In the realm of Property and Casualty, Trade Credit Insurance is a bit of a different animal.
Most Property and Casualty (P&C) coverage is reactive; a business or individual incurs a loss covered by a policy and then files a claim to be made whole. Trade Credit Insurance (TCI) — sometimes called Accounts Receivable Insurance — is proactive; the protection it provides enables a company to take capital kept in reserve to cover clients’ unpaid debt and invest this money to further the organization’s growth.
So, too, as the world navigates the second year of the COVID-19 pandemic, Trade Credit Insurance is following its own course. Or multiple courses.
While most of the P&C universe continues to operate in a “hard market” – high rates, limited availability, heightened underwriter scrutiny – the marketplace for Trade Credit Insurance is, in many cases, starting to soften from where it was a year ago.
Globally — perhaps most notably in the United Kingdom and other parts of Europe — government subsidies have supported credit insurers, allowing them to provide coverage that has helped businesses avoid bankruptcy due to customer payment defaults. In the United States, vigorous buy-in to the federal Payroll Protection Program has kept businesses afloat and is now starting to embolden underwriters to approve more Trade Credit applications. Some companies who lost coverages on customers covered by TCI earlier in the pandemic are now seeing it coming back, and pricing has leveled it off.
That’s the big picture. Viewed more closely, the TCI market varies according to specific factors befitting such a highly specialized product. While easier to come by for many, coverage remains inaccessible to some.
If you’re a business owner who’s unfamiliar with Trade Credit Insurance, you’re not alone. Although any business extending credit to customers should at least consider the coverage, a relatively small percentage of businesses use it in the USA.
TCI, as described by Business Insurance magazine, “protects manufacturers, traders and service providers against losses from non-payment of a commercial trade debt. If a buyer does not pay (often due to bankruptcy or insolvency) or pays very late, the trade credit insurance policy will pay out a percentage of the outstanding debt.”
But the benefits go beyond this basic description. The Balance Small Business, an online publication devoted to starting and growing businesses, offers these five reasons to buy Trade Credit Insurance:
- Control of financial risks — Customers’ financial problems are often unforeseeable. Trade Credit Insurance mitigates risk.
- Cash flow — Trade Credit Insurance ensures a company will have adequate cash even if clients are unable to pay their bills.
- Monitoring of customers’ credit-worthiness — Trade credit insurers monitor their policyholders’ customers throughout their policy terms, quickly analyzing extensive data to evaluate their financial status and give early warning of possible payment issues.
- Competitive advantage — Having Trade Credit Insurance gives a business the security to offer promising customers more generous options, such as higher credit limits or better payment terms as well as faster decisions.
- Borrowing terms — Having credit insurance makes businesses more marketable to lenders and can create more borrowing power on a line of credit.
Highly Specific Coverage
Because it is precisely customized to each account, TCI varies in cost and coverage. As the insurance industry marketing organization Trusted Choice notes, “Trade Credit Insurance typically pays between 85% and 95% of the invoiced amount, though you’ll be able to choose the amount that you want to insure for.”
Businesses also can choose whether they want to apply TCI to their customers collectively or on a more discerning basis, and they can select the circumstances to which coverage will apply, such as:
- Bankruptcy or insolvency only
- Political risk only
- Top or key customers only
- Specific line or division of the business to be covered
- Catastrophic, i.e. high deductible, program
- Full turnover
At the same time, carriers can choose to refuse coverage to certain customers of a business based on such factors as:
- Credit profile of the customer
- Where a customer is located
- The group or parent company that owns the business entity.
For example, an industry thriving in one country or region may be highly unstable in another. Or a high-performing subsidiary may be deemed too great a risk because its parent company is experiencing difficulty. In other words, underwriters consider both the macro and micro in making underwriting decisions.
The cost of Trade Credit Insurance is highly specific as well, with premium calculated as a percentage of insured sales. The rate (multiplier) is calculated by considering customer make up – both geographic and credit profile — as well as the volume of sales and size of exposures combined with the determined level of risk within any applicable industries, plus a few other factors. Premium rates are quoted in “basis points” (1 basis point = 1/100th of 1%). Rates will be a small fraction, significantly less than 1% of a company’s insured sales.
What You Can Do
As a proactive form of insurance, TCI requires information and attention on the part of the policyholder, particularly now, amid the volatility inherent in a pandemic. Cooley legal associate Alexander Selarnick observes in a recent article for Mondaq that “it is more critical than ever for policyholders to take a renewed look at their TCI policies to understand — and have the chance to improve — any early cancellation or termination risks, non-renewal provisions (including the timing for any required notice) and other potential coverage gaps.”
Working with an insurance agent or broker who’s willing to put in the work required to know your customers and understand their financials can certainly help. Over time, TCI policyholders often become so accustomed to renewal that they aren’t aware of the potential savings or increased limits available to them, provided they and their agent/broker do their due diligence.
To learn more about Trade Credit Insurance view this four-minute video from Alper Services, An Alera Group Company.
In addition to working with you on Trade Credit Insurance and the rest of your Property and Casualty Insurance program, Alera Group also has expertise in the area of Employee Benefits. We invite you to join us on Thursday, May 20, for a webinar designed to have a significant impact on your operations and improve your bottom line: Strengthen Your Benefits with EB Technology. To register, click on the link below:
About the Author
Vice President, Director of Global Trade Risk Management
Alper Services, an Alera Group Company
As Director of the Global Risk Management Division of Alper Services, an Alera Group Company, Gary Kirshenbaum provides protection for companies who need to manage domestic and international commercial trade risk and mitigate political risk involving international business investments. A former business owner, he has almost 20 years of protecting clients’ bottom line in three major areas:
- The threat of bankruptcy or payment default due to a customer affecting equity and cash flow;
- Lost faith in information used to make credit decisions regarding customers;
- Insurance cost reduction.