Trade Credit Insurance provides cover for businesses if customers who owe money for products or services do not pay their debts, or pay them later than the payment terms dictate. It gives businesses the confidence to extend credit to new customers and improves access to funding, often at more competitive rates. Trade credit insurance is for products and services that are due within 12 months.
| According to Government statistics, there were over 17,000 new insolvencies in 2019-2020 |
I. What is Trade Credit Insurance?
Cover can be obtained by companies trading within the UK as well as internationally, and in addition trade credit insurers help their customers manage risk by providing guidance and advice about credit risks and new markets to help businesses expand. Businesses can buy trade credit insurance for their entire portfolio of customers, or for individual accounts.
With trade credit insurance, the policyholder knows their business is protected against both commercial and political risks that are beyond their control knowing that money owed to them will be paid. This helps firms to grow profitably, supporting them at all stages of the business cycle and minimising the risk to them of unexpected customer insolvency.
Trade credit insurers will generally cover two types of risk that a business can include in their cover:
- Commercial risk – the risk that your customers are unable to pay the outstanding invoices because of financial reasons, for example, declared insolvency or protracted default.
- Political risk – non-payment as a result of events outside the policyholder or customer’s control, for example due to political events (wars, revolutions); disasters, (earthquakes, hurricanes); or economic difficulties, such as a currency shortage so are unable to transfer money owed from one country to another.
II. How Does Trade Credit Insurance Work?
No matter how careful you are, your customers can sometimes fail to pay. Unless you demand payment up front or are covered by credit insurance, this makes you vulnerable to bad debt.
Can your business afford a bad debt?
Credit insurance protects your cash flow. It covers your trade with your customers, so that you still get paid even if they go under or fail to pay you.
Trade credit insurance works by insuring you against your buyer failing to pay, so every invoice with that customer is covered for the insurance year up to the terms of your policy.
It’s used by businesses of all sizes to protect both international and domestic trade. Businesses also use credit insurance to help them secure finance and working capital with banks, explore new markets with confidence and attract new customers with favourable credit terms.
As with all types of insurance, there is no one-size-fits-all approach. The level and cost of your credit insurance will be dictated by your needs. For example the size of your credit portfolio, level of risk associated with your customers and location of your market will be unique to your business. Most trade credit insurance solutions will therefore be tailored to your requirements.
At Atradius Trade Credit Insurance, we operate a Modula Credit Insurance Policy.
Atradius Credit Insurance explained
III. Operating Your Credit Insurance Policy
Step I: Agree credit terms with your customer and insurer
Your trade credit insurer should monitor the financial health of your customers and potential customers and apply a risk rating, often called a buyer rating.
This is their assessment of how likely your customers are to pay your invoices on time. It will guide how much of your exposure they are prepared to insure.
The buyer rating is also a useful tool for you. You can use it as a guide to support your own due diligence and help you avoid potentially risky customers. A strong buyer rating can also help you secure potential buyers by offering them favourable credit terms.
Step II: Trade with confidence
Continue with business as usual. Some insurers will leave you alone. Some will provide ongoing support. At Atradius Trade Credit Insurance, we’ll share the market knowledge and expertise of our underwriters with you through regular trading reports and sector analysis.
Step III: Deal with an unpaid invoice
Not paid? Let your insurer know. Most insurers will first try to recover the debt. Ideally their first approach will be amicable. Your customer may just need extra time to pay up, or they may want to renegotiate payment terms.
If your insurer offers a debt collection service as part of your insurance package they will start debt collection procedures. For example, if your customer has gone bankrupt they will deal with a receiver or liquidator on your behalf.
If the debt is impossible to recover, your insurer should pay up in line with your policy, often up to 90% of the debt. Whether through debt collection or insurance you should get all or most of the money owed to you.
IV. Benefits of Trade Credit Insurance
Protecting your accounts receivable from potential bankruptcy is only part of the benefit this type of debtor insurance can provide. In addition to protecting your business from the risk of insolvency, it can help:
- Grow your customer base as potential buyers may be attracted to your credit terms
- Enhance trade providing you with the confidence to develop and expand your market
- Guarantee cashflow enabling you to build strong relationships with your suppliers and employees
- Safeguard customer relationships through improved communication and enhanced credit terms
- Improve your access to finance and your relationship with your bank
- Meet the risk management requirements of your stakeholders or board and provide peace of mind
Trade credit insurance is commonly used by businesses that export and want to protect their cash flow. (For example, purchasing insurance can relieve concerns over an international customer’s ability to pay due to political unrest or blocked funds.)
More about trade credit insurance
According to Export Development Canada (EDC)—a major provider of credit insurance to Canadian companies—businesses may also consider this type of insurance if they want to do the following.
- Be more competitive by offering deferred payment terms to their customers rather than asking them to pay upfront.
- Use their accounts receivable as collateral for financing.
- Sell their foreign accounts receivable to a collection/factoring agency to increase cash flow.
Trade credit insurance is often confused with credit insurance, which borrowers purchase to ensure the amount owed to a lender will be paid if they are unable to do so because of, for example, death or disability.
What are the differences between trade credit insurance policies?
There are four types of trade credit insurance, as described below. The cost of your policy will vary depending on the type of coverage you choose, your industry, your annual revenue that needs to be insured, your history of bad debts, your current internal credit procedures and your customers’ creditworthiness, among other factors.
Whole Turnover – This type of trade credit insurance protects against non-payment of commercial debt from all customers. You can select if this coverage applies to all domestic sales, international sales, or both.
Key Accounts – With this type of insurance, you decide to insure your largest customers whose non-payment would pose the greatest risk to your business.
Single Buyer – If most of your transactions are with one customer, you can select a trade credit insurance policy that insures against potential default from just that customer.
Transactional – This form of trade credit insurance protects against non-payment on a transaction-by-transaction basis and is best for companies with few sales or only one customer.
What is Not Covered by Trade Credit Insurance?
It is also important to know what trade credit insurance is not. Credit insurance is not a substitute for prudent, thoughtful credit management. Sound credit management practices should be the foundation of any credit insurance policy and partnership. Credit insurance goes beyond indemnification and does not replace a company’s credit practices, but rather supplements and enhances the job of a credit professional.
Trade credit insurance only covers business-to-business accounts receivable from commercial and political risks. Outstanding debts are not covered unless there is direct trade between your business and a customer (another business).
What Is Trade Credit Insurance (TCI)?
Many commercial buyers request credit in order to make large purchases of goods or services, but lending to those customers puts a supplier at risk that it won’t be repaid. If, for example, the customer files for bankruptcy, the creditor often receives only a portion of what it was owed or nothing at all. That’s especially true for unsecured debts, wherein the creditor doesn’t have collateral backing up the loan.
TCI mitigates that risk by compensating policyholders for the unpaid debt up to the applicable coverage limits. One of the advantages of TCI is that companies can more confidently extend credit to new or existing customers, secure in the knowledge that they’ll be paid back regardless of the customer’s financial position. Therefore, insurance can help companies grow their business without assuming undue risk.
The leading providers of TCI include carriers such as AIG, Zurich Insurance Group, Chubb, Coface, Allianz Trade, and Atradius. The Export-Import Bank of the United States (EXIM), the country’s official export credit agency, also provides credit insurance that protects foreign accounts receivable against insolvency and political risk. Businesses that are insured through EXIM receive 85% to 95% of the invoice amount should the buyer fail to pay.
How Trade Credit Insurance Works
As with any insurance product, the cost reflects the projected risk that the policyholder poses to the insurer. When evaluating a business’s risk, insurers look at a variety of criteria, such as the volume of trades a client engages in, the creditworthiness of its buyers, the industry in which it operates, and the repayment terms to which buyers have agreed. Typically, coverage costs less than 1% of the insured sales volume, according to Meridian Finance Group, a specialty insurance brokerage.
Businesses can often scale their insurance coverage to fit their budget and risk profile. For example, they may have the option to cover one particular client—especially if it’s a large or particularly risky account—or a select number of clients. Some policies also provide secondary coverage that only kicks in when the primary policy fails to cover the full amount of a claim.
Based on the financial strength of a client’s covered trade partners, insurance providers typically assign each one a specific credit limit. Should the buyer fail to pay for goods or services, the insurer will only cover losses up to that indemnity ceiling.
Though some carriers include nonpayment due to trade embargoes or other government-related events in their TCI coverage, other insurers offer a separate product known as political risk insurance. Such protection can be especially important for firms that operate in traditionally unstable regions, including multinational corporations and large hospitality chains.
Advantages of TCI
For some companies, the ability to offer generous credit terms to buyers can attract larger buyers or open the door to possible expansion into new geographic markets. TCI generally makes businesses more comfortable extending credit because the risk of default is significantly mitigated. In industries where most of the major competitors already carry TCI, having a loss-mitigation strategy can be a necessity just to stay competitive.
Offering greater credit limits to one’s buyers also helps companies generate economies of scale. Because customers can buy larger quantities, a company may find itself purchasing larger amounts from its own suppliers, creating the ability to negotiate better pricing.
Alternatives to TCI
TCI isn’t the only option on the table for companies worried about lost receivables. Here are three other possible strategies.
Self-insurance
One alternative is to self-insure, which means the business creates its own reserve fund specifically designed to cover losses from unpaid accounts. The downside to this strategy is that a company may have to set aside a considerable amount of capital for loss prevention instead of using that money to grow the business.
Third-party Factors
Another alternative companies have is to sell their receivable accounts to a third party known as a factor, which then attempts to collect the receivables itself. However, a factor typically purchases the right to those receivables at a considerable discount—usually 70% to 90% of the invoiced amount.3 The creditor may receive a larger percentage if the factor manages to collect the full debt, but it still has to pay a substantial fee for the factor’s services.
Buyer’s Letter of Credit
Finally, companies that do business overseas can obtain a letter of credit from the buyer. Essentially, it’s a guarantee from the purchasing company’s bank that the seller will be paid in full by a specific date. One of the drawbacks is that these can only be obtained and paid for by the buyer, which may be reluctant to pay the transaction fee amount for the bank’s guarantee. What’s more, the letter of credit only pertains to a single buyer, putting the onus on the supplier to protect its other receivables.
Growth of TCI Market
According to a 2021 report by Allied Market Research, the adoption of TCI accelerated during the economic downturn of 2020, which served as a reminder of the potential for market disruption and lost receivable revenues. The global market for TCI reached $9.39 billion in 2019 and is expected to reach $18.14 billion by 2027, according to the research firm’s projections. That represents a compounded annual growth rate of 8.6%.
Conclusion by Me:
Trade Credit Insurance Market Outlook – 2027
The global trade credit insurance market size was valued at $9.39 billion in 2019, and is projected to reach $18.14 billion by 2027, growing at a CAGR of 8.6% from 2020 to 2027. Trade credit insurance is a type of insurance designed to protect businesses from political & commercial risks that may influence the finances of the business. It is a type of property & casualty insurance, generally offered by private insurance companies and governmental export credit agencies to business entities or individuals. Moreover, trade credit insurance is largely used to protect accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy.
In the wake of COVID-19 global health crisis which has accelerated uncertainty & protectionism in global trade, the demand for trade credit insurance has increased tremendously in order to overcome the negative impact on the industry.
Rise in focus toward protecting & mitigating risk from non-payment across many types of good & services and expansion of trade in different regions demanding credit insurance are becoming major growth factors for the market. In addition, benefits offered, such as sales support & account receivable support provided by credit insurance, is becoming another major factor propelling the trade credit insurance market growth.
However, lack of awareness of credit insurance across the globe and varied & conflicting trade regulations across different jurisdictions are some of the factors that limit the market growth. Furthermore, developing economies offer significant opportunities for credit insurance solution providers to expand & develop their offerings, especially among emerging economies such as Australia, China, India, Singapore, and South Korea. In addition, surge in small & medium-sized enterprises expanding their businesses is expected to provide lucrative opportunities to the trade credit insurance market share in the coming years.
The large enterprises segment dominated the trade credit insurance market in 2019, and is projected to maintain its dominance during the forecast period. This is attributed to the fact that enterprises under this category are involved in bulk trading & huge amount of data. Therefore, to protect finances & overcome political & commercial risks, this segment emphasizes on the importance of trade credit insurance solutions & services in the market.
The report focuses on growth prospects, restraints, and trends of the trade credit insurance market analysis. The study provides Porter’s five forces analysis to understand the impact of various factors such as bargaining power of suppliers, competitive intensity of competitors, threat of new entrants, threat of substitutes, and bargaining power of buyers on the trade credit insurance market.
Segment Overview
The trade credit insurance market is segmented on the basis of component, enterprise size, application, coverage, industry vertical, and region. Based on component, the market is bifurcated into products and services. On the basis of enterprise size, it is segmented into large enterprises, medium enterprises, and small enterprises. By application, it is categorized into domestic and international.
Small enterprises segment will grow at a highest CAGR of 12.5% during 2020 – 2027
By coverage, the market is bifurcated whole turnover coverage and single buyer coverage. Based on industry vertical, it is segmented into food & beverages, IT & telecom, metals & mining, healthcare, energy & utilities, automotive, and others. Region-wise, the trade credit insurance market is analyzed across North America, Europe, Asia-Pacific, and LAMEA.
Trade Credit Insurance Market
By Region
Europe
Competitive Analysis
The report analyses the profiles of key players operating in the trade credit insurance market such as American International Group Inc., Aon plc, Atradius N.V., Coface, Credendo, EULER HERMES, Export Development Canada, QBE Insurance (Australia) Ltd., SINOSURE, and Zurich. These key players have adopted various strategies, such as product portfolio expansion, mergers & acquisitions, agreements, geographical expansion, and collaborations, to increase their market penetration and strengthen their foothold in the industry.
COVID-19 Impact Analysis
The COVID-19 pandemic has a significant impact on the trade credit insurance market, owing to increased uncertainty & protectionism in global trade, which is set to boost the demand for trade credit insurance.
Moreover, to curb the spread of virus, several regions have imposed lockdown, which has financially affected businesses. Therefore, trade credit insurance products are gaining momentum during the pandemic situation. This, in turn, has become one of the major growth factors for the trade credit insurance industry during the global health crisis.
Asia-Pacific region would exhibit the highest CAGR of 10.7% during 2020 – 2027
Rapid Expansion of the Market in New Regions
With an increased export & import of goods & services worldwide, the expansion of trade in new regions has gained momentum in the market. In addition, due to this increased trade, which includes issuing letters of credit (LCs), receivables & invoice finance, and others, the demand for credit insurance has accelerated and is expected to maintain its dominance during the trade credit insurance forecast period.
Moreover, trade credit is used by manufactures, importers, exporters, buyers, and sellers to ease financing activities during trade. Therefore, surge in requirement of goods & services from one country to another and expansion of trade in different regions have increased, thereby boosting the demand for trade credit insurance in the market.
Varied and Conflicting Trade Regulations Across Different Jurisdictions
Various laws set have different standards & regulation across different jurisdictions with an increased unified approach taken by financial centers toward trade regulation. This becomes a crucial factor for credit insurance companies to elaborate solutions, which brings an inter-regulation conflict and hinders the growth of the credit insurance market.
For instance, in the U.S., Export Credit Insurance (ECI) protects an exporter of products & services against the risk of non-payment by a foreign buyer. Therefore, to meet regulatory norms of respective countries before providing trade credit insurance is a major factor that hampers the trade credit insurance market growth.
Key Benefits For Stakeholders
- The study provides in-depth analysis of the global trade credit insurance market share along with current & future trends to illustrate the imminent investment pockets.
- Information about key drivers, restrains, & opportunities and their impact analysis on the global trade credit insurance market size are provided in the report.
- Porter’s five forces analysis illustrates the potency of buyers and suppliers operating in the market.
- An extensive analysis of the key segments of the industry helps to understand the global trade credit insurance market trends.
- The quantitative analysis of the global credit insurance market size from 2020 to 2027 is provided to determine the market potential.
Trade Credit Insurance Market Report Highlights
| Aspects | Details |
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| By Component |
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| By Enterprises Size |
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| By Coverages |
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| By Industry Vertical |
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| By Application |
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| By Region |
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| Key Market Players | AMERICAN INTERNATIONAL GROUP, INC., AON PLC, ATRADIUS N.V., COFACE, CREDENDO, EULER HERMES, EXPORT DEVELOPMENT CANADA, QBE INSURANCE (AUSTRALIA) LTD., SINOSURE, ZURICH |
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