By Bill Camarda
Trade credit insurance—sometimes called export credit insurance or business credit insurance—helps companies safeguard their business-to-business (B2B) accounts receivable, often the largest uninsured asset on their balance sheets.2 It’s relatively familiar in Western Europe, where the business originated and 15 percent of potential business customers use it. But it’s a newer concept in North America, where only 3 percent do.3 Trade credit insurance can protect exporters from a variety of credit risks, including customer default, bankruptcy, or insolvency. (Learn more about the basics of trade credit insurance.)
Depending on the insurer or situation, companies may also be able to include coverage against political risks of non-payment by foreign customers. This coverage may protect against losses associated with political risks such as war, insurrection, unrest, government expropriation of assets, or a government’s decision to bar currency conversion or foreign payment.4
As Paul Davidson, chairman and CEO of Willis Towers Watson Financial Solutions observed, “political risk has increased significantly, now becoming a reoccurring and material cost of doing business.” In their 2018 Political Risk Survey Report, Willis Towers Watson and Oxford Analytica found that 55 percent of global organizations with more than $1 billion in revenue experienced one or more political risk losses exceeding $100 million.5 The most common types of losses related to exchange transfer, political violence, and import/export embargoes.
Trade credit insurance may help an exporter in a variety of ways. First, since trade credit insurance transfers most of the credit risk to the insurer, it may protect against liquidity shortfalls caused by delayed payments or non-payments, and smooth out an exporter’s earnings volatility.6
Exporters that have insured existing receivables may be better positioned to assume the risks associated with pursuing additional foreign customers, or selling more on open account to existing customers. If an insurer considers the risk associated with an exporter’s customer acceptable, the exporter can increase that customer’s credit limit and potentially grow sales. So, too, working with the guidance of an insurer whose business depends on understanding local risks, an exporter may also be able to expand into new markets more safely, and plan growth more effectively.7
Exporters with insured receivables may be more attractive risks to banks, who may be more willing to lend, or to do so at a lower rate. Some banks may require trade credit insurance before considering an asset-based loan; an insured receivable is considered an asset in ways that an uninsured receivable isn’t.
If the worst happens, and the insurer has to pay a claim, follow-on collection or repossession costs may become the insurer’s problem, not the exporter’s. Finally, in certain circumstances, the costs of trade credit insurance may be deductible from taxable income, while bad-debt reserves aren’t.8
Insurers stress that trade credit insurance isn’t a license to be irresponsible. It should complement careful credit management rather than replace it, and exporters should work closely with their insurers on an ongoing basis to evaluate changing risks. A trade credit insurer may draw on information from all its policyholders to offer “early warnings” about foreign customers whose finances are deteriorating, helping an exporter make better credit decisions.9 This may be especially valuable in a volatile economic environment where a foreign customer’s credit outlook can shift rapidly.
In trade credit insurance, as with any insurance policy, the exporting company pays a premium in exchange for agreed-upon protection, and exporters weigh the business value of any policy against its cost. Of course, an insurer will charge more (or decline coverage) if it concludes that an exporter’s business presents extremely high risks.10
Policies typically specify what percentage of the invoice value will be paid by the insurer in the event the foreign customer defaults. This can vary widely: some policies will pay the exporter as much as 95 percent of the invoice, while others pay significantly less.11 Policies can vary in form as well; for example, some policies give an insurer the right to reduce or cancel coverage if it chooses, while others don’t.12 Some policies insure sales to all of a company’s foreign customers; others insure only a subset of customers, or just one. The length of time a policy is in force may also vary, with longer-term policies sometimes used for large capital equipment sales.13
While at least 50 companies offer trade credit insurance, the majority of privately underwritten policies continue to be sold by three large firms: Euler Hermes, Coface, and Atradius.14 Of course, different providers offer different capabilities, and some focus on specialized policies or individual geographical markets.
Digitization is promising greater innovation in trade credit insurance. For example, LiquidX recently introduced an electronic marketplace for buyers of trade credit insurance, where potential customers can request real-time quotes from several leading underwriters, using standardized policies and legal documents.15 In addition, Euler Hermes’ new Credable division has begun piloting links to selected European B2B platforms. Credable offers companies credit rating data and pay-as-you-go credit insurance on sales made digitally, and has also designed an SME on-demand insurance option combining protection against late and unpaid invoices.16
Companies may also be able to purchase trade credit insurance through an Export Credit Agency (ECA)—a government-backed institution such as the Export-Import Bank of the United States (EXIM) that is designed to help domestic companies export successfully.
By reducing credit risk, trade credit insurance can help many exporters expand into global markets. In today’s uncertain environment, with the potential for higher insolvencies and growing political risk in some regions, companies may wish to consider utilizing it more widely.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. “Corporate insolvencies rise for first time in 10 years,” Atradius; https://group.atradius.com/publications/economic-research/insolvency-forecasts-august-2019.html
2. “Guide to Export Credit Insurance,” Export-Import Bank of the United States; https://grow.exim.gov/hubfs/ebook/ECI_eBook.pdf?t=1536150203308
3. “'Huge opportunity' in trade credit insurance market,” Insurance Business Magazine; https://www.insurancebusinessmag.com/asia/news/breaking-news/huge-opportunity-in-trade-credit-insurance-market-100899.aspx
4. “Trade Credit Insurance,” Wikipedia; https://en.m.wikipedia.org/wiki/Trade_credit_insurance
5. 2018 Political Risk Survey Report, Willis Towers Watson and Oxford Analytica; https://www.willistowerswatson.com/en-US/Insights/2018/09/political-risk-survey-report
6. “Guide to Export Credit Insurance,” Export-Import Bank of the United States; https://grow.exim.gov/hubfs/ebook/ECI_eBook.pdf?t=1536150203308
7. “A Guide to Credit Insurance,” Euler Hermes; https://www.eulerhermes.com/en_US/resources-and-insights/economic-insights/guide-to-trade-credit-insurance.html
10. “Advantages & Disadvantages of Export Credit Insurance,” BizFluent; https://bizfluent.com/list-5877284-advantages-disadvantages-export-credit-insurance.html
11. “Understanding A Sample Trade Credit Insurance Policy,” Niche Trade Credit; https://www.nichetc.com.au/understanding-a-sample-trade-credit-insurance-policy/
12. “Trade Credit Insurance,” Wikipedia; https://en.m.wikipedia.org/wiki/Trade_credit_insurance
13. “Guide to Export Credit Insurance,” Export-Import Bank of the United States; https://grow.exim.gov/hubfs/ebook/ECI_eBook.pdf?t=1536150203308
14. “The Credit Insurance Market in 2018,” AU Group; http://www.au-group.fr/wordpress/wp-content/uploads/2018/06/Credit-Insurance-Market-2018-AU-Group.pdf
15. “LiquidX, Marsh partner on electronic platform for trade credit insurance,” Reinsurance News; https://www.reinsurancene.ws/liquidx-marsh-partner-on-electronic-platform-for-trade-credit-insurance/
16 “Growth of digital B2B marketplaces prompts demand for innovative trade credit insurance,” Global Trade Review; https://www.gtreview.com/news/fintech/growth-of-digital-b2b-marketplaces-prompts-demand-for-innovative-trade-credit-insurance/