Trade Credit Insurance
Encyclopedia
Trade credit insurance, business credit insurance, export credit insurance, or credit insurance is an insurance policy and a risk management
product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their balance sheet
asset
, accounts receivable
, from loss due to credit risk
s such as protracted default
, insolvency
, bankruptcy
, etc. This insurance product, commonly referred to as credit insurance
, is a type of property & casualty insurance and should not be confused with such products as credit life or credit disability insurance, which the insured obtains to protect against the risk of loss of income needed to pay debts. Trade Credit Insurance can include a component of political risk insurance
which is offered by the same insurers to insure the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation, etc.
This points to the major role trade credit insurance plays in facilitating international trade
. Trade credit
is offered by vendors to their customers as an alternative to prepayment or cash on delivery
terms, providing time for the customer to generate income from sales to pay for the product or service. This requires the vendor to assume non-payment risk. In a local or domestic situation as well as in an export transaction, the risk increases when laws, customs communications and customer's reputation are not fully understood. In addition to increased risk of non-payment, international trade presents the problem of the time between product shipment and its availability for sale. The account receivable is like a loan and represents capital invested, and often borrowed, by the vendor. But this is not a secure asset until it is paid. If the customer's debt is credit insured the large, risky asset becomes more secure, like an insured building. This asset may then be viewed as collateral
by lending institutions and a loan based upon it used to defray the expenses of the transaction and to produce more product. Trade credit insurance is, therefore, a trade finance tool.
Over the '90s, a concentration of the trade credit insurance market took place and three groups now account for over 85% of the global credit insurance market. These main players focused on Western Europe, but rapidly expanded towards Eastern Europe, Asia and the Americas.:
Many variations of trade credit insurance have evolved ranging from coverage that can be canceled or reduced at an insurers discretion, to coverage that cannot be canceled or reduced by the insurer during the policy period. Other programs may allow the policy holder to act as the underwriter.
While trade credit insurance is often mostly known for protecting foreign or export accounts receivable, there has always been a large segment of the market that uses Trade Credit Insurance for domestic accounts receivable protection as well. Domestic trade credit insurance provides companies with the protection they need as their customer base consolidates creating larger receivables to fewer customers. This further creates a larger exposure and greater risk if a customer does not pay their accounts. The addition of new insurers in this area have increased the availability of domestic cover for companies.
Many businesses found that their insurers withdrew trade credit insurance during the financial crisis of 2007–2010, forseeing large losses if they continued to underwrite sales to failing businesses. This led to accusations that the insurers were deepening and prolonging the recession, as businesses could not afford the risk of making sales without the insurance, and therefore contracted in size or had to close. Insurers countered these criticisms by claiming that they were not the cause of the crisis, but were responding to economic reality and ringing the alarm bells.
In the UK, the Government set up a £5 billion emergency fund for trade credit top-up. However, this was considered a failure as the take-up was very low.
Risk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
, accounts receivable
Accounts receivable
Accounts receivable also known as Debtors, is money owed to a business by its clients and shown on its Balance Sheet as an asset...
, from loss due to credit risk
Credit risk
Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Other terms for credit risk are default risk and counterparty risk....
s such as protracted default
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
, insolvency
Insolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
, bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
, etc. This insurance product, commonly referred to as credit insurance
Credit insurance
Credit insurance is a term used to describe both business credit insurance and consumer credit insurance, e.g., credit life insurance, credit disability insurance Credit insurance is a term used to describe both business credit insurance (a.k.a. trade credit insurance) and consumer credit...
, is a type of property & casualty insurance and should not be confused with such products as credit life or credit disability insurance, which the insured obtains to protect against the risk of loss of income needed to pay debts. Trade Credit Insurance can include a component of political risk insurance
Political risk insurance
Political risk insurance is a type of insurance that can be taken out by businesses, of any size, against political risk—the risk that revolution or other political conditions will result in a loss....
which is offered by the same insurers to insure the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation, etc.
This points to the major role trade credit insurance plays in facilitating international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
. Trade credit
Trade credit
Trade credit is an arrangement between businesses to buy goods or services on account, that is, without making immediate cash payment. The supplier typically provides the customer with an agreement to bill them later, stipulating a fixed number of days or other date by which the customer should pay...
is offered by vendors to their customers as an alternative to prepayment or cash on delivery
Cash on delivery
Collect on delivery is a financial transaction where the payment of products and/or services received is done at the time of actual delivery rather than paid-for in advance...
terms, providing time for the customer to generate income from sales to pay for the product or service. This requires the vendor to assume non-payment risk. In a local or domestic situation as well as in an export transaction, the risk increases when laws, customs communications and customer's reputation are not fully understood. In addition to increased risk of non-payment, international trade presents the problem of the time between product shipment and its availability for sale. The account receivable is like a loan and represents capital invested, and often borrowed, by the vendor. But this is not a secure asset until it is paid. If the customer's debt is credit insured the large, risky asset becomes more secure, like an insured building. This asset may then be viewed as collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
by lending institutions and a loan based upon it used to defray the expenses of the transaction and to produce more product. Trade credit insurance is, therefore, a trade finance tool.
History
Trade credit insurance was born at the end of nineteenth century, but it was mostly developed in Western Europe between the first and Second World Wars. Several companies were founded in every country, some of them also managed the political risk to export on behalf of their state.Over the '90s, a concentration of the trade credit insurance market took place and three groups now account for over 85% of the global credit insurance market. These main players focused on Western Europe, but rapidly expanded towards Eastern Europe, Asia and the Americas.:
- Euler HermesEuler HermesEuler Hermes is a French credit insurance company majority-owned by Allianz France which is in turn owned by Germany's Allianz SE.It claims to have 36% of the total credit insurance market. Euler Hermes is the result of the acquisition of Allianz's Hermes by AGF's Euler in 2002...
, merger of the two credit insurance companies of the Allianz Group. Euler Hermes is the world's number one credit insurance provider. - AtradiusAtradiusWith an estimated 31% global market share, Atradius is one of the world’s largest trade credit insurers. The company, rated A- by Standard and Poor turned over €1.5 billion in 2010....
. A merger between NCM and Gerling Kreditversicherung. Later renamed Atradius after it was demerged from the Gerling insurance group. - Coface. Formerly a French government sponsored institution established in 1946, this company is now part of the Natixis group.
Many variations of trade credit insurance have evolved ranging from coverage that can be canceled or reduced at an insurers discretion, to coverage that cannot be canceled or reduced by the insurer during the policy period. Other programs may allow the policy holder to act as the underwriter.
While trade credit insurance is often mostly known for protecting foreign or export accounts receivable, there has always been a large segment of the market that uses Trade Credit Insurance for domestic accounts receivable protection as well. Domestic trade credit insurance provides companies with the protection they need as their customer base consolidates creating larger receivables to fewer customers. This further creates a larger exposure and greater risk if a customer does not pay their accounts. The addition of new insurers in this area have increased the availability of domestic cover for companies.
Many businesses found that their insurers withdrew trade credit insurance during the financial crisis of 2007–2010, forseeing large losses if they continued to underwrite sales to failing businesses. This led to accusations that the insurers were deepening and prolonging the recession, as businesses could not afford the risk of making sales without the insurance, and therefore contracted in size or had to close. Insurers countered these criticisms by claiming that they were not the cause of the crisis, but were responding to economic reality and ringing the alarm bells.
In the UK, the Government set up a £5 billion emergency fund for trade credit top-up. However, this was considered a failure as the take-up was very low.
Credit insurance providers
- AIG UK Ltd
- Askrindo (Indonesia)
- AtradiusAtradiusWith an estimated 31% global market share, Atradius is one of the world’s largest trade credit insurers. The company, rated A- by Standard and Poor turned over €1.5 billion in 2010....
- AXA Assurcredit (France)
- AXA-Winterthur (Switzerland)
- BPI - MS (Philippines)
- CESCE (Spain)
- China Export & Credit Insurance CorporationChina Export & Credit Insurance CorporationChina Export & Credit Insurance Corporation is a major State Owned Enterprise controlled by China SASAC. It is the largest provider of Export Credit Insurance in China....
- CLAL (Israel)
- Coface
- COSEC (Portugal)
- Credit Guarantee (South Africa)
- Ducroire/Delcredere (Belgium)
- ECICS (Singapore)
- Equinox Global (United Kingdom)
- Ethniki (Greece)
- Euler HermesEuler HermesEuler Hermes is a French credit insurance company majority-owned by Allianz France which is in turn owned by Germany's Allianz SE.It claims to have 36% of the total credit insurance market. Euler Hermes is the result of the acquisition of Allianz's Hermes by AGF's Euler in 2002...
- Executive Risk Insurance Services (Canada)
- Export Credit Guarantee Corporation of IndiaExport Credit Guarantee Corporation of IndiaThe Export Credit Guarantee Corporation of India Limited is a company wholly owned by the Government of India based in Mumbai, Maharashtra. It provides export credit insurance support to Indian exporters and is controlled by the Ministry of Commerce. Government of India had initially set up Export...
- Export-Import Bank of the United StatesExport-Import Bank of the United StatesThe Export-Import Bank of the United States is the official export credit agency of the United States federal government. It was established in 1934 by an executive order, and made an independent agency in the Executive branch by Congress in 1945, for the purposes of financing and insuring...
- Garant (Austria)
- GCNA (Canada)
- Groupama Assurance-Crédit (France)
- HCC International (United Kingdom)
- ICIC (Israel)
- Liberty Mutual Insurance Europe Ltd (United Kingdom)
- Malayan Insurance (Philippines)
- Mapfre (Spain)
- Mitsui SumitomoMitsui Sumitomois a Japanese insurance holding company headquartered in Tokyo, Japan.Formed in 2001 from the merger of Mitsui Marine & Fire Insurance Co. and Sumitomo Marine & Fire Insurance, it is the third-largest property insurance company in Japan behind Tokio Marine and Sompo Japan, with market share of...
(Japan) - Nippon Export and Investment InsuranceNippon Export and Investment Insuranceor NEXI, is an incorporated administrative agency of the Japanese government. The current organization was formed on April 1, 2001 under the jurisdiction of the Ministry of Economy, Trade and Industry based on the General Rules for Incorporated Administrative Agency and Trade and Investment...
(Japan) - Oriental Assurance Corp (Philippines)
- Prisma (Austria)
- QBE InsuranceQBE InsuranceQBE Insurance Group Limited is an Australian based general insurance provider, providing insurance services mainly to the Asia Pacific region, but also America and Europe . It has offices in 45 countries...
(Australia, United Kingdom and The Americas) - R&Q Risk Services Canada Limited
- SACE BT (Italy)
- Korea Trade Insurance Corporation (Korea)
- SID First Credit (Slovenia)
- Sompo Japan
- Tokio Marine & Nichido Fire (Japan)
- Trade Credit Re Insurance Company
- XL Insurance (The Americas, Europe and Asia)
- Zurich Surety, Credit and Political Risk (USA)
- Zurich Versicherung (Germany)