Trade credit insurance can allow businesses to take necessary risks with new and existing clients to grow and develop. With a policy in place, businesses not only receive cover for non-payment, but also the advice and support of industry credit experts.
A credit insurance policy can provide certainty of payment which helps pave the way for increased trade in times of economic uncertainty.
The trade credit market is facing a challenging year ahead, but the current economic environment and uncertainty mean businesses will need to consider this cover more than ever.
It’s hard to turn the corner without another headline announcing the financial demise, or at the very least a tightening of belts, of another well-known company. The trends in trade credit that kicked off 2018 only increased throughout the year, and as 2019 begins, looming Brexit, political uncertainty and other economic woes have meant we are already seeing stories of difficult operating environments across sectors.
The trade credit insurance market is undoubtedly affected by uncertainty in the UK and beyond, combined with economic slowdown. Insolvencies continue to rise across all sectors and markedly for retailers and construction, areas that are particularly vulnerable to potential economic turbulence in the months ahead.
Other sectors are also under pressure - a number of airlines have failed, while the leisure and food & drink sectors have also witnessed insolvencies. Firms are struggling with rising costs brought about by both government intervention, such as increases in the living wage, coupled with the shrinking value of the pound. This is making raw material prices higher, exacerbated by weak consumer demand.
Despite these challenges, there are opportunities for the trade credit insurance market, particularly for those carriers that are ready to provide advice and support for their customers.
Is trade credit insurance misunderstood?
One way to find new opportunities in the market is to work to expel misconceptions around trade credit insurance and to increase awareness among customers of the true benefits of having cover for these risks in place. After all, it is only going to be more important to protect against the challenges ahead this year.
Trade credit insurance was once seen as an extra cost, a discretionary spend rather than a necessary cover, like liability or property. This is now changing as more directors and business owners realise the consequences of not having this insurance in place, which covers their balance sheets against non-payment, protecting their shareholders in the process. Growing uncertainties, such as the Brexit negotiations, have certainly increased interest in trade credit insurance. Another factor that may drive the hardening of the trade credit market during the next few months are interest rate increases and the resultant further squeeze on corporate margins.
Although recent headlines and economic uncertainty mean the awareness of the need for this coverage is growing, challenges remain around common misconceptions of trade credit insurance. One is that it is simply too expensive. However, as an example, a company with a turnover of £50m could typically insure its sales for approximately £50k, which could mean a sale to a client of £50,000 costs just £50 to insure. In many companies it costs more in administration costs to provide an invoice. More should be done in the industry to make customers aware of the costs vs benefits.
Another incorrectly held belief is that trade credit insurers pulling cover means an insured’s coverage is suddenly taken away and not honoured. In reality, all risks up to coverage being withdrawn are covered, so sales made are claimable under the policy, but the insurer will not provide further cover for new transactions taking place after the insurance has reduced.
The removal of cover is a last resort for both the insurer and the policyholder. QBE’s underwriting team spend a significant proportion of their time talking to the companies that are purchasing the goods and services that a policyholder sells. Our underwriters on many occasions work under non-disclosure agreements and are in direct communication with managing directors and finance directors of the buyers of clients’ goods and services to fully understand the stress and pressures on a business and what measures management are undertaking to mitigate these factors.
Such discussions may involve disclosure to the underwriter of management information (such as financial projections and cash flow projections) on which the underwriter may be able to maintain credit coverage allowing the insured to continue to supply to the buyer, its client. The more dialogue the underwriter has with the buyer– and the more open and transparent with information, projections and targets the company is, the greater is the ability of the underwriter to maintain/reinstate credit coverage.
Of course, there are situations where our underwriters, who are sector specialists, reach a conclusion that a client of an insured is likely to fail in the near future and potentially expose the insured to a loss if they continue to ship goods on credit terms. It is at this point that the underwriter will talk with the insured to explain the actions that we are having to take to reduce or fully remove credit cover. On many occasions, on-going dialogue with the insured’s clients allows the underwriter to reinstate prior facilities, but there are occasions where insurers will advise their insured not to trade further due to the heightened risk of failure.
It is important to understand that a credit insurance policy is not a once a year policy – it is a constantly living and evolving dynamic of ongoing support and discussion with the insured to provide early warning of potential financial stress of the companies that they are selling to. At the same time, underwriters should build dialogue and trust with the insured’s clients to assist in opening up and maintaining credit facilities to allow the growth of their business. Trade credit insurance is an economic enabler and never more so than in uncertain times like these.
This article was first published in Insurance Day.