Can Trade Insurance turn into a Pay as you Go Product?

Recently, Euler’s Digital Agency announced a partnership with Flowcast to deliver a new single invoice cover insurance product to protect B2B companies from non-payment, transaction by transaction.

Flowcast is in the emerging Analytics-as-a- Service space, helping all types of banks and specialty lenders improve their underwriting. In this particular case, based on invoice-level data, Flowcast has developed smart algorithms that predict a range of risk parameters, such as the probabilities of default or expected timing of invoice payment – critical factors for business.

I have found in the past there are several reasons for using traditional trade credit insurance, from enhancing receivables to enable better financing advances and rates to the risk mitigation (typically the primary reason for using trade credit insurance is for peace of mind against customer insolvency).   Credit insurance represents an opportunity to enhance overall quality of receivables portfolio (eg. say from ‘B’ to B+ rated).

But will this work?

I have to say, I am a bit skeptical. Yes, it’s nice that we have data and we can do all kinds of risk scoring, but lets not forget the fundamentals of trade credit insurance.

Insurers provide both portfolio and transactional credit insurance based on the credit to cover the event of “insolvency", which means a buyer is unable to pay debts. But insurers, particularly private insurers not backed by taxpayers, don’t want to lose money so they issue insurance to large recognized names.  In talking with many financial lenders in the invoice finance space, they say 99.9% of defaults around invoice finance are due to disputes, not credit. To predict insolvency for large corporates over the next 60 or 90 days when invoices will be paid is not a big deal.

A second issue is just claims and private insurers recognizing claims. In general, private insurers don’t want to pay claims.    As I said in the post -Why Some Lenders Find No Value in Trade Credit insurance, trade credit insurance only provides protection for bankruptcy of obligor. And becoming insolvent can be very different than “failure to pay”.  Most trade credit claims are filed 90 days after an overdue date, but funding providers who provide some form of short term liquidity on average are funding an invoice for 60 days or less.

Also, credit insurance adds a cost to the equation.

So will Pay as you Go insurance be successful? Look, my personal view is even with mid market size companies, dispute is what causes late payment, short pays, and no pays.

I believe there is a sweet spot in this space for B2B Marketplace transactions where buyer and sellers are relatively unknown to each other. Euler has a rich data set of buyer and payment term data extension which sellers can use to decide on if and how to extend credit and terms to buyers.

It will be interesting to see how the market reacts to one of the latest and newest InsurTech products.

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