Trade Credit Insurance: A Necessity for Modern Corporates

In a modern economy that is heavily dependent upon international trade, issues such as protracted default, insolvent buyers, and political uncertainty are ever-present. Unfamiliarity with new buyers and markets may deter sellers from extending the necessary credit required to conduct domestic or cross-border business. The issue can be more pronounced in volatile regions, where concentration of the credit risk may pose a particular concern.

According to the World Economic Forum’s Global Risks Report 2019 (the Report), rising geopolitical and geo-economic tensions are one of the most urgent risks of 2019. The Report indicates that the world’s ability to foster collective action in the face of urgent major disasters has reached a crisis level, with worsening international relations hindering action across a growing array of serious challenges.

As such, the risk of non-payments and defaults from suppliers is emerging as a prominent risk across the globe.  A default or non-payment can happen due to variety of reasons: 

• Insolvency of the buyer.
• Leveraged buyouts.
• Global economic developments.
• Change in domestic trade, tax policies.
• Changes in foreign government regulations.
• Political risk, wars etc.
• Willful defaults.

AN INDIAN EXAMPLE

The Indian subcontinent is a classic example of a volatile region, where cross-border tensions play an important role in deciding the trade relations. Take for example the Pluwama terror attack in Jammu and Kashmir where 40 Central Reserve Police Force personnel were killed by the Pakistan-based Jaish-e-Mohammad terror outfit, on February 14, 2019.

Following the attack, India withdrew Pakistan’s Most Favoured Nation (MFN) status  which it had enjoyed since 1995, and imposed a 200% import duty on Pakistani goods. All World Trade Organization member states with MFN status are treated on par in matters of tariffs on imports.

The Impact

This sudden change in the India-Pakistan bilateral trade policy will have consequences for the traders in both the countries.  The same thing could happen with other countries. While the future trade policy remains uncertain, understanding the risks and consequences of protectionist and pro-trade policies may help corporates mitigate or prepare for their future impact.

In a worst-case scenario, Indian companies could face lower revenues due to new trade barriers, taxes, and/or tariffs placed on production inputs. The potential reduction in working capital could lead to increased non-payment or bankruptcy risks, expense reduction pressures, and ultimately layoffs.

Solutions

To prepare themselves for varying trade policy impact scenarios, companies needs to reassess their risk profile, operations, and finances. They should consider the following:

• Assessing potential reductions in revenue flows and financing, including the impact on access to resources, production, distribution, and bottom line.
• Reviewing and updating business interruption and supply chain contingency plans and policies if supplies or suppliers become unavailable.
• Evaluating whether their business may be at risk of increased customer defaults due to policy changes and taking mitigating actions.
• Reviewing their political risk insurance policies’ terms and limits.

The good news is there is a solution for corporates to help them increase their business and protect their accounts receivables simultaneously. The solution is Trade credit insurance.

Who is it for?

Trade credit insurance has benefits for:

• Any company that has receivables on its balance sheet and has a potential exposure to loss from the failure of a customer to pay.
• Any company that exports products to countries where there is a political environment that makes it significantly more of a challenge to conduct its business.

In essence it helps identify good buyers, monitors them and also indemnifies your unpaid debts.

What is it?

Trade credit insurance is a financial management tool that safeguards your company against losses sustained arising from the non-payment of trade related debts. It protects businesses from non-payment of commercial debt. It helps ensure that invoices will be paid and allows companies to reliably manage the commercial and political risks of trade that are beyond their control.

This bespoke insurance solution covers defaults by buyers due to events beyond a business’ control and ensures your company is not adversely affected by the unforeseen failure of one or more of your customers. It is also a tool to help you manage your risks. The benefits of trade credit insurance include:

• Covers debtors’ insolvency.
• Covers willful  default
• Provides global debt collection services, available worldwide.
• Preserves cash flow and protects profitability, by protecting your balance sheet.
• Addresses political risks (only in case of exports).

Trade Credit Insurance with Marsh

At Marsh our brokers have considerable trade credit experience and resources for you to draw upon. You receive:

• Access to credit expertise and market knowledge from a worldwide leader in credit insurance.
• Effective, professional assessment of the financial situation of your customers.
• Country specific risk services – access to information about the risks in particular countries, and advice and strategies to mitigate the associated political risks.
• Financial intelligence – access to the databases of trade credit insurers on financial information about customers, giving you the comfort and confidence to grow in new or existing markets by identifying customers in financial distress and protecting yourself.

Conclusion

Trade Credit insurance is a tool to help effectively cover a company’s receivables and maximize profits over the long term.

Unlike other insurance policies this policy can or may change over the course of the policy period and the credit manager plays a key role in that process, making the relationship between the insured and the broker quite dynamic.                          

To find out more about trade credit insurance with Marsh talk to the nearest Marsh representative, or please visit: https://www.marsh.com/in/services/trade-credit.html