spend. So there's got to be some valuable reasons that this product makes sense for these corporations. So let's start off in no particular order. What are the reasons why Lincoln Provision purchased trade credit?
NITEEN JOSHI: Well, Lincoln Provision is in the meat business. And the meat industry has a huge customer base as everybody has to have some food, and meat is the popular cuisine for everybody. And we do sell to further processors as well as some restaurants and grocery chains. And it's not necessarily always our customer. But since we are in B2B business, the customer's customer could have a problem. And as a result, my customer could suffer a financial loss.
And as a result, I mean, it could affect their credit worthiness and we would need the insurance to cover the receivable. So quite honestly the policies first and foremost purchased in my industry or for any industry for that matter as a risk mitigation tool to manage the credit risk. And it does cost money, it's optional, but I look at it as a cost of doing business.
SCOTT PALES: Excellent. Excellent. I hear you loud and clear. You said it, first and foremost, it's a risk mitigation tool. But as you were talking through that and talking about your customer's customer, I also hear that you perhaps use this as a credit management tool. It's used certainly by yourselves as a way to make good credit decisions. Am I reading into that too deeply or do I have that right?
NITEEN JOSHI: Not necessarily. I think it's pretty straightforward. So whenever we have a new customer filing a credit application, we go to the insurance company to assess what kind of a credit line or credit limit that the insurance company is willing to cover for this customer or to what extent the customer is eligible. And based on the feedback that we get from the insurance company, which is in actual dollars, we make our decision actually to decide what credit limit we should have for each individual new customer that we have really no idea about.
And sometimes we value it more, actually I would say if the insurance company denies the coverage. Because what happens is that that's a trigger for us to know that, hey, this is a risky business, do we really want to get into it? And sometimes we shy away from it or we put the customer on a COD basis. And just to manage your receivable and mitigate the credit risk that you have.
SCOTT PALES: Yeah. You brought up a great point because normally, in this industry, customers generally look at those nil limits as a negative. The insurance company is not supporting, either issuing a zero cover on this particular buyer. But you're looking at it from a completely different perspective. You actually find that to be a positive because it helps you avoid, I guess, a potential loss. In that basis, do you look at international customers any differently than maybe you look at your domestic customers?
NITEEN JOSHI: Definitely. Because unlike a domestic customer, we don't have too much information on the international customers. Most of the times, international customers are reluctant to share the credit information. Also it is quite difficult sometimes to decide who the ultimate parent company is because they operate with various shell companies. So credit insurance, actually it's a basic protection to run our business. And quite honestly, to put it in simple terms, I look at the credit insurance as similar to a life insurance for an individual because finance is the backbone of any business.
No matter what your profit margins are, if you do not realize the receivable and turn it into cash, your business is not going to survive for a long time. So it's basically a life insurance for us.
SCOTT PALES: That's a great analogy. I don't know if I've ever come across that analogy in the past. But if you don't mind, I'm going to steal it for the future.
NITEEN JOSHI: Be my guest because it really-- it's really good.
SCOTT PALES: Well, while we're speaking of international business, have you ever used the trade credit insurance policy to support any of your financing activities? Because I do know that other corporations do that. Has it been a tool for you to support bank financing?
NITEEN JOSHI: Yes, definitely, although we don't use any financing currently. But in the past, we have definitely used the policy to allow our international receivables to be eligible for advanced within the lending program. And actually one more thing, our bank would not allow the receivable to be eligible without the credit insurance.
So it was almost mandatory for us to have credit insurance on our international customers unlike domestic customers. So yes, definitely I would suggest that it's very important to have credit insurance for your international business, a little more important than domestic.
SCOTT PALES: Yeah. No, that's a great point especially if it can facilitate better advance rate through maybe ABL funding or programs of that nature. So you've touched on a couple of different reasons that you currently are using trade credit insurance as a tool. I'm curious about one more because as you were talking earlier about using the policy and specifically the credit decisions that the insurer came up with, I'm wondering, does it also facilitate maybe some increased sales for LBI? both to those new customers that you don't have much information on, whether they're domestic or international, and then maybe existing customers where the outstanding need is greater than maybe the credit teams feel that that particular customer is eligible for?
Do you use it in that fashion to maybe help with sales?
NITEEN JOSHI: Yes. It is almost automatic because as you said that for the new customers, if I apply and if I get-- we have an easy cover type of coverage within our insurance, which instantly gives us the credit limit. So you say, for example, if I have a new customer and all of a sudden when we applied we get $100,000 approval, I can now tell my salesperson that hey, go. Go sell as much as you can because I have $100,000 coverage, you may be wanting to sell only $25,000 at a time. But you know what? I've got more appetite for this customer.
So definitely it helps in increasing the sales. As far as the existing customers, those who have already a limit in place. And if I see the activity increasing, there are two ways I can approach it. One way is to request the insurance company to increase the limit. And second way is to get an additional insurance for a small fee, which we call as a cap. So basically increasing the capacity of the insurance company to insure the customer and the cap is available for most of the cases 100% of the original limit, so that obviously expands our capacity 100% more to do the business.
So yes, it does help in increasing the sales in both cases and known customers and known customers with this cap program.
SCOTT PALES: So I'm not going to put words in your mouth, but you're almost saying that the increased sales maybe cover the cost of the policy and then grow the bottom line for the corporation as well or the top line.
NITEEN JOSHI: Absolutely. You know what? I don't even consider the cost to be a significant thing because as I said, it's a cost of doing business. If you want to stay in business and one single major loss because we create huge receivables for the customers. And one single bankruptcy could basically pay for my two or three years worth of premium. So I mean, from that perspective, I don't even worry about it. In the total scheme of things in our budget, this cost is not really that high, the rate for domestic is much more affordable than the international.
But again, nationally we have higher margins. So we adjust it in our margins as well to cover the cost for this insurance because we're able to do that in our business.
SCOTT PALES: It's fantastic point, thanks for those Niteen. Now I want to get into the nuts and bolts of the coverage. And for the most part, the reasons why corporations ultimately purchase. And that's to cover a loss to pay a claim. So in 20 years of trade credit insurance, I imagine you've had a claim or two. And it's obviously the most scary point in time for organizations because now they have a loss, is the insurance going to pay? What's your experience in working with the insurer through claims? And is it scary as maybe perhaps some people may think?
NITEEN JOSHI: Yes, it is. But in just one word, my experience is-- is the process is absolutely seamless. And I must make a point here that we have had a great support from Willis Towers Watson as our broker, because they have an inside out knowledge of what the policy, the terms and the conditions. And they assist us very well in the whole claim process to expedite it, to educate us from time to time, and to answer any questions that we have, which I'm sure insurance companies would do as well. But we just have a much better comfort level talking to our broker.
SCOTT PALES: So I appreciate that plug, I guess I owe you a free lunch on that one. Thank you.
NITEEN JOSHI: No need to do that because I spoke my mind.
SCOTT PALES: All right. So in terms of that claim experience, have there been any hiccups? Did you not have a claim go according to plan? Did it work well?
NITEEN JOSHI: Yes, it did work well in almost all the cases. And sometimes it's like we had to provide some documentation, and sometimes it could be challenging. But as I said, there are some complex claims. However, I must say that there is one additional aspect that the insurance company provides us, and that is the collection service.
SCOTT PALES: Yeah.
NITEEN JOSHI: Yes, exactly. So before the claim actually is filed, our current insurance company, Allianz, is providing us a collection service which is actually much cheaper in cost as compared to any other private collection companies or third party collection companies. The process is quite automatic. I mean, you key the information on the online portal, the collection process starts. They do a great job in collecting for most part.
And if, for some reason they are not able to collect because of the bankruptcy of the customer or going out of business for that matter, then it automatically converts into the claim, and we get the claim paid. However, I value the collection service a lot because it's much cheaper than paying the deductible and paying the co-insurance. So that aspect of the policy and the service, I appreciate and I like it very much.
SCOTT PALES: I would have failed to even mention it, I'm glad you brought that up because in our line, we're always thinking about the claim. But here, you're getting to a resolution before you have to go through the process of even going through claim because the collections do indeed work well. So thank you for that, it's an aspect I would have even crossed over. So appreciate that, it's a great point. So now I'm going to shift over a little bit and get away from claims, because I think you hit it in a nutshell, you said it's seamless so.
I'm going to stop at that point because I love that word. And I'm sure all the insurers listening to the WTW podcast are going to love it as well. So next, I'm wondering, because we talked about it being a discretionary spend, how do you look at this spend if you're coming into a recessionary environment, like we are now, versus very strong cycles where the credit is-- the credit risk is relatively benign. Does that change your outlook on the use of the policy at all?
NITEEN JOSHI: Well actually we find value in the policy no matter what the business cycle or environment is. Because, look at it this way, when we face the recessionary environment, obviously our credit risk is heightened. And with the potential risk of increased insolvencies as well. So in that case, obviously it is very, very helpful and necessary-- even more necessary to have the insurance because you need added protection. However, in case of increasing market, our sales to the key customers can grow beyond our comfort level, beyond even the insurance limit for that matter.
OK. And also, our industry has very fluctuating prices.
SCOTT PALES: Yeah, commodity-based.
NITEEN JOSHI: Exactly. Based on demand and supply and the total slaughter in the US, there are several factors but definitely it's a demand and supply. So what happens is that when the prices are too high for the same quantity or same volume of product that we sell, our receivable outstanding can be significantly higher. And due to this volatility in prices. And then at that point, we need this insurance even more, because now we are owed a lot more money than even our limits are.
And at that point, we really need to be ensuring that our receivable is protected in case there is a problem or there is an issue with the customer actually growing beyond their own capacity.
SCOTT PALES: Thank you for that, because I would have assumed you would have said, hey, in the recessionary cycles, it's going to be of utmost importance because we're facing potential insolvencies. But you're right. Even in those-- even in those benign sectors or benign cycles, you could see receivables climbing beyond comfort level. So thank you for that, I appreciate that. So you've covered quite a few great topics for us today. I appreciate all of your insights, do you have any closing thoughts on trade credit insurance, the food sector, meat in general, any closing thoughts on our discussion today?
NITEEN JOSHI: Well, I would say, you know what? Although accounts receivable insurance is a security blanket for you, you cannot ignore watching your own business and you cannot blindly depend on the insurance that OK, no matter what the insurance is going to pay for it, so why should I care watching my receivable? No, I mean, definitely use it as a tool, use it as a support, but you need to be very vigilant about your credit procedures, about your collection efforts, and making sure in the turbulent business environment that you manage your business properly.
Obviously the accounts receivable insurance is going to be a great help and do take that help. But I would say, watch your business for yourself and its success. Thank you so much.
SCOTT PALES: Wow. That is also going to make all of our insurers listening very happy to hear, very good point as well though. Yes, the insurance is valuable, but you must always obviously keep your eye on your own business. So thank you for that. Niteen, great discussion today, thank you for all the insights on the way you've used trade credit insurance for your business. It was a great conversation. So thank you very much.
NITEEN JOSHI: Well, thanks to the listeners and thank you Scott for having me today. Have a wonderful day. All the best, thanks.
SCOTT PALES: And thanks to our listeners as well for tuning in. Be on the lookout for future podcasts, cover other sectors at risk. And until next time, trade safe and be well.
Thank you for joining us for this WTW podcast featuring the latest perspectives on the intersection of people, capital, and risk. For more information, visit the Insights section of wtwco.com.
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