Trade credit – emerging from a crossroads

Blog | 4 March 2015

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Expropriation, bankruptcy, resource nationalism, border closures, deferred payment. The list of scenarios in which trade credit insurance might be useful correlates pretty directly with the news headlines. So why, if (according to our research) over two thirds of exporters expect to do more business in the next five years, are fewer people purchasing?

Risk awareness

Any credit manager knows that their company’s lifeblood is cash, and that bad debt can have a catastrophic effect on liquidity. According to the International Trade Survey 2014, (sponsored by AIG, and which canvassed almost 3,000 UK companies involved in the export business), 69% of respondents expected to depend more on exports over the next five years, compared to 63% in 2013. Despite this, only 37% of respondents purchased Trade Credit Insurance (TCI) in 2014, down from 40% in 2013; and 53% in 2012. This is in sharp contrast to awareness of geo-political risks among businesses being at the highest level for 20 years at the senior management and board level.

As these statistics make clear, we need to do a better job promoting our industry and products. The industry must engage holistically across the whole credit management space, helping companies improve the way they view and manage credit risk, rather than just doing it for them, which simply creates dependency. This is necessary to challenge both the traditional image of TCI and the self-insurance model deployed as a trade credit risk mitigation technique by many companies.

Insight and innovation

Innovation has been led by delivering a greater proliferation of excess of loss, non-cancellable cover, to exporters and other companies that traditionally purchased ‘ground-up’, whole turnover products. TCI clients that have used truly non-cancellable cover products in higher-risk markets such as Argentina, Russia and Ukraine have seen their credit limits kept in place for 12 months after inception or renewal.

The non-cancellable aspect stops credit insurers from reining back or withdrawing their credit limits, addressing past flaws in the product and actions that earned the insurance industry a bad reputation in some quarters five or six years ago.

They encourage good credit management and responsibility for customer risk, thus aligning the interests of seller and insurer. In depth analysis to identify and quantify credit and political risks before the product is “sold” and more tailored solutions will also drive growth in the TCI market.

The other key point is that the technology has evolved enormously, giving client management deeper insights into their balances and exposures as well as reducing the administrative burden of policy management. A revitalised approach to information sharing and more tailored policy structures can be of equal use to the banking industry, as it seeks to deleverage balance sheet risk and align with Basel III.

A new dawn

There is no doubt that the market is a great deal more positive than prior to 2008 and there is a more holistic approach at work. It is no longer just about banks or businesses seeking cover when the economy deteriorates, but understanding the banks’ and clients’ strategy and, critically,  help them to grow. 2008 was a tipping point prodding all the stakeholders to change credit management practices for the better.

 Will Clark is head of trade credit at AIG in the UK  

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