The death of a dot-com retailer doesnt mean trouble for its unpaid suppliers — if theyve got credit risk insurance.
Underwriters say such policies allow suppliers to accept contracts that they may otherwise consider too risky — such as deals to supply shaky e-tailers — giving many dot-coms and other Internet companies a new lease on life.
Credit risk insurance provides businesses with protection against the failure of its customer to pay trade debts. This can happen if a customer becomes insolvent or fails to pay within a set period. If a customer does default on an order, the insurance provider will reimburse the seller for the value of the order.
In the last few months, insurance companies have seen a spike in demand for credit risk insurance policies to cover the goods that brick-and-mortar companies supply to Internet retailers, industry executives said.
“Companies are looking for insurance companies to specifically design products for the Internet to wrap around their traditional coverage, to manage the risks of doing business online,” said Hilary N. Rosen, partner in the insurance and Internet practice at Thelen, Reid & Priest, in San Francisco.
“Insurance is a great way to protect their assets and manage the risk,” said Michael Flanagan, managing director at Silicon Insurance in Chicago.
American International Group, Chubb, various Lloyds underwriters, The St. Paul Companies and Zurich Financial Services have been leading the way on writing policies particularly tailored to doing business on the Internet, Rosen said.
E-commerce companies encounter all kinds of risks not covered by traditional insurance policies, Rosen said. Those risks include disruption of service if an Internet service provider goes down or liability issues involved if a Web site is considered a publisher, she said.
The premiums on credit risk insurance vary widely. A policy can cost from 1 percent to 5 percent of the order value, depending on risk issues such as the type of business, customer base and loss experience, insurance experts said.
Underwriters assess risk based on a companys creditworthiness, which is derived from information on how current the e-tailer is on its bills furnished by Dunn & Bradstreet and other sources.
With the rise of business-to-business exchanges, AIG has noticed a big increase in the demand for credit insurance, said Ranjini Pillay, vice president of e-business risk solutions at AIG in New York.
“The need for credit insurance is heightened because you dont know the buyers and sellers,” she said.
AIG teamed up with Dun & Bradstreet to launch Avantrust.com last fall to provide credit risk insurance online, Pillay said. One of the companys products, Net Advantage Security, can assess the risk of a Web site and recommend insurance based on that risk, she said.
The cost of premiums can be well worth it. For example, toy maker Brio lost $500,000 worth of Swedish wooden toys it had supplied to Toysmart when the company filed for bankruptcy last summer.
When Brio supplied $200,000 worth of inventory to eToys.com late last year, it took out a credit risk insurance policy to cover the inventory in case eToys fails and cant pay the debt, said Peter Reynolds, the companys president.
EToys is shutting down and is on the brink of bankruptcy.