Industry Insight: How the Collapse of OW Bunker Impacted the Insurance Industry

OW Bunker's sudden bankruptcy on November 7, 2014 sent shockwaves throughout the shipping industry. Only seven months earlier the company had undergone its IPO (Denmark's second-largest company flotation since 2010), and measured by turn over it was the third largest company in Denmark and controlled around 7 per cent of the global market for shipping fuel.

Yet the discovery of fraud came out of the blue and has led to repercussions for all companies involved in this industry, including insurance. This is one of the biggest claims that the trade credit insurance industry has ever experienced and provides interesting insight into the value of having effective credit insurance in place and also what lessons the industry and insurers can learn.

When it comes to decisions on buying credit insurance policy holders as well as insurers look to historic losses in receivables and use them as the best predictor of future outcomes. While this clearly can be a rational way to consider things and a standard approach in the insurance industry, the issue is rather that the real value of insurance is to assist companies manage the irrational, unpredictable or the unexpected.

Fraud

Fraud is clearly one such event. By its very nature it is unpredictable and concealed, so it is difficult to spot the signs until it is too late.

The sudden demise of OW Bunker in 2014 reinforced the view that unexpected events with little or no warning can overwhelm trading partners. Perhaps more critically it demonstrated the value of being properly protected by all of those who did have in place effective insurance cover.

The immediate effect of the bankruptcy was a mini credit crunch in the bunkering industry. With the industry working on small margins even a small change in terms and conditions in the supply chain will have immediate consequences on liquidity.

For example if one supplier wants to be paid up front and a customer needs 30 rather than the usual 20 days to pay for their fuel, serious financial pressures can quickly build up as outstanding receivables can escalate and eventually may overwhelm the balance sheet.

The sudden squeeze that the OW Bunker bankruptcy caused, combined with a more general feeling of distrust and fragility that arose in the sector, resulted in several other companies in the supply chain facing shock bankruptcy.

At the same time as the sector was reeling, many of the entrenched insurers quickly reduced the level of their exposure and the sector struggled to find credit capacity, at the time it needed it the most. This left companies that had seen their insurance cover cut forced to ask their trading partners to pay them more quickly, or in cash, exacerbating what was already a very challenging situation.

Lessons to Learn

Although the legal battles have commenced, it will be years before these cases are resolved, and until more information comes to light it is too early to asses all of the lessons that will arise. However, from what we have digested so far there are three areas where the industry has reason to reflect and learn the lessons. 

Firstly, the OW Bunker case has proved to be an education for the industry. There are some suppliers that will only work with large companies because they assume that these are immune to bankruptcy and therefore also do not purchase insurance. OW Bunker demonstrated that large companies are not immune to failure or to fraud. A consequence of this revelation might be increased pressure from shareholders and banks, on the shipping industry and suppliers to the shipping industry, to purchase insurance to ensure their investment is safeguarded against the unimaginable.

Secondly, we believe there will now be greater scrutiny of relationships, of risk management procedures and not least the specific terms of trade. The false sense of security among those in engaged in the financing and management of receivables, based on the regular interactions they have with customers, may have clouded their view of possible problems lurking beneath a healthy business façade.

Analysis of the OW Bunker events has also highlighted that the risk management procedures although stated to be important, fell far short of t meeting best practices and standards. We believe it is likely that we will see the commodity trading sector at large seek to implement far more robust risk management procedures, part of which will be a greater analysis of relationships across the supply chain.

Additionally there is a likelihood of a tightening up of the terms and conditions, particularly regarding the terms of trade and retention of title. Many companies did not insist on strict terms of trade because they felt the size and reputation of the company was enough security in itself. Having secure terms of trade is not the industry norm but this is very likely to change in the future. 

Lastly, the magnitude of the fall out from this loss and the need to increase insurance protection across the industry might lead to market consolidation, amongst smaller companies, as they may find it increasingly difficult to access affordable credit insurance.

For those that traded with OW Bunker there was little, if anything, they could have done to avoid the loss itself, as the company had gone through full due diligence ahead of its IPO, in early 2014, and there can rarely be a time where a business is scrutinised more, than all of the legal and commercial due diligence taking place just before a listing.

What the case does highlight, however, is that no matter how big the company, or how strong the trading relationships, nothing is risk free. OW Bunker's bankruptcy reminded the affected industries that although rare, these unexpected and unpredictable events do happen and it is vital to have considered properly the risk/reward balance of choosing or not to take out effective credit insurance protection.