Inside Opinion: The Evolution of Bunker Credit

Phew. So the shipping crisis is over. That's what people are saying. Clarksons have been very positive about the current state of the markets compared to the darker days we've been living through of late. I say "of late" but its been turbulent to say the least for six years. Six years! How time flies when you are having fun in the doom and gloom!

My personal view is that we're most certainly not out of the woods yet, and whilst tankers are poised to enjoy a decent 2014 compared to previous years, and Bulkers will stem in part the tide of red ink, the box ship sector is headed for a catastrophe if over-capacity issues are not addressed urgently. But let's assume for a moment the yaysayers are right and that the markets generally are headed for a sustained period of good times.

I can't be the only one waiting, sarcastically, for credit insurance premiums to come down.

The Pay Back

Rising premiums are a bugbear of mine. I've never in all my career claimed back even close to half of what has been paid out in credit insurance annually. Our team is stronger, processes are more robust, the analysis is better and our market awareness is more acute than ever before. We're improving all the time. Loss rates are falling and yet cover levels continue to fall whilst premiums continue to rise.

It's a generalization and I have no hard facts to back this up but I would be amazed if the big traders with established credit teams consistently lost in bad debt anything close to what some of them pay out in credit insurance premium.

Of course it isn't the day to day ins and outs, wins and losses that credit insurance is used for – it is the once in ten years blindside multi-million dollar juggernaut you never saw coming where it saves your life.

Even so, now that the markets are improving and things are looking a little brighter, why won't premiums be coming down?

The Bunker Credit Market

I'd suggest the bunker credit market is outgrowing credit insurance as we know it today. Some years ago when the first dedicated credit managers were taken on by the bunker majors the infrastructure was not there. There was no best practice, no conventional wisdom and no accepted method of actually managing things.

Many companies employed collections managers long before there were any credit managers in the modern sense, and for some the role of collections and credit manager has always overlapped. For many it is the same thing. For others not so.

Over the last ten years the market has rushed to take on credit managers and credit departments followed. Credit policies were drawn up. Bunker companies shopped around for their preferred insurance partner or decided not to insure. The industry has become more defined as it has advanced. We've gone from a couple of guys sitting with the traders saying yes or no based on MRC reports to a multi-million dollar global industry within an industry. It is now, more than ever, a finance exercise first and foremost.

Financial risk has never been more talked about amongst credit managers as it is now. They are finance experts, managing operational cashflow of our company and assessing that of our customers'. We use sophisticated qualitative and quantitative modelling techniques, even more sophisticated hedging instruments in some cases and we have access to a broad range of financial services.

Evolution

What I'm getting at is that credit management is growing and developing and there will come a time, sooner or later, where the bigger insured bunker traders look to dedicated, syndicated captive market to self-insure. It is the evolutionary next step some feel, as long as the banks providing support on the basis of insured risk can eventually agree. It won't be for all, but the potential is there for many.

Who knows, maybe one day we will see a dedicated bunker credit insurance mutual group?

As with anything long-term business success is determined by an ability to adapt and survive. The credit insurers' days are not numbered but they would be foolish to think their captive market will not adapt and grow. I hope for their sake they are not left behind.