Trade credit insurance represents an opportunity to enhance the overall quality of a suppliers receivables portfolio (eg. lets say from B to BB- rated). Trade credit insurance can be used for both bank trade finance transactions and trade credit (or inter-firm transactions). see Trade Credit versus Trade Finance – Is there a difference?
Insurance premiums underwritten for trade credit continues on a steady growth pattern, with 2012 trade credit insurance premiums at $9 billion. The Berne Union, based in London and representing 80 members in the insurance field that provide both export credit and trade credit insurance, indicated that its members insured $1.8 trillion of exports and foreign direct investment, or more than 10% of international trade in 2012.
Why the steady increase? For one, market conditions are favorable compared to the financial recession, when many insurers found high write-offs and balance sheets that were downgraded by S&P, Moodys and Fitch. Also, Asian companies are using trade credit insurance more than ever, with premiums increasing 13% year over year to almost $1 billion.
Still, U.S. companies use trade credit insurance significantly less than their European counterparts. Studies have indicated that 5 to 10% of US companies have retained trade insurance, versus up to 70% for European companies. Part of this reason is the emphasis in Europe since World War II on insurance to foster trade. The three main insurers – Coface, Atradius, and Euler, are based in Europe.
There are two ways for receivable financing to occur with insurance
- In one case, the corporate buys the policy and assigns it to the bank. Remember, on average, inter-enterprise credit is five times more than the total volume of short-term bank credit .
- Banks can also buy a Master Policy and insure the accounts receivables it buys from multiple clients/suppliers
Trade receivables represent an under-utilised asset class, and trade credit insurance is especially relevant in current market conditions as both a risk mitigation tool but also to enable finance. If a corporation does not have a robust internal credit department (see Even Sellers must manage Credit Risk like Banks) than using credit insurance , especially in volatile industries (retail for example) or those prone to price swings (chemicals, mining) can add extra protection with your trading partners.
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