Consider a recent transaction involving an Australian agricultural producer and a food company in India.
In this situation, the varied impact of El Nino on weather conditions around the world – from heavy rainfall and flooding in some areas to severe drought in others – led to a significant trade opportunity for the two companies.
Low monsoon rains in India, the world’s largest chickpea producer, caused a sharp decline in domestic production and local food companies had to look elsewhere for chickpeas. Meanwhile, in Australia, a weather-related bumper chickpea crop was available for export.
With an eager market for its chickpeas, the Australian producer was ready to deal; however, it needed to make sure its new customer could pay. The solution involved the purchase of a trade credit insurance policy by the Australian firm.
In such transactions, trade credit insurance is designed to protect the seller from financial loss arising from a default by the buyer. Depending on the policy purchased, the defaults can result from any one of several causes, including insolvency, contract repudiation, and a range of political exposures. One insurer also has added an optional coverage for natural disasters that affect an exporter’s customers. In recent years, this has proved especially valuable with respect to the flooding in Thailand and typhoons that struck the Philippines.
In addition, the leading global trade credit insurance companies maintain extensive databases on the financial status of businesses located in all parts of the world. While this information is primarily used for underwriting purposes, insurance companies often can help exporters with a credit assessment of potential trading partners before a deal is concluded.
Trade credit insurance policies can be arranged in a variety of ways, including to cover a single transaction, multiple transactions with a single party, or multiple transactions with multiple parties that occur over a defined period of time. Because the insurance reduces the insured’s financial risk from the default of a customer, it can help to strengthen the insured’s credit rating. As an alternative to letters of credit, it can free up a company’s credit lines to enable more investment in growth or expansion.
In this case, trade credit insurance resulted in a win for both the Indian food company and the Australian exporter with a surplus crop.
Stephen Allan, is manager, Trade Credit, at GSA Insurance Brokers, Sydney, Australia. The firm is a partner of Assurex Global, a partnership of independent insurance brokerages in all parts of the world.