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  March 6th, 2018 | Written by

Research Identifies Growth Potential for Trade Credit Insurance

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  • Credit insurance is increasingly required by investors, banks, and rating agencies.
  • Credit insurance has been used to protect balance sheets against the risk of trade default.
  • Credit insurance is increasingly used to enable access to lending and optimize working capital.

Credit insurance is important to ensuring the smooth functioning of domestic and international commerce. As such, it continues to grow in relevance as policyholders look to protect themselves against economic and political uncertainty.

Traditionally, credit insurance has been used by organizations to protect their balance sheets against the threat of a default on their trade receivables. While this is still the predominant case, it is increasingly used as a proxy for a financial guarantee to enable policyholders to gain access to bank lending and optimize their working capital needs. By ensuring adequate corporate risk management, credit insurance has become an essential ingredient for proper corporate governance, required by investors, banks and rating agencies alike.

In order to understand the dynamics of the credit insurance market, what drives purchasing decisions, the supply and demand picture, and whether products satisfy buyers’ needs, XL Catlin commissioned a global credit insurance survey. The Global Credit Insurance Monitor compared attitudes and opinions of policyholders to those of credit insurers and examined the evolution of buying behavior and ways of growing the global credit insurance market. An independent research consultancy interviewed insurers, credit insurers, and corporate risk managers from across the globe representing revenues of more than $500 billion.

Although the majority of credit insurers and policyholders agree that the level of insurance coverage currently purchased is adequate, policyholders tend to exclude certain risks from their credit insurance purchasing. A lack of risk awareness might be one reason for this.

Purchasing decisions may be driven by a desire to keep the good risks and only insure the higher-risk business. SMEs in particular tend to exclude domestic risks, for example. When margins are tight, the cost of credit insurance can be crucial when deciding whether or not to transfer the risk. However, the complexity of the policy – the contract wording, its interpretation and its practical applications – can also be a deterrent for smaller insurance buyers. Large global sellers, by contrast, who choose credit insurance primarily for financing purposes, retain a portion of the credit risk on their balance sheet and manage it through their tighter payment terms and conditions.

According to the results of the survey, both insurers and policyholders see significant potential to expand credit insurance protection and therefore generate additional revenues for insurers and support policyholders in building their franchises. Interestingly, credit insurance buyers believe the current suite of products does not fully meet their protection needs and/or that policies are too rigidly applied. Larger companies would prefer to have the ability to differentiate between different types of risks. These results suggest more flexible and tailored products may bring about new business opportunities for insurers and open access to previously untapped client segments.

Credit insurers agree that there is significant opportunity to capture this additional credit insurance demand. In order to tap into this, many suggest reducing product complexity, enhancing client servicing, improving the reliability of credit insurance solutions and adopting a more bespoke approach to pricing.