Trade Credit Insurance

From Wikipedia, the free encyclopedia

Trade 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 risks 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 (finance) 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.

[edit] 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.:

Atradius. 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.
Euler Hermes, merger of the two credit insurance companies of the Allianz Group.

While Trade Credit Insurance is often mostly known for protecting foreeign 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 ccounts. The addition of new insurers in this area have increased the availability of domestic cover for companies.