SCOTT PALES: A warm welcome to our listeners. As we continue our Trade Safe series, I'm your host Scott Pales. I'm a trade credit specialist broker with WTW. With me today is my guest, Peter Van Ede. Peter's the global head of WTW trade credit line of business. Welcome, Peter.
PETER VAN EDE: Thanks so much, Scott. Thanks for having me.
SCOTT PALES: Excellent. So Peter, for this episode, we're going to be discussing the various causes that we see for claim declinations and more importantly, how our insured clients can avoid these claim denials. After all, these corporations are paying insurance premiums to have claims paid when a loss occurs, not receive a declination notice. So I'm going to break this down into some key areas for discussion. Let's start with one of the key areas, policy reporting breach. Do you agree that the failure to report past due balances within the notification period is one of the primary reasons for declination of claim?
PETER VAN EDE: For sure it can be, Scott. Like you mentioned, our clients pay premium. They expect to collect when a default occurs. But unlike other instruments, credit insurance, trade credit insurance have an element of conditionality in it. And from the statistics, from the underwriting community, we know that the let's say the untimely notification element of a past due account is one of the key potential reasons for an insurer to decline a claim. It can vary from policy to policy. Typically, across the policies, we see this period to be 60 to 90 days, but it's a crucial element to be aware of as a client to make sure that you can collect the claim. Scott.
SCOTT PALES: So just what exactly do the insurers do once these past due notifications come through? How is it useful to the insurer? What do they do with it?
PETER VAN EDE: Some do nothing. But in general, you can imagine that our insurers use the information for their own reinsurance agreements. They need to potentially reserve against a potential claim. But also in our markets, we don't have a one on one situation across the board. So in many, many times, our insurers collect these past due notifications as a clear sign that something may be wrong with the customer. And in a case of an insolvency, it's quite clear. But in the case of what we call in our industry protracted default, so prolonged period of non-payment, these notifications can be used to prevent a claim or mitigate a loss. And therefore, it's an important trigger in our policies to act on.
SCOTT PALES: You mentioned that it's an important piece for the insurer, but I would say that this also could be a very important piece for the insured. Give them an early warning system, if you will.
PETER VAN EDE: For sure. But there's also insurers who believe that they're still able to collect, who believe that when they potentially notify an insurer, it may mean that future shipments are no longer covered. So it's a bit of a balancing act. And therefore, it's extremely important to liaise with your WTW broker on how to communicate, when to communicate, and more importantly, to create background on the circumstances of a past due because in many, many cases, after connecting with an insurer, things continue to flow, and there's not a stop of coverage. And certainly, that's what our clients want.
But for our clients, you're right. It can be an additional element of information that they're unaware of beyond having their own past due situation. If this happens across the board, it's clearly a potential adverse piece of information that our clients need to be aware of.
SCOTT PALES: As this is a failure on the part of the insured to make the notification, as brokers, how can we help create a solution against this occurring?
PETER VAN EDE: It starts with onboarding, Scott. And whether you like it or not you and I have been in the industry for quite some time. And we learned through shame that onboarding is one of the crucial milestones in making sure that our clients understand their responsibility. For several clients that I'm personally involved in, it basically means to prepare a cheat sheet from order to invoice to due date. What are the time periods of potential notification if a passage occurs? What are the actions that our client need to take? So that is one, onboarding.
And then typically, continued communication around the portfolio. We have clients who share as you know, who share their monthly aging with us so that we can jointly walk through the aging, sometimes even with the insurer or insurers if it's a syndicate to just clarify, potential past due situations in those buckets that those aging agents show.
More recently, we've seen that insurers and clients and also ourselves have developed technology in which these pieces of information are not manually acted on. But it's a continuous flow of information that allows an insured and an insurer and a broker to communicate on potential issues in the portfolio, Scott.
SCOTT PALES: These are both like third party options as well as options presented by the insurers themselves?
PETER VAN EDE: Correct.
SCOTT PALES: I know for one, I used that monthly aging report with a client. And I think we did it for three or four months before that client then became completely self sufficient with this. So I do think that's a very good solution as well. Let's move on to our next topic. It's maybe a little more delicate because this is specifically the insured's failure under the policy.
The key one that I'm thinking of is the failure to endorse the correct buyer. I do struggle with this often to make sure what the policy says is covered is actually the entity that the insured is shipping to. Do you agree? Does this happen very often?
PETER VAN EDE: I wish I didn't know. But I'm sure in the millions and millions and millions of customers that are endorsed to our trade credit insurance policies across the globe, I am certain that there are a bunch of them that are wrongly identified. It starts again with onboarding, Scott, where we clarify together with the insurer and ourselves and our teams with the client to identify the right legal entity, not necessarily where shipment is going through, but who has the payment obligation to the insured. So our insurers have made it easier. Because of online databases, it is quite simple to identify a counterparty to identify the customer or buyer as we refer to in our industry.
SCOTT PALES: I've been, for example, on one of the main databases. And if we only, for example, get the name and country of an organization, I can key that into the system, and maybe 12 matching buyers come up. And it almost becomes a shot in the dark as to which one is the correct entity. So there's got to be a little more than just these databases. We actually need the client to provide more detail.
PETER VAN EDE: No, for sure. It's the onboarding of a client of their customer as well. So it comes typically with a text ID or depending on the domain or the market, registration number, Dun Bradstreet number, and as you know, as at a minimum, the full legal address. And when in doubt, there are typically, with onboarding, there are matching processes to make sure that every counterparty is clearly identified.
But to answer your question, it is not that the many claim denials in this case. It's just the case that if you look at the wider portfolio that is insured, I'm sure there's still customers in there that are wrongly identified and not matched to the entity that has the payment obligation.
Thanks for clarifying that I was wrong, Scott, with that point. But you're totally right. If you go in the common names, you have to be cautious. And like I said, the ID, the business, legal entity name, as well as the registration number or Dun Bradstreet number, Chamber of Commerce number is typically how we identify the right entity.
SCOTT PALES: Completely agree. This is going to be a very similar track. And I think it's going to go back to one of your earlier points where you said you have to read the policy. But how do these policies treat a parent limit, subsidiary limits, trade styles? Maybe speak to a bit in terms of do we have to pay attention to how we actually endorse the buyer, whether it's a parent or subsidiary.
PETER VAN EDE: Absolutely. And this also is, it can be manuscripted from client to client, from policy to policy. We have some clients that globally prefer to have a group limit on a large global customer of theirs where they sell to each individual subsidiary across the globe. That is one version.
You have another version where insurers have more preference where they endorse each individual entity that has the payment obligation into the policy. And then you have a version where it's a bit of a hybrid where you've got a subsidiary with several trading styles in a certain market. So in that case, again, with onboarding, it has to be pointed out that all those variations need to be dealt with in the policy and eventually need to be resulting in the right entity being endorsed to the policy. Scott.
SCOTT PALES: As you were talking, I was thinking of a case I'm working with right now where the insured is invoicing to two specific countries, US and Canada. But on their country listing of covered countries, they might have 25 covered countries. So maybe let's talk a bit about third country risk because it's often excluded under the policy unless it's brought back by definition; or sorry, brought back by endorsement. So by third country, do you want to talk a little bit about that and how we can help a client look out for that so it doesn't become a declined claim?
PETER VAN EDE: Now, a fair point. And I think especially when you look at the political risk element of our trade credit insurance policies, this is crucial. It also depends on the incoterms our clients have with their customer. So without being too boring to you, Scott, it starts with the onboarding and asks the right questions. And through shame, we have all learned that that onboarding process is crucial to it out in the policy in an appropriate way.
So many of our insurers are able to endorse a third country risk element to the policy. But without asking, you will not figure that out just based on data that we receive as brokers or the same goes for insurers. So it has to be fixed. And depending on the domicile, it's typically sorted out through endorsement in the policy so that, that element of risk, especially the political risk element, is insured in the policy accordingly.
SCOTT PALES: And I think you hit it on the head. It's the onboarding process. So the solution, as you just rightly said, is the communication. During that onboarding process, really check off these items and make sure it's not a key area of concern for a given client.
All right. So maybe next, let's talk about invoice terms because this one, I don't know if it comes up that often. But likely I'm going to hear your same comment, onboarding process, communication, read the policy. The issue is the policy may say you can issue up to, for example, 90-day open terms of sale. But if in the claim submission package there are invoices at 120 days, those are going to those specific invoices are going to be excluded from the claim settlement. How often do you think this occurs?
PETER VAN EDE: I think it occurs a lot. I don't think it's the case based on the statistics that claims are declined across the board, and it's a main declination element in the claims process. However, going back to the onboarding process, we ask our client to provide their maximum terms of sale when we start structuring a trade credit insurance policy.
We also ask our client, typically ask our clients to provide us with their credit management process and procedures. And what we've learned is to really probe on exceptions to the standards that our clients have set within their own firm. And that together with the insurer or insurers, we also incorporate those exceptions in the policy rather than having to operate on a case by case basis continuously.
And eventually, it's also continuous discussions with clients on their operating environment and whether there are any red flags from an extension of payment to extending terms beyond the whatever the policy says. So onboarding, continuous discussions, and probing enough as a broker and insurer that the policy still matches their trading environment. So it happens a lot.
Typically, we govern that through the policy terms and conditions to make sure that the maximum is incorporated and allowed by the insurer. And if not, on a case by case basis prior to agreeing to a customer, insurers need to be informed to make sure that it's covered. We see, Scott, that this happens where a client reaches out to say, I've got one that is outside whatever my policy allows. And in normal conversations with insurers, we then have a separate endorsement that allows for that trade or that customer to be at those extended terms.
SCOTT PALES: I think you hit it on the head again with communication because for lack of a better word, things change. So what might be maximum terms at the inception of the policy could very well be extended terms being requested by a key customer. And over time, certain aspects can be forgotten. So I think that key area of communication is regular check-ins with the client, making sure there are no terms beyond those afforded by the policy. So I think that communication is key.
PETER VAN EDE: Yes. So Scott, maybe to add for some clients who've never had a claim, what we do is we have a fake claim process. So we have a claim audit. So we just pick a buyer. We pretend the buyer is in difficulty, either protracted default or insolvency. We collect the information needed for a claim. And we provide a report. And we provide an overview of where potentially something may not be matched by what the policy states.
And it's quite helpful, to be honest. It's enlightening for many clients to make sure that they have the communication with the customer, they have all the documentation from order to invoice to whatever communication takes place in case of a default. And typically, we pick up exceptions like you referenced in that process as well.
SCOTT PALES: That's a great idea. And maybe in that onboarding process that you talked about during a policy delivery, for example, you mentioned to the client that during the course of the year we will be conducting this claim audit, if you will. I think it's a great idea. And it can uncover potential issues that you fix in a fake claim rather than having to deal with them in a real claim.
PETER VAN EDE: For sure.
SCOTT PALES: OK. So this one is an interesting one. It's the failure to minimize loss. And just curious, has this ever come up where an insurer in the scope of one of your claim settlements has advised that the client has failed to minimize loss? And if this is an area in which we can see claim declination, how do we help a client make sure that this doesn't happen with them?
PETER VAN EDE: Yeah, I have personally not seen that, Scott. It's clearly stated in the policy that what we typically say at onboarding as well is the client needs to continue to operate as if it doesn't have trade credit insurance because by just having a trade credit insurance policy and then let things go and collect the claim, it doesn't work like that. So all of our policies clearly indicate that the client's responsibility is to continue to mitigate a loss.
So in doubt, especially in a past due situation where we spoke about, have a conversation with the broker. And a broker will determine together with the client whether it makes sense to discuss the case with the underwriter. The underwriter typically has information beyond whatever the client has. So yes, it can be a claims declination as per the policy, but it's not that we see that happening on a continuous basis.
More importantly, dialogue with the insurer to determine what needs to be done going forward, some insurers, when they see an exposure that is way beyond the credit limit that they have set, they continue to say, well, you've pushed this customer into potential default by overtrading. All of those elements need to be dealt with at the time when a potential default occurs or whether past due notifications need to be made. So no, not a main core course of claim declinations, but certainly an area where dialogue and clarification needs to happen between insurer and our client.
SCOTT PALES: I agree. It's infrequent. And you've just already underscored, again, the topic of communication. So I think this continues to ring pretty loud for us. On a really similar note here-- and I'm dealing with it now for two separate insureds in one week-- and that's with regard to rescheduled debt or payment plan. And if you fail to notify the insurer of these payment plans, it could be, again, a cause for claim denial. How often do you see this?
And I know on my side, we're dealing with situations where the client has orchestrated, worked hard, created a set payment plan, and now I'm saying, well, hold tight. You can't execute this until we get the insurers agreement to the plan. How often do you see it? Because I see..
PETER VAN EDE: You're totally right. It happens a lot. It doesn't mean that it's a typical reason to decline a claim. But what happens a lot is that our client, credit manager, the finance manager, their sole purpose is to sort out a workout with a customer and that they believe they're doing everything they can to mitigate that loss. And the last thing, unfortunately, they think about, uh, let me call my credit insurance broker who will then inform the insurer and seek for approval. So it is in the policies.
Most policies have that reference in the policy that there is a period of time in which you need to get approval from the insurer because otherwise, potentially, it could be a claim denial. So again, it comes to getting that communication going. It happens quite a lot that we are the last thought when it comes to informing or actioning. And why is it important? It is important because our insurer is potentially dealing with other insurers who are negotiating similar terms or similar workout plans.
Secondly, our insurer has a lot of experience and information that will allow a customer perhaps to be better informed and better positioned to agree a workout plan. If we go to an insurer and say we've sorted out something for the next 15 years, it obviously defeats the purpose of a workout that will be reasonable and acceptable to an insurance company. So they have a stake in the game. They are part of the receivable risk when it comes to potentially paying out a claim. So certainly we see it a lot, not as it claims denial, but certainly something that needs attention when it comes to approval from the insurer and make sure it's insured.
SCOTT PALES: And getting into the weeds a bit, but the insurer is going to see this as very important from their side because in most cases, these payment plans also involve the shipment of new product that would have to be covered under the scope of the plan. So for the insurer, they're facing a deteriorating situation and agreeing to new shipments. So I do see it from their side as well.
PETER VAN EDE: A fair point. And in our experience also, Scott, is when you go to an insurer and seek approval, typically, potentially there are minor tweaks, but typically, the insurer facilitates our client's action to execute on a workout, so, yeah.
SCOTT PALES: Yeah, agree. Agree. Next topic. And this is shifting away to a more generalized failures under the policy. So not necessarily that this would be the cause for a complete claim denial, oftentimes it would target specific invoices that these items occur with. But the first one that comes to mind is disputed invoices. We see this pretty often, don't we?
PETER VAN EDE: Yes , and like you said, it's not the claims denial reason. It's more that it's expense or possess the ability to collect on a claim because the insurers need to have the rights to a confirmed receivable. And a disputed invoice is simply not that confirmed receivable yet.
It's annoying for many clients who potentially are not working with trade credit insurance on a daily basis. But it's common that, that dispute needs to be resolved prior to being able to collect on a claim. Information to the insurer around the circumstances of the dispute, client communications, all of that allows our client to determine whether legal action needs to be taken to confirm the debt versus it's a genuine dispute based on the performance of our client or other circumstances. So it's not necessarily claims denial element. In certain claims, we see an element of disputes or typical reconciliation of what is real, so to speak, and what is not there yet.
SCOTT PALES: Well, you mentioned legal. And if you do have that court judgment, then it becomes a defined insolvency under the policy. In terms of these disputes, do you see any difference within the specific policies in terms of how a dispute based claim or a claim with a dispute involved can be settled?
PETER VAN EDE: Yeah. Now, that's a good point. I think in certain markets across the globe, Scott, we have, this is a bit technical, but we have policies that are written on a losses occurring basis. So the actual default needs to occur within the policy period. Whereas in other markets, we have risk attaching.
So there's a tail end to potentially filing a claim, collecting a claim. So on the losses occurring policies, if you have a disputed claim where all receivables are disputed and the actual default or the consummation of debt falls outside that policy window, there's going to be a challenge to collect on that. So in those markets, we typically try to incorporate wording and a tail to that process to make sure that our client has as an insured position.
SCOTT PALES: Also a strong argument for risk attaching policies.
PETER VAN EDE: Yeah. And in certain markets, they're more used to losses occurring. But yeah, good point.
SCOTT PALES: And then our, and this could be much older policy forms. But do some forms still say that if there is a dispute basis to the claim, that disputed receivable has to be settled before the claim in its entirety can be settled versus those policies that say the claim will still be settled but just remove the undisputed portion for a later settlement if it gets resolved? Do..
PETER VAN EDE: Yeah.
SCOTT PALES: you still have that dichotomy?
PETER VAN EDE: Yeah. I think you will still see policies where that is not resolved yet. Obviously, with the development of our market and the experience and the rollout of new policy forms, it's mostly, like you described, in that second example. We also have it depends by client and policy. We also have circumstances where the industry itself typically results not necessarily in disputes, but a reconciliation process where the client and the customer go back and forth on what's the actual receivable based on the trade.
And in those cases, our insurers allow clients to file a claim. And if it deems to be that an element of those receivables are not necessarily true receivables or it results in a different amount, there's some after effect reconciliation with the insurer as well. So very important topic. It needs to be governed in the policy. And it depends on the clients, the industry, and obviously the insurer to sort that out up front.
SCOTT PALES: But why is it so key for insurers? I mean, why is this aspect of dispute and them having undisputed receivables such a key issue for them?
PETER VAN EDE: Because the insurers have the right to recovery potential.
SCOTT PALES: Exactly.
PETER VAN EDE: And if it's a disputed invoice, they have an inability to collect on those.
SCOTT PALES: All right. So two things came through loud and clear as we've just had this discussion. The first has been communication over and over again through that onboarding process, through regular discussions with clients, communication, communication, communication. And then read your policy. So I think those things were very clear. Thanks for all the tips. Thanks for the insight. Appreciate your contributions today, Peter.
PETER VAN EDE: Thanks for having me, Scott.
SCOTT PALES: And thank you to our listeners for tuning in to this discussion and reach out with some suggestions for any future episodes that you would like to hear topics on. Until next time, trade safe, and be well.
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