The Path to Reducing Losses and Safer Growth: Transferring Risk to Insurers is a Priority for Healthy Business

The current geopolitical environment, the Russian attack on Ukraine, and consequently the price shocks in the energy market have brought the energy sector into focus, making the energy space a global arena where the uncertain global macroeconomic situation will certainly weigh heavily on the profitability of energy entities. In today’s unstable climate, reducing losses and transferring risk to insurers are priorities for healthy business.

One of the solutions that economic entities can use to manage risk is accounts receivable insurance, a business insurance product that protects the seller from losses due to non-payment by their customers. By insuring accounts receivable, we prevent unwanted losses and enable secure business operations. Typically, up to 90% of the amount of receivables is insured, while the uninsured amount of receivables represents the insured’s own share in the loss.

Since accounts receivable insurance can cover both domestic and foreign customers, the global energy market is no longer a problem, and in the case of business expansion, you do not have to worry about liquidity. When we consider that economic entities in market operations often do not have significant bargaining power against their customers regarding payment terms, accounts receivable insurance becomes an even more important risk management instrument. Customers dictate the terms of business, often conditioning payment deferrals, and each payment deferral carries the risk of non-payment.

Expertise and Knowledge

In an environment where the CEO still has the primary task of growing in an unstable market, accounts receivable insurance provides increased liquidity to energy entities, and the cost of insurance is low compared to the margin obtained from potentially lost earnings. Experience shows that energy entities registered for the production and distribution of energy are excellent candidates for accounts receivable insurance. Marsh, as the world’s largest insurance broker, has its branch in Croatia, wholly owned by MarshMcLennan, the largest global risk management, strategy, and people corporation.

In Croatia, Marsh operates largely as a niche broker for energy insurance against all insurable risks, and nearly 80% of Croatian companies in the energy sector are in Marsh’s portfolio. The reason for this is largely due to professional experts at the local level, as well as the global know-how of the largest broker in the world.

Indeed, the capacities for insuring and reinsuring energy are subject to significant changes, especially in these crisis times, both in terms of pricing and volume. Croatia, as an exceptionally small energy market, and thus the companies from this sector in Marsh’s portfolio, manage to gather extremely important global and domestic energy insurers and reinsurers through local Marsh due to its overall portfolio of the largest global energy companies.

It is important to emphasize that the energy sector is exceptionally risky for insurance, and it is crucial to present the risk to foreign markets in the true sense of the word – with all its good and less favorable aspects, so that in the event of a disaster, the compensation for damages is adequate.

Improving Stability

Marsh’s professional stance, which has been recognized by all major domestic companies in the energy sector, is that this sector should not be insured against small risks but should retain those risks in its own retention due to its profitable operations. Only those large risks that would significantly impact the business in the event of damage should be transferred to insurers, thereby affecting the survival of energy companies.

How much risk local energy companies retain is a decision for each management to make, of course with Marsh’s recommendation. Marsh is there to explain all possible scenarios and their consequences. Marsh’s team is highly specialized and ready to answer all questions from the energy sector. Globally, it organizes the largest energy conference in the world once a year in Dubai with over 500 participants – experts from the energy sector, CEOs, CFOs of the largest global energy companies, and insurers and reinsurers. Marsh has been in existence for over 150 years (22 years in Croatia) and its annual revenue of nearly $20 billion and listing on the NYSE speak for themselves.

Regarding accounts receivable insurance as just one segment in the risk allocation of energy companies, there is also a team of local and global experts, and with its size, and thus its negotiating position, it helps domestic companies improve business stability, enabling them safer growth.