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Trade Credit Insurance Enables Growth in International Trade

By Zack Andresen

A heightened perception of global economic, commercial, and political risk has increased the popularity of trade credit insurance among businesses engaged in international trade.1,2 Trade credit insurance offers import-export businesses an opportunity to capitalize on trade opportunities in emerging markets while mitigating the risk of nonpayment from international business partners in volatile countries.3

What is Trade Credit Insurance?

 

Often referred to as export credit insurance,4 international trade credit insurance protects an exporter from the potential risk of buyer non-payment by guaranteeing compensation of 85 to 100 percent of an invoice owed.5,6 Policies typically cover commercial and political risks that could result in non-payment on a short- or medium-term, single or multi-buyer basis. Covered commercial risks include buyer insolvency, bankruptcy, and protracted default. Political risks range from war, terrorism, or riots to unexpected changes in monetary or currency policies, expropriation, and modifications to a country's import-export regulations.7

 

Both private insurers and export credit agencies (ECAs) like the Export-Import Bank of The United States (EXIM) offer trade credit insurance to companies engaged in international trade.8 ECA contributions vary from country to country. Many European countries, including the United Kingdom,9 prohibit ECAs from providing short-term credit insurance in light of the country's robust private insurance market.10 Today, three European insurance providers — Euler Hermes, Attradius and Coface — control over 80 percent of the global trade credit market.11

 

Conversely, many Asian ECAs, including China's Sinosure, are the primary suppliers of short-term trade credit insurance given the region's relatively sparse private insurance market.12,13 In the U.S., the private insurance industry continues to grow, however, EXIM remains a primary source of short-term trade credit insurance for small or new-to-export businesses.14

 

Though available to qualified companies of any size engaged in international trade,15 60 percent of trade credit insurance policies sold in the U.K. in 2015 went to small-to-medium-sized enterprises, who also accounted for 40 percent of claims filed totaling £36 million.16 However, a survey from British Business Bank found that just 1 percent of exporting SMEs in the U.K. had even applied for trade credit insurance in that period.17

 

In the U.S., a 2016 survey from the National Small Business Association found only 6 percent of SMEs engaged in international trade had taken advantage of private credit insurance; 18 percent had leveraged EXIM products, of which 77 percent used short-term credit insurance.18 However, the EXIM Bank highlights that across businesses of all sizes, nearly half of European exporters use trade credit insurance on a regular basis compared to just 10 percent in the U.S.19

 

EXIM attributes low utilization of trade credit insurance by U.S. exporters to an underappreciation of risk. In 2017, U.S. exporters conducted more than a third of international trade with their North American neighbors, Canada and Mexico,20 where risk of nonpayment is generally considered less than the up-front costs of trade credit insurance.21 However, with 4.1 percent growth projected for higher-risk emerging markets in 2017,22 trade credit insurance may present new opportunities for SMEs to grow their international business without assuming the commercial and political risks associated with more volatile countries.23

 

How Trade Credit Insurance Helps Facilitate International Trade

 

The International Monetary Fund attributes nearly 80 percent of global economic growth to emerging markets and developing economies.24 For businesses interested in international trade in these markets, trade credit insurance offers a way to manage risk on the front-end of a transaction, giving exporters the confidence to increase export sales and establish a presence in emerging and developing coun­tries.25

 

However, the benefits of credit insurance may extend beyond the risk of buyer nonpayment. Trade credit insurance plays an important role in enabling exporter growth through international trade.26 Unlike letters of credit, which are underwritten by the buyer's bank and thereby block their credit line,27 trade credit insurance allows buyers to purchase on what's known as an open account28 — a transaction where goods are shipped and received by the importer before payment is due.29 Open account transactions are preferred by importers because they free the buyer's cash flow and allow for higher credit limits.30,31 Because trade credit insurance enables exporters to finance a transaction, its purpose can go beyond risk transfer into a tool that helps exporters compete for international business.32

 

"Trade credit insurance is more than just insurance," notes the EXIM Bank. "It's a front-end risk management and credit enhancement tool in addition to a being a sales tool."33

 

Roadblocks to Future Trade Credit Insurance Demand

 

Short-term trade credit insurance saw $1.63 trillion in new business globally during 2016 by ECAs alone. Medium and long-term coverage by ECAs and private insurers combined contributed an additional $159.5 billion in new business. And while the International Chamber of Commerce (ICC) notes that 2016 was a "pretty good year for most insurers," several potential risks threaten the health of the global trade insurance market.

 

Though claims decreased by $500 million in 2016 over the year prior, claim levels remain comparable to those seen at the depths of the financial crisis in 2009.34 Premium levels, however, remain low as a result of competition, despite forecasts to the contrary.35 The fear, according to the ICC, is that claims remain high while premiums continue to decrease, thus threatening the stability of the market. Regulatory barriers to international trade may worsen this situation by creating riskier environments in which buyer insolvencies increase.36

 

The potential effect on exporters engaged in international trade has some precedent in the Great Recession. Following the collapse of Lehman Brothers, private trade credit insurers minimized or canceled exporter credit limits to minimize insurers' exposure, thus reducing the availability of trade credit insurance for exporters.37 The ICC notes that there are "no signs yet" of this recurring now, however exporters may wish to monitor for it.38

 

The

Takeaway:

Trade credit insurance may offer exporters engaged in international trade an opportunity to expand their business without risk of buyer nonpayment. Such an opportunity can open doors for multinational corporations and SMEs alike to establish business in emerging markets, while also offering better payment and financing options to clients. While utilization of this particular trade finance product is increasing, claim levels and regulatory barriers threaten to destabilize the industry.

Zack Andersen - The Author

The Author

Zack Andresen

Zack Andresen is a business technology writer based in Brooklyn, NY, but currently traveling the world with his wife and son. Learn more at ZackWrites.com.

Sources

1. Global Risks Report 2017, World Economic Forum; http://reports.weforum.org/global-risks-2017/preface/
2. Rethinking Trade Finance, International Chamber of Commerce; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
3. “5 Reasons U.S. Exporters Underutilize Trade Credit Insurance,” Export-Import Bank of the United States; http://grow.exim.gov/blog/5-reasons-us-exporters-underutilize-trade-credit-insurance
4. “What is the difference between export credit insurance and trade credit insurance?,” International Credit Insurance & Surety Association; http://www.icisa.org/trade-credit-insurance/1547/mercury.asp?page_id=1673
5. “Export Credit Insurance,” Export.gov; https://www.export.gov/article?id=Trade-Finance-Guide-Chapter-9-Export-Credit-Insurance
6. “Trade Credit Insurance,” Global Trade Mag; http://www.globaltrademag.com/trade-credit-insurance
7. “Export Credit Insurance,” Export.gov; https://www.export.gov/article?id=Trade-Finance-Guide-Chapter-9-Export-Credit-Insurance
8. Ibid.
9. “Export Insurance Policy,” UK Export Finance; https://www.gov.uk/guidance/export-insurance-policy
10. Report to the U.S. Congress on Global Export Credit Competition, Export-Import Bank of the United States; https://www.exim.gov/sites/default/files/reports/508%20compliant%20version_EXIM%20Bank%20Competitiveness%20Report_June%202017.pdf
11. “Trade Credit Insurance,” Global Trade Mag; http://www.globaltrademag.com/trade-credit-insurance
12. “A Brief Introduction of Short-Term Export Credit Insurance,” China Export & Credit Insurance Corporation; http://www.sinosure.com.cn/sinosure/english/products_short.htm
13. Report to the U.S. Congress on Global Export Credit Competition, Export-Import Bank of the United States; https://www.exim.gov/sites/default/files/reports/508%20compliant%20version_EXIM%20Bank%20Competitiveness%20Report_June%202017.pdf
14. Ibid.
15. “Trade Credit Insurance,” Euler Hermes; http://www.eulerhermes.us/credit-insurance/Pages/default.aspx
16. “New figures show how small business are big winners with trade credit insurance,” Association of British Insurers; https://www.abi.org.uk/news/news-articles/2016/05/new-figures-show-how-small-business-are-big-winners-with-trade-credit-insurance/
17. “2015 Business Finance Survey: SMEs,” British Business Bank; https://british-business-bank.co.uk/wp-content/uploads/2016/02/Business-Finance-2015-SME-survey-report.pdf
18. Small Business Exporting Survey 2016, National Small Business Association; http://www.nsba.biz/wp-content/uploads/2016/04/Export-Survey-2016-Final.pdf
19. “5 Reasons U.S. Exporters Underutilize Trade Credit Insurance,” Export-Import Bank of the United States; http://grow.exim.gov/blog/5-reasons-us-exporters-underutilize-trade-credit-insurance
20. “Top Trading Partners - September 2017,” U.S. Census Bureau; https://www.census.gov/foreign-trade/statistics/highlights/toppartners.html#exports
21. “5 Reasons U.S. Exporters Underutilize Trade Credit Insurance,” Export-Import Bank of the United States; http://grow.exim.gov/blog/5-reasons-us-exporters-underutilize-trade-credit-insurance
22. Global Economic Prospects | June 2017, The World Bank; http://pubdocs.worldbank.org/en/216941493655495719/Global-Economic-Prospects-June-2017-Global-Outlook.pdf
23. “5 Reasons U.S. Exporters Underutilize Trade Credit Insurance,” Export-Import Bank of the United States; http://grow.exim.gov/blog/5-reasons-us-exporters-underutilize-trade-credit-insurance
24. “Emerging Markets and Developing Economies: Sustaining Growth in a Less Supportive External Environment,” International Monetary Fund; https://blogs.imf.org/2017/04/12/emerging-markets-and-developing-economies-sustaining-growth-in-a-less-supportive-external-environment/
25. “Export Credit Insurance,” Export.gov; https://www.export.gov/article?id=Trade-Finance-Guide-Chapter-9-Export-Credit-Insurance
26. “5 Reasons U.S. Exporters Underutilize Trade Credit Insurance,” Export-Import Bank of the United States; http://grow.exim.gov/blog/5-reasons-us-exporters-underutilize-trade-credit-insurance
27. “Credit Insurance vs. Letters of Credit,” Euler Hermes; http://www.eulerhermes.com.br/en/credit-insurance/Documents/LettersOfCredit-vs-CreditInsurance.pdf
28. “5 Reasons U.S. Exporters Underutilize Trade Credit Insurance,” Export-Import Bank of the United States; http://grow.exim.gov/blog/5-reasons-us-exporters-underutilize-trade-credit-insurance
29. “Open account,” United Nations Economic Commission for Europe; http://tfig.unece.org/contents/open-accounts.htm
30. “Open Account,” Export.gov; https://www.export.gov/article?id=Trade-Finance-Guide-Chapter-5-Open-Account
31. “Credit Insurance vs. Letters of Credit,” Euler Hermes; http://www.eulerhermes.com.br/en/credit-insurance/Documents/LettersOfCredit-vs-CreditInsurance.pdf
32. Ibid.
33. “5 Reasons U.S. Exporters Underutilize Trade Credit Insurance,” Export-Import Bank of the United States; http://grow.exim.gov/blog/5-reasons-us-exporters-underutilize-trade-credit-insurance
34. Rethinking Trade Finance, International Chamber of Commerce; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
35. “5 Reasons U.S. Exporters Underutilize Trade Credit Insurance,” Export-Import Bank of the United States; http://grow.exim.gov/blog/5-reasons-us-exporters-underutilize-trade-credit-insurance
36. Rethinking Trade Finance, International Chamber of Commerce; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
37. “Private Trade Credit Insurers during the Crisis: The Invisible Banks,” World Bank; http://siteresources.worldbank.org/INTRANETTRADE/Resources/TradeFinancech11.pdf
38. Rethinking Trade Finance, International Chamber of Commerce; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf

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